The Dollar Melts as Iraq Burns; The Death Knell of the Dollar

December 11th, 2006 - by admin

James K Galbraith ? The Guardian & Clive Maune / Gold, Silver & Oil Shares – 2006-12-11 00:18:29

The Dollar Melts as Iraq Burns
James K Galbraith ? The Guardian

LONDON (December 4, 2006) — The melting away of the dollar is like global warming: you can’t say that any one heat wave proves the trend, and there might be a cold snap next week. Still, over time, evidence builds up. And so, as the greenback approaches two to the pound, old-timers will remember the fall of sterling, under similar conditions of deficits and imperial retreat, a generation back. We have to ask: is the American financial empire on the brink? Let’s take stock.

It’s clear that Ben Bernanke got buffaloed, early on, by the tripe about his need to “establish credibility with the markets.” There never was an inflation threat, apart from an oil-price bubble that popped last summer. Long-term interest rates would have reflected the threat if it existed, but they never did.

So the Fed overshot, and raised rates too much. Now long rates are falling; Bernanke faces an inverting yield curve and even bank economists are starting to call his next move. That will be to start cutting rates, after a decent interval, sometime next year.

Once again, all you monetary policy buffs, in unison please:

The grand old Duke of York,
He had ten thousand men.
He marched them up to the top of the hill.
And marched them down again.

This is not good news for the dollar.

The US economy is going soft faster than the inflation hawks and growth optimists thought. Housing has been in free-fall for months. With the new Congress anxious to display “fiscal responsibility” — cue Robert Rubin who has moved in very fast on Nancy Pelosi — there won’t be any help next year from them. If business investment falls off, recession could hit in 2007 or 2008. With that fear in mind, gloomy profit expectations are setting in, and that’s not good for the dollar.

The US trade deficit is near all-time records. By itself, this proves nothing: the US supplies reserves to the world system, and it can run any deficit that the world is prepared to finance. But, sooner or later the world may start to get other ideas.

So here’s the big question: is the age of the dollar economy lurching toward an end? Are China, Japan, Saudi Arabia and other big holders of T-bonds about to start a rush, or even a stately promenade, toward the exits? Let’s hope not,
because the world is unprepared to replace the dollar with anything else.

The euro is not suited for the job, and a joint dollar-euro system would need better central bankers than either America or Europe has got. An end to the dollar system would therefore be chaotic, inflationary, and very tough on world trade. The best argument for the dollar has always been: it’s not in anyone’s interest to bring it down.

Could it happen, though? Yes, it could. And it could be connected to that other unfolding disaster. As the “Pax Americana” goes to hell in Iraq – producing a nervous breakdown among the pro-war elites – let’s remember that security and finance are linked.

Typically, the country that provides global economic security enjoys the use of its financial assets in world trade. And when the security situation changes, that privilege can be revoked. The consequences are unpleasant. Ask the British: after the sterling area folded, it took a generation for the UK to come all the way back.

That is partly why Economists for Peace and Security – a group I chair – opposed the Iraq war from the beginning. As far back as 2002, we understood — as the economically illiterate neo-imperialists did not — that a world system very favourable to America was on the line.

And it was not, as they seemed to think, just a matter of military might. We knew that if the war undermined confidence in the power, good faith and common sense of the United States, that could lead toward disastrous changes on the financial front.

Four years in and with no end in sight, that risk may finally be catching up to the almighty dollar.

Death Knell of the US Dollar…
Clive Maune / Gold, Silver & Oil Shares

(December 3rd, 2006) — The dollar plunged with startling ferocity late last week, driven by heavy selling. This was very bearish action that signals panic, and the probable onset of a severe downtrend. A break below the crucial support at 80 on the dollar index is expected to mark the transition from a clandestine unloading of dollar assets to an all-out stampede to “get what you can for them” before it’s too late.

The conditions leading to an inevitable dollar panic sell-off did not come about overnight. They are the result of years of abuse, principally by the Federal Reserve of the US, which has created a veritable blizzard of dollars, and the universal acceptance of this “funny money” has, up until now, allowed the United States to freeload economically on the rest of the world, living way beyond its means.

The exponential growth in dollars has been and is created electronically at the touch of a button, so that paying for anything is never a problem, whatever you want you simply print the extra money to pay for.

Because foreigners have so far played along with this game, they are now widely, and to some extent understandably, regarded as stupid. However, it is a dangerous mistake to underestimate the mental capacities of other peoples. The Chinese, in particular, have an ancient and deep culture, and when it comes to strategic considerations, can outthink – and outflank virtually anyone.

So what’s going on? – why have they accepted a mountain of paper and IOU’s over many years in exchange for real hard work and a vast quantity of real tangible products? The Chinese, and others, have done this to carry them over a bringing period during which they have built up their economies and infrastructure.

Their goal – which they are fast moving towards – is to arrive at the point where there is sufficient domestic and regional demand that they no longer need to rely on orders from countries like the United States.

At this point — which we may arrive at sooner rather than later — things will become very dangerous for the US dollar, and the situation is actually far worse than many now believe, because the Chinese and others are preparing to WRITE OFF THEIR DOLLAR ASSETS AS A BAD LOSS — they will try to get what they can for them, of course, but otherwise will be ready to fall back on domestic and regional demand and tough it out, thus severing the umbilical with the United States, which will be left stranded, with no takers for its funny money, a gutted manufacturing base, astronomic debts and fiscal chaos, and a huge military it can no longer afford to service.

When the forces of globalization are let loose, as they have been, this is actually a natural and inevitable process, as orders and work simply move to the lowest bidders. Europe and the United States are uncompetitive and will be sidelined by the powerhouse economies of China and South East Asia.

The Chinese and other trading partners with the US are already rotating out of dollars and into Dinars, Euros, commodities generally and Precious Metals at an ever increasing pace.

As we already know, this has been a primary driver for the commodities boom. The recent attempt by the United States to maintain its dominance by brute force – a big reason why Iraq was invaded was that it was planning to sell its oil in Euros – is right now, quite literally, running into the sand, and it is now only a question of when, not if, the helicopters arrive on the rooftops to evacuate the last of the embattled US service personnel, like in the film “The Killing Fields”, although a last wildly dangerous attack on Iran still cannot be ruled out.

Having looked at the fundamentals, let’s now see what the charts have to say about the dollar.

On the 1-year chart for the dollar index we can see how the plunge on Thursday broke the dollar down out of a gentle uptrend that had been in force from the May low. It fell steeply again on Friday to arrive in the support zone at the May – June low.

This support may provide temporary relief, but the severity of the decline suggests that it won’t be long until it resumes, assuming it pauses at all that is, which it may not. Note the bearish alignment of the moving averages, with the 50-day having closed up the gap with the 200-day in recent months, creating the potential for another severe decline.

On the 6-year chart we can see that the dollar had been marking out a potential Head-and-Shoulders bottom pattern since early 2004, but that the action of the past few days signals that the pattern is aborting, and a clear break below the May lows, which we are close to, will project the index down to the crucial long-term support at and approaching 80. What is the origin of this strong long-term support? To see this we will have to look at a chart going back many years.

Iran to Replace Dollar with Euro in Foreign Trade
Mehr News Agency

TEHRAN, Dec. 4 (– Iran has decided to replace the dollar with euro in its foreign trade given the continual impediments and hostile policies directed by U.S. toward the country, Iranian finance minister said on Monday.

According to ISNA, the would-be decision is also more attuned to existing trade volume between Iran and European nations, the country’s major economic partners, which is transacted through the ‘euro banks’. “Such inclination has been underlying part of our economic policy for awhile and our Oil Stabilization Fund (OSF) in dollar is at its lowest now,” Davud Danesh-Jafari continued.

Back in September, the head of the Central Bank of Iran (CBI) Ebrahim Sheibani had threatened that Iran would resort to dollar-to-euro conversion if the U.S. pressure continued. Moreover, the 9/11 event seemed to consolidate a tentative unanimity being formed on this matter among Iranian statesmen after the emergence of euro in 2000.

Experts believe that less reliance on dollar and conversion to euro may increase Iran’s financial flexibility and access to euro accounts would be easier if the U.S. chooses to impose a unilateral economic sanction on the country.

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