The US dollar is in the grips of a serious crisis. Its value is dropping almost daily against most major and even many minor currencies around the world, and calls for its replacement as the global reserve currency are being made, openly and often by quite senior public figures – also on a near-daily basis. But any objective examination of the state and prospects of the US economy provides ample evidence to support the idea of a dollar decline and the growing enthusiasm to dethrone it – at least, that is, until the alternatives are considered.
Just yesterday (Thursday), for example, Daisuke Uno said that the dollar may fall to a rate of 50 yen next year, compared to its current level around 90 yen – which is already very low by historical standards. Mr Uno’s opinion is not irrelevant, if only because he is the ‘chief strategist’ of Mitsui Sumitomo Banking Corp, Japan’s third-largest bank. “The U.S. economy will deteriorate into 2011 as the effects of excess consumption and the financial bubble linger,” Uno was quoted on Bloomberg a saying, adding that “the dollar’s fall won’t stop until there’s a change to the global currency system.” Although the rationale quoted is couched in terms of fundamental economic analysis, the full article gives the impression that Uno is basing himself primarily on technical analysis – or perhaps he uses both, as indeed he should.
In any event, let’s assume for the purposes of the discussion that he is right, and the dollar does indeed lose over 40% of its value against the yen over the next year or so.
What does he think will happen to the rest of the world – starting with Japan? After all, the Japanese economy is in such desperate straits that it makes the American one look almost good by comparison. The main threat hanging over the US economy – that total government debt will grow so rapidly that it will be larger than the country’s GDP – is an achievement the Japanese chalked up years ago. Now their massive and continuing deficit spending is heading towards a new target: a debt-to-GDP ratio of 200%.
However, and unfortunately for the Japanese people, their rapidly-ageing population is no longer able to maintain the level of savings it used to achieve and the saving rate is steadily falling toward zero. The national pension system is about to swing into net payments rather than net income, so the sources that hitherto funded the Japanese government debt are shriveling up. The only hope, therefore, is to fall back on Japan’s ace, namely export-led growth. But if the yen is at 50 to the dollar, whom does he think is going to buy Japanese exports? The Chinese or the Indians? They can’t afford it either and will try to make stuff themselves, or cheaper versions thereof.
In short, although it’s difficult to ascertain which galaxy Mr Uno comes from, his analysis is totally detached from this world. Japan cannot and will not survive a rapid collapse in the dollar. But let’s not snigger at the wretched Japanese, who have allowed their miracle economy to disintegrate. What about us here? Yesterday, as part of the same steady erosion in the dollar’s value, the shekel slipped below the 3.70 level. Foreign analysts who follow the Israeli economy have been predicting for some time that the shekel will reach 3.60, 3.50, 3.40 – each seeking to outdo the others in their forecasts. In a situation in which the dollar steadily falls around the world, this is not impossible, because the Bank of Israel’s intervention is aimed at offsetting autonomous shekel strength, not a rise in the shekel which is actually part of a global decline in the dollar.
But if the shekel climbs in value against the dollar (remember, 3.60 represents a higher value than 3.70), then we, too, will have increasing difficulty in selling our goods and services. Once software programmers in Herzliya cost as much, or more, as they do in California, Israeli high-tech becomes uncompetitive and many companies will either leave or wither. The supposedly remote currency crisis is actually critical for the Israeli economy, as it is for the Japanese, and for most other economies. A continued decline in the dollar, let alone a rout or rapid collapse, will cause severe dislocation all around the world – and that’s just from an economic and financial perspective. What do Mr Uno and all the other smart-ass financial analysts think the geo-political implications of a dollar collapse will be, for American allies on the one hand (that’s us) and enemies on the other (u-no-who)?
We are back to basic choices, almost as stark as last year: either the Western economies, with or without Chinese co-operation, act in concert to support the dollar, or they are pulled down themselves by its collapse.