Monday, February 18, 2008

Dollar Seceding from Community of Currencies

Somewhere we got caught up in the political swirl, our true task neglected to the extent we are babbling about politics without making any related analysis about money.

So we now set aside our brief Obamic delirium, but will follow in his footsteps by lifting liberally from an article by one Judy Shelton in last Friday's Wall Street Journal. She is an economist and someone we've never heard of before, but her piece, "Security and the Falling Dollar", is important reading. Indeed if an anonymous rabbit had written it, or a rock cried it out with verbal eloquence, I would be all over it, nearly plagiarizing it for your benefit.

Friday's Journal actually had more than a few worthy articles, including one on the rising prices of agricultural commodities, which fit quite nicely with what Jim Rogers (the bow tied investor once connected to George Soros, and now living with his wife in, I believe Singapore) was saying in an interview almost two years back in the book, "Inside the House of Money" which I have been slowly making my way through.

Judy starts off by informing us that the Director of National Intelligience pegged the falling dollar as one of the major national security issues facing the United States. Not merely the fall of the dollar, but the ascendency of foreign governments with new resources at their disposal, and their ability to influence the world (and the U.S.) financially for political purposes.

The fact that it takes very little on the part of a few nations to greatly cause the quality of life in America to meander in unpleasant directions is a message not preached at the campaign rallies.

And when we read of the general triumphant applause by U.S. political elites over Kosovo's rash decision to unilaterally declare independence, there seems to be a certain lack of realization that our financial world position grows more tenuous to the extent we are actually not considering other nations, their rational (or irrational) choices, and the impact of those choices. In other words, you can't walk tall, or straight, if you have no pants or carry no stick.

And increasingly we are that naked Emporer.

In her article Ms.Shelton points out various realities that ought to be somewhat disturbing, though not because the events are in themselves wrong actions by others. I fully expect the world to play up to their potential. That is, I expect nations to build huge piles of currency if they feel it's in their interest. It's rational for an Iran to want nukes or China to want more nuclear subs. I fully expect Valdimir Putin to be praised in his country for pulling it together and snatching the assets back from the democratic kleptobillionaires who grabbed up assets as the country collapsed, because it's natural for people to want a country they feel is strong, stable and benefitting more than a lucky seven. These attitudes and events should, however, be expected, considered normative, and factored into our expectations and how we conduct ourselves.

(Interestingly, in the same book, the ever astute Jim Rogers points out the rational reality of Putin's actions, while still proclaiming that the country is crooked and will ultimately disintegrate into multiple parts).

Our leadership has a tendency to expect the world to be rather thankful for mere existence, and we, deep down, are not ready for them to do a bit more than exist, for them to compete. We certainly are not ready for say, a situation where one of OUR native ethnic groups decides to secede, with the support of say, Russia and the UN, though we are well able to have the lack of judgement that European nations like Spain and Greece have. (Both knowing that they themselves have restive separatist groups, and that such groups exist all over the planet, and thus it behooves them to avoid getting the jollies over Kosovo secession).

Our shortsightedness and deliberate disregard extend to the U.S. dollar.

The article continues:



If gold and foreign currency reserves were the only prerequuisite for harboring global ambitions in the monetary arena, China could make impressive claims of its own with $1.7 trillion as of December 2007., the world's highest level. Japan comes in second at $973 billion.




It goes on to say that the European states have $511 billion, and Russia has accumulated $484 billion.

The article points out that Putin has called for denominating its vast oil sales in rubles instead of dollars and certain middle eastern nations have been making noises along the same lines.

American citizens by and large do not fully appreciate the benefits of having the language and currency that greases the world's transactions, but to the extent we grow financially weaker, and the dollar also loses value, a very wealthy world will not necessarilly sit back and watch it for long.

Judy suggests a "perfect storm of dollar desertion" with Russia and China and other nations banding together to create a kind of Asian reserve currency.

All of these musings and thoughts by other countries are important to the extent that the world is interconnected and to the extent we are the world's leading debtor needing foreign funds to keep us chugging along. Right now we happen to be in a position where the promise of even lower interest rates does not inspire confidence in those who must sell their assets in dollars, nor do our economic woes give us much room to be less inflationary in our policy.

These are issues that need to be discussed, and by the candidates.

Ms. Shelton then takes what I call a "sharp right turn." I have a friend who does that. We can be having the nicest conversation about some woman, how lovely her she is, how sweet, how smart, how tasteful in dress and then, bang, out of nowhere, he says, "I would do her really hard".

Whoa, whoa what??!?!? Ms. Shelton does the economic equivalent by suggesting that we return to the gold standard, by virtue of the U.S., Germany and France having the highest level of gold reserves. After pointing out the competitive threats to the United States under the system of fiat currency, she irrationally suggests that the world (who is in competition with the United States) would embrace a hard currency system dominated by the U.S, and at Russia's expense.

Right questions, ridiculous answers.

How about this:

How about we balance the budget, and reduce the national debt?

Our problem is not being on gold, or off gold, or even the dollar fluctuating. Our problem certainly is not other nations trying to do what we have always done.

Our problem is shortsightedness and not taking care of our own business. It's investment banks providing funds to mortgage companies that don't do due diligence. It's the United States applauding separatist movements despite the fact that a bazillion nations run the risk of having to deal with now encouraged separatists (the Basques and Kurds are smiling). It's lowering interest rates to bail out banks that should have had a better grasp on risk. It's individuals seeking things they cannot afford. It's funding Saddam to fight Iran then having to kill Saddam. Or funding revolutionaries in Afghanistan to kick out Soviets only to have to go back in to push out the people you financed.

We can quibble on certain details, but we really need leadership that takes a more nuanced view, and a more long term view. I can already see the looks on the faces when the Serb section of Kosovo decides to secede from Kosovo. What will we say then and will we be so supportive?

It reminds me of a person on a blog I was reading. The question was posed about ethnic groups seceding in the U.S. and the person responded, "Oh it can't happen here because it's not constitutional, simple as that". As though countries typically write in secesson rules for their minorities, prenuptial style. Only in the American mind.

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