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Thread: weekend commentary - deja vu for the US dollar ?

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    Default weekend commentary - deja vu for the US dollar ?

    in the interest of equal time ...



    "A Losing War, a Failed President, a Weak Dollar: We've Been Here Before
    by Leon Hadar"

    (snip)"Specifically, the Vietnam War and the increasing military expenditures to finance it resulted in an increased dollar outflow and accelerated inflation by the 1970s, leading to rising balance-of-payment and trade deficits. The dollar was overvalued while the Deutschemark and yen were undervalued, and the attempt to defend the dollar at a fixed peg was becoming increasingly untenable. Ripping the dollar loose from gold was designed to boost U.S. exports and cut the country's worsening deficits.

    In a way, Nixon's decision to delink the dollar to gold followed by his 1972 visit to China reflected the relative decline in U.S. global political and economic power – brought about by the devastating geopolitical and economic impact of the Vietnam war – and Washington's adjustment to these changes (the two decisions together are appropriately known as the Nixon Shocks) in American political history.

    So you recall one failed war (Vietnam), U.S. presidents fighting for their political survival (Lyndon B. Johnson and Nixon), and a weakening U.S. dollar, and suddenly it seems that someone has produced a remake of that old horror movie. Once again there is a failing war (Iraq), a beleaguered U.S. president (George W. Bush), and erosion in the value of the U.S. dollar. As in the case of the U.S. quagmire in Southeast Asia (which spread from Vietnam into Laos and Cambodia), the current military quagmire in the Middle East (which is producing shock waves also in Iran, Lebanon, and Israel/Palestine) has led to a major increase in military spending (and not unlike in that period, no effort has been made to cut domestic spending), resulting in rising budget and trade deficits.

    If in the 1960s and early 1970s the Germans and the Japanese were helping finance the U.S. military intervention in Vietnam, China and other East Asian central banks are playing a similar role today. Hence the need to reevaluate the dollar can be seen now like then as a recognition that American geopolitical and economic power is declining and that some kind of readjustment is necessary. From that perspective, the erosion in the U.S. currency was inevitable under these conditions – although the slowdown in the U.S. economy and the attractive economic conditions in the euro zone may have been the direct trigger for the dumping of U.S. dollars and the buying of the euros.

    Things can get even worse if the rising populist and protectionist wing of the Democratic Party that has taken over Capitol Hill adopts policies to punish China for its "unfair" trade practices, which are supposedly responsible for the giant American trade deficit with the Chinese. The Chinese, who until now have continued to invest in the U.S. economy, thus preventing an even more dramatic and painful drop in the value of the U.S. dollar, might then have no choice but to change course.

    One of the main reasons why U.S. Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke are traveling to Beijing this month is to work together with the Chinese to prevent the kind of worst-case scenario that could result from the political pressure by the Democratic trade warriors on Capitol Hill. That makes a lot of economic sense, but it doesn't deal with the geopolitical sources of the problem: the bloody and costly war in Iraq and the potential for wars with Iran and other parts of the Middle East that are going to drive U.S. military spending and the deficits into the stratosphere and put even more pressure on the dollar.
    "(snip)


    In hopes of maintaining a majority of financial vs political content, I'll simply point out that the author is obviously trying to draw an analogy between fundamental economic changes in the past 4-5 years versus the early 1970's ... which implies that his outlook is that the US economy over the next five years should resemble the late 70's - which was not a positive period (close to 20% inflation / interest rates).

    If nothing else, it's noteworthy that voices from both ends of the political spectrum as well as the center are all calling for a US dollar dive !!!
    Last edited by Melonie; 12-08-2006 at 06:49 AM.

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