U.S. dollar at the abyss?

Even Federal Reserve Chairman Alan Greenspan has now made clear that he is concerned about the apparent free fall of the U.S. dollar. After more than a decade of using U.S. dollars to finance imports from other countries, it would appear that we have come to a possible braking point (or breaking point!).

While this seemed like a virtuous circle for a time – the Federal Reserve pumped dollars into our banking system, we borrowed them and then spent them to buy products from the new manufacturing centers of Asia; in turn, the Asians built massive manufacturing capacity and built up a surplus of dollars that they then used to buy U.S. treasury bills and U.S. corporate bonds and stocks so that the whole cycle could continue. But at the end of the day the U.S. must pay interest on the debt it takes on and that means our economy must be generating sufficient value to meet that interest payment. There are credible indications that we are not able to do that.

UCLA economic historian Robert Brenner argued in a recent talk that in fact U.S. corporate profitability has not recovered from the slump of the late 70s – that the boom of the late 80s was built on junk bonds that collapsed in the early 90s and that the boom of the late 90s was built on dot com illusions which collapsed in the spring of 2000. Any semblance of recovery since then, he suggests, is resting on a new bubble, this time in real estate.

The decline in the dollar relative to the Euro in the past few months suggests that foreign investors may no longer be willing (or able) to continue their role in the cycle. If that is the case and Brenner is right then we may be headed for a dramatic economic collapse. One leading Wall Street economist recently told clients that the U.S. had only a ten percent chance of avoiding “financial armageddon.”

This is heady stuff and complicated as well. Attention to this issue will be a central goal of GlobalLabor in the months to come. For anyone who wants to plunge into this issue here is a link to a series of articles by Henry Liu, an investment banker and writer for Asia Times, who follows these issues closely particularly as they impact China.

(Note: Liu is far more sympathetic to what he calls “socialism” in China than I think is justified. But there is no mistaking his depth of knowledge about these issues. My suggestion is to just substitute “neo-mercantilism” when he talks about Chinese socialism – that seems to me a better way to understand the statist orientation of many of the Asian economies (and some in Europe) that resist the U.S. model of free market economics.)