The Dollar Crisis E-Book

Richard Duncan

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 446

Veröffentlichungsjahr: 2011

Beschreibung

In this updated, second edition of the highly acclaimed international best seller, The Dollar Crisis: Causes, Consequences, Cures, Richard Duncan describes the flaws in the international monetary system that have destabilized the global economy and that may soon culminate in a deflation-induced worldwide economic slump. The Dollar Crisis is divided into five parts: Part One describes how the US trade deficits, which now exceed US$1 million a minute, have destabilized the global economy by creating a worldwide credit bubble. Part Two explains why these giant deficits cannot persist and why a US recession and a collapse in the value of the Dollar are unavoidable. Part Three analyzes the extraordinarily harmful impact that the US recession and the collapse of the Dollar will have on the rest of the world. Part Four offers original recommendations that, if implemented, would help mitigate the damage of the coming worldwide downturn and put in place the foundations for balanced and sustainable economic growth in the decades ahead. Part Five, which has been newly added to the second edition, describes the extraordinary evolution of this crisis since the first edition was completed in September 2002. It also considers how the Dollar Crisis is likely to unfold over the years immediately ahead, the likely policy response to the crisis, and why that response cannot succeed. The Dollar Standard is inherently flawed and increasingly unstable. Its collapse will be the most important economic event of the 21st Century.

Leseprobe

Contents

Preface to the Revised Edition

Introduction

Part One: The Origin of Economic Bubbles

Chapter 1: The Imbalance of Payments

International Reserves

The Era of Paper Money

Imbalance of Payments

Credit Creation

References

Chapter 2: Effervescent Economies

The Great Japanese Bubble

The Asian Miracle Bubble

Chapter 3: The New Paradigm Bubble

The Boomerang Currency

References

Chapter 4: The Great American Bubble (of the 1920s)

Why The Twenties Roared

Conclusion

Reference

Part Two: Flaws in the Dollar Standard

Chapter 5: The New Paradigm Recession

Introduction

Giving Credit Where Credit Isn’t Due

The Business Cycle

Conclusion

Reference

Chapter 6: The Fate of the Dollar: Half a Trillion Reasons Why the Dollar Must Collapse

Introduction

Financing The U.S. Current Account Gap: Half A Trillion Dollars A Year Required

The Investment Alternatives

Conclusion

References

Chapter 7: Asset Bubbles and Banking Crises

Asset Price Bubbles

Systemic Banking Crises, Old and New

From Banking Crises to Fiscal Crises?

Conclusion

References

Chapter 8: Deflation

Worldwide Disinflation

Free Trade is Deflationary

Excess Capacity

There is Worse to Come

Do Bank Bailouts Cause Liquidity Traps?

Conclusion

References

Part Three: Global Recession and The Death of Monetarism

Chapter 9: Global Recession: Why, When, and How Hard?

Introduction

The Importance of Imports

How Hard?

When?

Conclusion

References

Chapter 10: The End of the Era of Export-led Growth

A Question of Timing

How Much Must The Dollar Fall?

At The Dawn of A Difficult New Age

Conclusion

References

Chapter 11: Monetarism is Drowning

Introduction

“Print Lots of Money”

Irrational Monetarism?

Mg: Global Money Supply

References

Part Four: Policy Tools For The 21St Century

Chapter 12: A Global Minimum Wage

Introduction

Establishing Equilibrium in The Global Economy

The Proposal

The Illustration

Four Big Steps

Old Tools Have to Be Replaced

If Unanimity is Lacking ...

A Caveat

Reference

Chapter 13: Controlling the Global Money Supply

Controlling Mg

Then What? The Hair of the Dog That Bit You

The IMF-GCB

References

Part Five: The Evolution of a Crisis

Chapter 14: Deflation: The Fed’s Greatest Fear

References

Chapter 15: The Run on the Dollar, 2003

References

Chapter 16: The Great Reflation

References

Chapter 17: Understanding Interest Rates in the Age of Paper Money

Reference

Chapter 18: What’s Worrying the Chairman?

References

Chapter 19: After Reflation, Deflation

References

Chapter 20: Bernankeism

References

Conclusion

Index

Copyright © 2005 by John Wiley & Sons (Asia) Pte Ltd

First published in 2003 by John Wiley & Sons (Asia) Pte Ltd

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Preface to the Revised Edition

The principal flaw in the post-Bretton Woods international monetary system is its inability to prevent large-scale trade imbalances. The theme of The Dollar Crisis is that those imbalances have destabilized the global economy by creating a worldwide credit bubble. In the two years and three months since the first edition of the book was written, those imbalances, and the risk to the global economy of them coming unwound, have grown enormously. The U.S. current account deficit has ballooned by 40% and become the most hotly debated issue in international economics. Total international reserves, the best measure of global money supply, have surged by US$1.2 trillion, or 50%, with the world’s central banks creating paper money at a pace never before attempted during peacetime.

This heightened disequilibrium in the global economy was the outcome –indeed, the goal – of the policy response to the worldwide economic slump that followed the implosion of the New Paradigm technology bubble. Policymakers in the United States applied unprecedented fiscal and monetary stimuli to pull the world out of the ensuing economic downturn and to ensure that deflation did not take hold in America as it has in Japan. Three large tax cuts took the U.S. budget from a surplus of US$127 billion in 2001 to a deficit of US$413 billion in 2004; and the federal funds rate was cut to 1%, a four-decade low. As interest rates fell in the United States, property prices soared, creating a wealth effect that was more than sufficient to offset the losses from the stock market crash. Equity extraction from homes fueled consumption, consumption fueled imports, and imports reflated the global economy. It was economic management through bubble creation.

Nearly every asset class appreciated in value except one – the U.S. dollar. With the U.S. current account deficit approaching 5% of U.S. GDP in 2002, it became clear that the “strong dollar trend” was unsustainable. Private investors dumped dollars in such quantities that the United States would have faced a balance of payments crisis had Asian central banks not intervened in the foreign exchange markets, bought up all the dollars the private sector wished to unload, and then reinvested those dollars in dollar-denominated assets in the United States. Japan’s intervention amounted to US$320 billion, requiring the Bank of Japan to create money equivalent to 1% of global GDP, in what was effectively one of the most aggressive experiments in monetary policy ever conducted.

To date, the results of these efforts to reflate the global economy have been impressive. In 2004, the world economy grew at the fastest rate in nearly 30 years. Economic bubbles are easier to create than to sustain, however. The United States is the world’s engine of economic growth because it imports 75% more from the rest of the world than it exports. The result is a current account deficit of US$640 billion that even Fed Chairman Alan Greenspan has described as unsustainable. There are no sources of global aggregate demand capable of substituting for the U.S. current account deficit. When that deficit corrects, as it inevitably must, the global reflation it brought about in recent years will give way to global deflation, as the capacity that has been put in place to fulfill the demand from an expanding U.S. trade deficit goes unutilized.

The policy options then will be to endure a very severe and protracted global economic slump, or to provide a new round of stimulus. Conventional policy tools are nearly exhausted, however. Therefore, an unconventional approach must be anticipated. The Federal Reserve, terrified of deflation, has spelled out what that response is likely to be: fiscal stimulus financed by money creation. If applied aggressively enough, that approach is likely to succeed in staving off the slump for some time by creating an even greater bubble; but ultimately it will all end very badly. If helicopter money were a viable policy option, it would have been discovered a long time ago and we would all be living in a world of infinite prosperity today.

Seven new chapters have been added to the revised edition of this book as Part Five to describe the extraordinary evolution of this crisis between September 2002, when the first edition was completed, and the end of 2004, as the second edition goes to print. Part Five also considers how the dollar crisis is likely to unfold over the years immediately ahead, the likely policy response to the crisis, and why that response cannot succeed. The dollar standard is inherently flawed and increasingly unstable. Its collapse will be the most important economic event of the 21st century.

Richard Duncan

March 2005

Hong Kong

Introduction

Then the Gods of the Market tumbled, and their smooth-tongued wizards Withdrew, And the hearts of the Meanest were humbled and began to believe It was true That All is not Gold that Glitters, and Two and Two make Four And the Gods of the Copybook Headings limped up to explain it once more.

— Rudyard Kipling, 1919

When the Bretton Woods international monetary system broke down in 1973, the world’s financial officials were unable to agree on a new set of rules to regulate international trade and monetary relations. Instead, a new system began to emerge without formal agreement or sanction. It also remained nameless. In this book, the current international monetary system which evolved out of the collapse of Bretton Woods will be referred to as the dollar standard, so named because U.S. dollars have become the world’s core reserve currency in place of gold, which had comprised the world’s reserve assets under the Bretton Woods system as well as under the classical gold standard of the 19th century.

The primary characteristic of the dollar standard is that it has allowed the United States to finance extraordinarily large current account deficits by selling debt instruments to its trading partners instead of paying for its imports with gold, as would have been required under the Bretton Woods system or the gold standard.

In this manner, the dollar standard has ushered in the age of globalization by allowing the rest of the world to sell their products to the United States on credit. This arrangement has had the benefit of allowing much more rapid economic growth, particularly in large parts of the developing world, than could have occurred otherwise. It also has put downward pressure on consumer prices and, therefore, interest rates in the United States as cheap manufactured goods made with very low-cost labor were imported into the United States in rapidly increasing amounts.

However, it is now becoming increasingly apparent that the dollar standard has also resulted in a number of undesirable, and potentially disastrous, consequences.

First, it is clear that the countries that built up large stockpiles of international reserves through current account or financial account surpluses experienced severe economic overheating and hyperinflation in asset prices that ultimately resulted in economic collapse. Japan and the Asia Crisis countries are the most obvious examples of countries that suffered from that process. Those countries were able to avoid complete economic depression only because their governments went deeply into debt to bail out the depositors of their bankrupt banks.

Second, flaws in the current international monetary system have also resulted in economic overheating and hyperinflation in asset prices in the United States, as the country’s trading partners have reinvested their dollar surpluses in U.S. dollar-denominated assets. Their acquisitions of stocks, corporate bonds, and U.S. agency debt have helped fuel the stock market bubble, facilitated the extraordinary misallocation of corporate capital, and helped drive U.S. property prices to unsustainable levels.

Third, the credit creation that the dollar standard made possible has resulted in over-investment on a grand scale across almost every industry. Over-investment has produced excess capacity and deflationary pressures that are undermining corporate profitability around the world.

The U.S. economy, rightly described as the world’s engine of economic growth, is now beginning to falter under the immense debt burden of its corporate and consumer sectors. The rest of the world has grown reliant on exporting to the United States and, up until now, has allowed the United States to pay for much of its imports on credit. However, record bankruptcies and accounting fraud at the highest level of corporate America raise serious doubts about the creditworthiness of the United States. The trading partners of the United States now face the choice of continuing to invest their dollar surpluses in U.S. dollar-denominated assets despite very compelling reasons to doubt the security of such investments, or else converting their dollar surpluses into their own currencies, which would cause their currencies to appreciate, and their exports and economic growth rates to decline. Neither choice is appealing, particularly considering the economic fragility of most of those countries and the huge amounts required to finance the U.S. current account deficit – currently US$50 million an hour, or 5% of U.S. gross domestic product (GDP) per annum.

In recent years, severe boom-and-bust cycles have wrecked the financial systems and government finances of countries with large balance of payments surpluses; excessive credit creation has fueled over-investment and culminated in strong deflationary pressures around the world; and the reinvestment of dollar surpluses into dollar assets has facilitated reckless debt expansion in the United States that has impaired the creditworthiness of its corporate and consumer sectors to such an extent as to preclude that country from continuing to serve as the world’s engine of growth.

In short, the world economy is in a state of extreme disequilibrium and is at risk of plunging into the most severe downturn since the Great Depression. The purpose of this book is to demonstrate that flaws in the international monetary system are responsible for that disequilibrium; to show that the unwinding of those imbalances will soon culminate in a collapse in the value of the U.S. dollar and a worldwide economic slump; and to describe what can be done to re-establish equilibrium in the global economy and to lay the foundations for sustainable economic growth in the decades ahead. The dollar standard has failed and has begun to collapse into crisis. This crisis will be referred to as the dollar crisis, both because it originated from the excessive creation of dollar reserve assets and because it must culminate in the collapse in the value of the dollar.

The Dollar Crisis is divided into five parts. Part One will describe the nature of the extraordinary imbalances in the global economy and explain how they came about. It will be shown that trade imbalances, and in particular the U.S. trade deficit, resulted in the excessive credit creation responsible for the economic bubble in Japan in the 1980s, the Asian Miracle bubble of the mid-1990s, and the New Paradigm bubble in the United States in the late 1990s.

Part Two will demonstrate why the disequilibrium in the global economy is unsustainable and must result in a collapse in the value of the U.S. dollar and elimination of the U.S. current account deficit.

Part Three will show how a severe recession in the United States and the elimination of the U.S. current account deficit brought about by a collapsing dollar will cause a severe global economic slump.

Part Four will propose measures that could help restore balance in the global economy and mitigate the extraordinary damage that now seems likely to result from the implosion of a worldwide credit bubble.

Part Five, newly added to the revised edition of The Dollar Crisis, describes the extraordinary impact that the 40% deterioration in the U.S. current account deficit and the 50% increase in the global money supply have had on the global economy in the short time since the first edition went to print, as well as what can be expected next as the dollar crisis continues to unfold.

PART ONE

The Origin of Economic Bubbles

INTRODUCTION

The global economy is in a state of extreme disequilibrium. Excess capacity across most industries has brought about deflationary pressures that are undermining corporate profitability, while the collapse of a series of asset price bubbles has created financial sector distress in many countries around the world.

Part One will demonstrate how the international monetary system that evolved following the collapse of the Bretton Woods system facilitated the development of a worldwide credit bubble. It will be shown that the U.S. current account deficit flooded the world with dollar liquidity, as well as how that liquidity caused excessive credit creation and economic overheating in those countries with large trade or financial account surpluses. It will also establish that a similar chain of events culminated in the Great Depression of the 1930s.

Chapter 1 will show that an extraordinary surge in international reserves took place once the restraints inherent in the Bretton Woods system were eliminated when that system collapsed. Next, the mechanics of the Bretton Woods system and its predecessor, the gold standard, are briefly described in order to demonstrate that both systems contained automatic adjustment mechanisms that prevented persistent trade imbalances between countries. The primary flaw of the dollar standard, the current international monetary system, is that it lacks any such adjustment mechanism. Consequently, trade imbalances of unprecedented magnitude and duration have developed. It will be made clear in following chapters how those trade imbalances have destabilized the global economy. Finally, the reader will be made familiar with the terminology used to describe the balance of payments between countries and be shown that extraordinary imbalances on the current and financial accounts have left surplus countries holding an enormous amount of U.S. dollar-denominated debt instruments and turned the United States, the primary deficit country, into the most heavily indebted nation in history.

Chapter 2 describes how those countries with large current and/or financial account surpluses have been blown into bubble economies as those surpluses enter their domestic banks and set off a process of credit creation in the same way as if the central banks of those countries had injected high-powered money into those banking systems. Japan and Thailand are taken as examples of how countries with large surpluses and a corresponding rapid accumulation of international reserves were transformed into bubble economies as their trade or financial account surpluses entered their banking systems and unleashed an explosion of credit creation that caused economic overheating and hyperinflation in asset prices.

Chapter 3 demonstrates how the United States has been destabilized by its own enormous current account deficit. It will be shown that the foreign capital inflows into the United States that finance the current account deficit are, to a large extent, merely a function of the U.S. current account deficit itself. The trading partners of the United States have accumulated large reserves of U.S. dollar-denominated assets with their trade surpluses, rather than converting those dollars into their own currencies, which would have caused their currencies to appreciate and their trade surpluses and economic growth rates to slow. Consequently, their acquisitions of U.S. dollar-denominated stocks, corporate bonds, and U.S. agency debt have helped fuel the stock-market bubble, facilitated the extraordinary misallocation of corporate capital, and helped drive U.S. property prices higher.

Chapter 4 explains how the breakdown of the classical gold standard at the outbreak of World War I set off a chain of events remarkably similar to that which has occurred following the collapse of the Bretton Woods system. Once the discipline inherent in the gold standard was removed, trade imbalances swelled and international credit skyrocketed. The result was prosperity . . . followed by depression.

Part One shows how trade imbalances have destabilized the global economy by flooding the world with dollar liquidity and causing economic bubbles in Japan, the Asia Crisis countries, and the United States. Part Two will explain why the disequilibrium that has resulted from those imbalances is unsustainable.

Chapter 1

The Imbalance of Payments

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

— Ludwig von Mises, 19491

During the three decades following the breakdown of the Bretton Woods international monetary system, trade imbalances have flooded the world with liquidity, causing economic overheating and hyperinflation in asset prices, initially within individual countries and now on a global scale. This chapter will illustrate the extraordinary surge in international reserves that came about once the restraints inherent in the Bretton Woods system were eliminated when that system collapsed. Next, the mechanics of the Bretton Woods system and its predecessor, the gold standard, are briefly described in order to demonstrate that both systems contained automatic adjustment mechanisms that prevented persistent trade imbalances between countries. The primary flaw of the dollar standard, the current international monetary system, is that it lacks any such adjustment mechanism. Consequently, trade imbalances of unprecedented magnitude and duration have developed. It will be made clear in the following chapters how those trade imbalances have destabilized the global economy. Finally, the terminology used to describe the balance of payments between countries will be explained in order to demonstrate how extraordinary imbalances on the current and financial accounts have left surplus countries holding an enormous amount of U.S. dollar-denominated debt instruments and turned the United States, the primary deficit country, into the most heavily indebted nation in history.