the coming dollar implosion
Reply to an e-mail sent to J.
The collapse of the world financial system has been predicted for many years. Books have been written on it, but it has not happened yet. This does not mean that it will not happen. However, it is only possible to make an accurate prediction if one knows all of the pertinent facts.
The author of the article [sic; article not cited] sites the $360 billion U.S. trade deficit as a significant problem for the U.S., as it tends to undermine the USD’s overseas value. The author does not explain why this is such a big problem and I do not see why myself. The trade deficit reflects the fact that it costs less to produce goods in the U.S. than, for instance in Europe. This means that, if anything, the USD is undervalued, not overvalued. If its value against other currencies were increased, the trade deficit would decline.
The second thing that is discussed in the article is the declining value of the USD versus the euro. This is a much more serious problem. It is an indicator that the world financial system, which was put together at Bretten Woods, New Hampshire, in 1944, is in danger of falling apart. The conference at Bretten Woods was held right after it was certain that the Normandy invasion would succeed, and that the fall of Germany and the end of the war were in sight. Japan, Germany, and Italy were excluded from the conference, which was, for the most part, run by bankers and the U.S. and G.B. At the conference, it was agreed that the USD would replace the English pound as the world currency. Since then, most international trade has been conducted in USD. Oil companies, for instance, demand payment in dollars for the oil they deliver to foreign countries.
With the post-war recovery of Europe and Japan, the value of the USD declined. A drastic revaluation occurred in the 1970s, with the German mark and Japanese yen doubling against the USD. These days, the new euro dollar has sufficient economic muscle behind it to challenge the USD for the number one currency in the world. If this happens, there will be a large decline in the standard of living in the U.S. and the value of the USD, as foreign countries will no longer have to exchange their currencies for dollars to buy pounds. Less demand for dollars equals less value for dollars.
Bretten Woods evolved into the G7 (or G8?) system, where the seven (or 8) countries with the most capital meet to make financial policy, such as what interest rates are charged on loans to third world countries. The fact that they do not know whether it is G7 or G8 shows how meaningless and weak the system is. Russia demanded (and got) into the system as one of the terms for ending the cold war. The only problem is that Russia has almost no capital. Other countries not in the G system, such as Saudi Arabia, have substantial bank deposits and a great deal of influence over policy decisions. Developing nations, such as Brazil, India, and China, also have large amounts of accumulated capital, and should have a say in the G decisions. China, for instance, just purchased 10% of the company that, among other things, runs the Panama Canal for Panama.
The world financial system is in need of change. This must be done before it collapses and crises, such as Argentina, develop in other countries that owe the IMF a great deal of money. However, I do not believe that the G7 Countries will allow their control of the world financial system to disintegrate. Particularly, it is not likely that the G7 will allow the USD and euro to compete for the position of the most desired currency, as this would be disastrous for both parties. If nothing is done, the system will probably fall apart, with unforeseen consequences to every nation.