Bush’s Chernobyl Economy; hard times are on the way

[Seb]

Bush’s Chernobyl Economy; hard times are on the way

Certainly woke me up this morning!

I need a shot of optimism! Can anybody help?

[Kim o the Concrete Jungle]

I come from a place that faced an economic crisis of this magnitude back in 1932. And from what I know of that incident, I think this article overstates its case.

In the real world, I believe, China and the other countries financing the US debt are going to do everything in their power to avoid the kind of economic chaos the article predicts.

Even if they are, at first, reluctant to be accomodating, there is one single word that will force them to change their minds (and their underwear). That word is "default".

[Seb]

I guess it's kind of like the scene in 'The Great Escape' where the prisoners have to shuffle earth from their trousers without anybody noticing.

If somebody offloads too many of their dollars then somebody else is left holding a worthless clutch of them.

Has the tipping point finally arrived for the dollar?

Stock markets across the globe had a tough time of it last week. The FTSE 100 fell 1.1% to 6,122 by the end of the week, Japan‘s Nikkei 225 shed 2.2% to 15,734, and even the seemingly unstoppable Dow Jones was knocked off its stride.

A sharp slide in the dollar was the main thing worrying investors. On Friday, the euro rose to more than $1.30, while the pound hit more than $1.93, levels not seen for more than 18 months. And this is unlikely to be the end.

“We are just at the start of what we think will be a downtrend for the dollar - a tipping point has probably been reached,” said Tim Fox of Dresdner Kleinwort Wasserstein. He expects the pound to hit the $2 by March next year - a level not seen since 1992.

So why the sudden plunge in the dollar?

Long overdue

The biggest question isn’t so much “why is the dollar falling now?” - it’s more “how has it managed to defy gravity for so long?”...

[Pastafarian]

I've wondered why the dollar has held up for so long, but I'm also baffled now. What I remember triggering the latest drop in the dollar was China's saying they're diversifying their currency reserves away from the dollar a few weeks ago. Now, why would they say that? If it's true, by announcing it, they've not only devalued the dollar, they've devalued their huge reserves of the dollar, so they'll have to sell those dollars at a discount.

They may be increasing their dollar holdings, but that doesn't make sense, either. The only thing I could figure is, maybe Chinese officials personally shorted the dollar in anticipation of the announcement.

[Master Taran]

Another conspiracy?

[Don Alhambra]

Maybe they said it, thus triggering a slide in the dollar, so they can actually buy more dollars so when the thing goes up again they'll be even better off.

[Seb]

Originally Posted by Pastafarian

I've wondered why the dollar has held up for so long, but I'm also baffled now...

Yes, that is rather puzzling.

[Seb]

Well, somebody is reading the tea leaves positively

[Glen Livet]

This isn't exactly 'hot off the press' news but it is a clear indication of how bad things are for the American trading economy.

During the early years of Thatcher and Regan there was serious discussion about fixing the GBP/USD ratio at 1:1 as the UK economy was very close to parity with the US.

Thanks to the heroic salvation Margaret Thatcher achieved for the economy of the UK ( among many other heroic achievements ). when the Tories left power the ration of GBP/USD was 1 : 1.58.

Now the ratio is 1 : 1.90. In comparable terms it is even worse against the EUR.

The price that the USA is currently paying for this incompetance ( and that is what it is ) is to be bankrolled by Communist China, thus China has very effectively bought US silence regarding many export violations and civil rights abuses. Criticism of China is almost a no-go area in US government circles even when sanctions and embargos are flagrantly ignored.

Effectively a large slice of the US economy and media reporting is now under Chinese Communist control. If the Chinese support is removed - America goes down.

[Pastafarian]

Originally Posted by Glen Livet

Effectively a large slice of the US economy and media reporting is now under Chinese Communist control. If the Chinese support is removed - America goes down.

I don't agree about the media, but Chinese reserves are certainly crucial to the US economy. But if the US goes down, so does China, and China knows it. It's a fragile situation, but not I don't see China pushing that boulder down the hill deliberately.

That is, where do you think they're getting all those dollars they hold? By selling huge amounts of goods to the US. And if the US economy tanked, and Chinese exports to the US were to drop steeply, how do you think that would affect the Chinese economy?

[Glen Livet]

Hiya Pasta

China also trades heavily with Europe and Europe provides currency that is a strong alternative to a weak Dollar. So if ( and more likely, but not definitely, when ) the USD goes into a fast decline they have a viable basket of currencies whith which to offset any loss in market trading.

By the same token so much of the US infrastructure is now in Chinese control if things became too unstable it could be offshored to the lower outlay Asian suppliers ( the increase in Indian service industry and China's own growing offshore service supliers has already proved that this is both viable and easliy achieved ).

As for the US media's reluctance to report on China, I'll accept you have your finger far more on the pulse than I, but when exactly was the last time ABC, NBC or any of the other US players, reported on Chinese civil rights abuse regarding pro-democracy campaigners ?

[Pastafarian]

Originally Posted by Glen Livet

China also trades heavily with Europe and Europe provides currency that is a strong alternative to a weak Dollar. So if ( and more likely, but not definitely, when ) the USD goes into a fast decline they have a viable basket of currencies whith which to offset any loss in market trading.

I don't think so. For one thing, China had a larger trade surplus with the US than with Europe in 2005. Not so easy to replace. More important is the relative level of various currencies in China's reserves. Neither you nor I know what that is. China keeps it close to the vest. But I think it's safe to say China has a lot of dollars, which would lose a lot of value if the dollar lost a lot of value. That is, the loss would not be in "market trading," but in the value of huge (dollar-based) assets they're holding.

Originally Posted by Glen Livet

By the same token so much of the US infrastructure is now in Chinese control if things became too unstable it could be offshored to the lower outlay Asian suppliers ( the increase in Indian service industry and China's own growing offshore service supliers has already proved that this is both viable and easliy achieved ).

You lost me here. What I think of as infrastructure is physically located in the US (roads, ports, communications paths, power plants), and can't be offshored. I don't know how much of that is owned by Chinese interests, but I don't think it's a significant amount, and whether it's owned by China or India doesn't seem like a big difference. If you're talking about services, the US actually has a significant trade surplus with China in services.

Originally Posted by Glen Livet

As for the US media's reluctance to report on China, I'll accept you have your finger far more on the pulse than I, but when exactly was the last time ABC, NBC or any of the other US players, reported on Chinese civil rights abuse regarding pro-democracy campaigners ?

Well, I have to admit I don't know what the US TV networks are reporting. I get my news mostly from National Public Radio and The New York Times, where I have heard about civil rights abuses in China. But even if that's not typical of coverage in the US, what I was disagreeing with was your assertion that "Effectively a large slice of the US [economy and] media reporting is now under Chinese Communist control." The Communist Party of China is not in control of our media. Rupert Murdoch, maybe, but not Hu Jintao.

[Seb]

Lots more info, for those interested, on the decline of the dollar.

US setbacks see dollar plunge to 15-year low

Dollar woes poised to carry over into next year

Greenback is down about 50% vs. euro in past five years; down 6% vs. yen

[Seb]

More via Information Clearing House.

An article from today's Observer which also comments a bit on the export market between America and China.

Plunging dollar will set world markets reeling

The slowdown in the US economy, which has sent the dollar into freefall over the past fortnight, will have devastating knock-on effects in markets around the world, analysts warn.

You know, some people call me deeply pessimistic and that might be true. I've been charged with the fact that the material I read tends to be left wing...but I tend to buy the Financial Times every weekday from my student union for the very studenty price of 40p and the noises coming from the paper - re the state of the US economy, the financial mismanagement, the housing market, currency instability etc - aren't good.

[Gurdur]

Originally Posted by Seb

.... the noises coming from the paper - re the state of the US economy, the financial mismanagement, the housing market, currency instability etc - aren't good.

Yeppers.