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Is the Dollar Becoming Less Global?

by: Tim Iacono September 29, 2008 | about stocks: UDN / UUP    

Tim Iacono

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This interesting little item was in the news last week and is deserving of a closer look. John Laughland writes in the Russian News and Information Agency about the most recent financial crisis in the U.S., pondering its implications for the world currency order as it now exists.

It seems that exorbitant privilege may once again be a problem for the U.S. as it was back in the 1960s. This time, however, it will more likely be leaders in Asia who will protest as Charles De Gaulle of France did some forty years ago, a protest that led Nixon to "close the gold window" in 1971, thus ending the Bretton Woods System, the world currency order at the time.

The decision by the US government to inject $700 billion into the financial system means that the already gigantic annual budget deficit of the American state (previously some $450 billion a year) will now rise by a factor of three. The total state debt of the USA will rise to well over $11 trillion. It is obvious that such a colossal debt can never be repaid. Instead, it will be serviced by more debt in the future.
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In America, this basic culture of debt is aggravated by the fact that other countries use the dollar itself as a reserve. This means that the United States can export dollars in order to pay for its imports without the dollar losing value. Other states also need dollars to buy key commodities like oil. The USA can therefore export paper currency almost indefinitely - the famous "deficit without tears" analysed by the great French economist, Jacques Rueff.
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What can Russia do about this? At first sight, Russia's role in the international financial system does not seem very large. However, as a major exporter of hydrocarbons, her role in the world economy is actually very important. As the age of the dollar draws to a close, Russia will have to consider selling her oil and gas not in the devalued American currency, but instead in the euro used by most of her customers. It is surely unnatural for two geographical neighbours to do such large volumes of business using the currency of a distant and now ailing nation.

Second, the Russian leaders might also consider making their own currency, the rouble, convertible into gold. The idea of gold convertible currencies is extremely unpopular among most economists: they dismiss gold as a "barbarous relic" (to use the famous phrase of John Maynard Keynes) and suggest either the present regime of paper currencies or, at best, a link to a basket of commodities.

A currency based on gold... what a novel idea.

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This article has 9 comments:

  •  
    Sep 29 02:14 PM
    Ironic, no?

    The socialist/communist 'evil empire' is the first to consider seriously returning to the gold standard as a means of protecting itself from the fiat currency of the world's (insolvent) capitalist super-power.

    Should that happen we will be tracking the USD/Rouble exchange rate and lamenting the fact that our currency is turning into so much worthless paper and ink.
    Reply
  •  
    Sep 29 02:25 PM
    A lot of excellent companies in the world without any debt. The question is whether they will survive the Government Capitalism which will, sooner or later, lead to one world government which the Goldman people have been banking on for fifteen years and now that they have Buffett on board along with Rubin and his Manchurian Candidate, Thain and Paulson. Goldman's "shadow government" has had people in high government positions for decades. Now they not only control stock and bond markets but government finances.

    Wake the f... up!!
    Reply
  •  
    Sep 29 07:04 PM
    Now that the bailout is trashed, it will be interesting to hear what Warren has to say.

    This article is one of the few that goes to the actual reason Paulson, et al are in such a panic about wall st. It may well be the end of the deficit without tears i.e. USD loses its defacto reserve status. When the dollar is devalued to 10% like some Third World country, how embarassing for us.

    Gold may be an anacronism according to Keynes, but until someone comes up with a better way to maintain bulletproof monetary-fiscal responsiblity in Congress, like a simple balanced budget, this relic should be revived.

    The other reason for the panic is the preservation of the SWF's. If they ever start thinking there is a better / safer investment out there than the US, the dollar is sunk. Globalization is the great equalizer. Devaluation will bring the US economy abruptly to the true level that the Feds have been trying to hide or ease into.

    So it's less about Main Street and more about The Hill.
    Reply
  •  
    Sep 30 08:31 AM
    That would be a huge move -not only would it cause a devaluation of the dollar but many corporations who are looking to have future oil and gas contracts might lose them to russian gazprom or lukoil being their currency would be backed by assets rather than debt with a zero likely hood of devaluation or inflationary pressure -what it would buy today it would buy tomorrow
    I would expect after watching some success with it other countries would follow suit
    Reply
  •  
    Sep 30 11:47 AM
    Yes I'd much rather have a Russian Ruble backed by gold than a pocket full of Bengimans btw Tear up my credit cards and give me a Chinese Express too
    Reply
  •  
    Sep 30 01:07 PM
    Year, right. For naive people out there, ruble fell against dollar more than 10% in the last couple of months. Who cares if ruble is valued in dollars, gold or mud pies? Russian economy is less than 10% of American and that number is hugely inflated by price of oil. Russian companies, mainly government ones, owe Western banks more than $500 million, they ran dollar carry trade and got caught with their pants down when ruble fell. Now government is going to bail them out, but government doesn't have that kind of money.
    Reply
  •  
    Sep 30 01:08 PM
    Sorry, misprint. Russian companies owe more than $500 billion.
    Reply
  •  
    Oct 01 02:02 PM
    Funny, about a year ago I was speaking with a friend in Russia about this. Could you imagine a gold-backed Rouble? It would change the finance geography overnight....but I don't think it will happen anytime soon. Finance is a gun, politics is knowing when to pull the trigger. Nevertheless, USD are nothing more than the promises of politicians to pay us and we all know where that is going. Is the USD on the wane? Well, for me, I'm a fan of Oil Producer Currencies.
    Reply
  •  
    Oct 11 01:13 AM
    Russia's in trouble, China is still a poor country, euro is collapsing due to internal stress...can't do business with China or Russia; reneging on deals is a national pastime. Gold backed rupee, anyone?
    Reply
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