End of an Era

July 7, 2009 at 6:35 pm | Posted in Economoney, Events, History | Leave a comment

It’s very nice to hear our leaders in government and business tell us that the worst is over and the the economy is now on the mend.

But if you have some impression it’s going to go back to where it once was, you’d be mistaken. North America will never be the same. The balance of power is changing, largely for the better. There are any number of reasons for this but here is a few to consider.

Since the end of the Second World War, the US$ has been the currency of much of international commerce and has been prominent in many countries reserves. After the fall of the Soviet block, the US became the sole “superpower”. But just as all empires fall, we are now seeing the fall of American dominance.

You may consider this an overly dramatic statement, but lets review a few of the events underway.

Firstly, the law of supply and demand. If supply is modest compared to demand, the price will climb. Like oil or gold. If supply surges and demand falters, the price will go down. Recently, countries that have invested heavily in the US$ have continued to buy to support their existing reserves. But that is now changing.

Not only are some prominent countries asking for a move away from the US$ in international trade but they have begun shifting their reserves away too. Slowly, to try and retain some value. But this is a double move against the US$. If more countries realize this is going on, there can be a stock-market like run. Countries like Iran that moved away from the US$ for political reasons have an easier time of it. Sell high.

http://www.bloomberg.com/apps/news?pid=20601104&sid=arU9Z8d.vfqY

With so much in foreign holdings, this also means the US has less control of the trajectory of their currency.

Why is this happening? Because of the recession? Because of the US response to the recession. As this next column outlines, the US may have reduced the hit of the downturn on some sectors but one may question at what cost. Short term gain for long term pain? It’s a little like the US has just maxed all it’s credit cards. Some question if they can even meet the interest on the debt.

http://seekingalpha.com/article/147047-dollar-s-days-of-dominance-are-over

The principle is very simple. If the goods produced and assets (value) remain about the same while the amount of currency increases, the value of the currency will drop. All this talk of it not having an impact is contrary to basic economics. The US has printed an astonishing amount of cash out of thin air. By January, they had already effectively doubled the money supply, thus halving its real value. The Federal Reserve printed even more than Congress approved. And that was before the auto makers.

If we as an individual are no longer able to meet our debts, we go into default and bankruptcy. A country has a second choice to avoid default. Devaluation. What we typically call inflation. This gives you an idea why the above article suggests a possible 75% devaluation.

Recently, the IMF issued a new type of bond to raise money. They are bonds on Special Drawing Rights(SDR), a kind of “meta-currency” that blends a “basket” of several currencies. Kind of like a mutual fund. SDR were created in 1969 for financing deficits. It was originally based on the formerly gold-backed US$, when it had a real value. Now it’s based on currencies that are valued primarily by perception, like the stock market. A distributed risk, but we’re still talking of bonds on debt, based on currencies that may devalue. However, it’s also a move away from straight US$ reserves and they sold briskly. It’s also a possible precursor to an international currency, although currency based on debt is hardly the way to go.

http://online.worldmag.com/tag/special-drawing-rights/

Given the emerging power of India and China, one wonders how long the existing balance of power will remain. Already, the G-20 is making shifts the original G-8 would not.

And this is just the US$ on international markets. What of the local economy and the impact of unemployment? If the war in Iraq does not end in peace, it will end for economic reasons.

Perhaps this is overstating the case. One never knows with economies. But the voices that expected the bubble to burst are indicating we’ve just seen the opening act.

I also don’t consider this an apocalypse or end-of-world scenario but rather a healthy move away from a casino style economy. A great way for a few to become wealthy but it does little for the average person.

Where is it going? Look at the demographics. In North America, the boomers are aging into underfunded pension plans. A continent dominated by the aging. Not so in India and China. 60% of Iran is under 25. Big changes are afoot. The recession just sped it up a bit.
David

Leave a Comment »

RSS feed for comments on this post. TrackBack URI

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Create a free website or blog at WordPress.com.
Entries and comments feeds.