Jump to content
House Price Crash Forum
Sign in to follow this  
GCS15

Dumping Of Us Dollar Could Trigger 'economic Septe

Recommended Posts

The Australian

Dumping of US dollar could trigger 'economic September 11'

There is a potentially fatal flaw at the heart of the global economy: the strong possibility of financial meltdown following a collapse of confidence in the greenback, Clyde Prestowitz tells Bruce Stannard

August 29, 2005

THE nightmare scenario that haunts global strategist Clyde Prestowitz is an economic September 11 -- a worldwide financial panic triggered by a sudden massive sell-off of US dollars that would lead inexorably to the collapse of economies around the world.

If that happens, Prestowitz predicts: "It would make the Great Depression of the 1930s look like a walk in the park."

Australia would be sucked into the vortex of such a recession, which would cause great hardship throughout the world, he warns.

Prestowitz is not a doomsayer, neither is he alone in his views. As president of the Economic Strategy Institute, a Washington think tank, he is in regular contact with the most influential US business leaders, several of whom -- Warren Buffet and George Soros included -- have taken steps to hedge their currency positions against the possibility of a cataclysmic plunge in the greenback.

"Right now," he says, "we have a situation in which the US is running huge trade deficits -- about $US650 billion ($766 billion) in 2004 -- which are financed by borrowings from the central banks of Asia -- mainly the Chinese and the Japanese. All the world's central banks are chock-full of US dollars -- they're holding many more dollars than they really want. They're holding those dollars because at the moment there's no great alternative and also because the global economy depends on US consumption. If they dump the dollar and the dollar collapses, then the whole global economy is in trouble.

"However, some countries have a bigger stake than others in maintaining the status quo. China and Japan have a big stake in maintaining the flow of their exports to the US and keeping the US economy humming. Russia, on the other hand, does not export much to the US. India doesn't export much to the US. Yet Russia and India are also big dollar-holders. They hold many more dollars than they really want or need.

"It doesn't take any great stretch of the imagination to see what could happen if one of these central bank managers decides to dump dollars. We had a situation recently when a mid-level official at the Central Bank of Korea used the word 'diversification'. It was a throwaway remark at some obscure lunch, but there was instantaneous overreaction. The US stock market fell by 100 points in 15 minutes because the implication was that South Korea might be shifting out of US dollars.

"So picture this: you have a quiet day in the market and maybe some smart MBA at the Central Bank of Chile or someplace looks at his portfolio and says, 'I got too many dollars here. I'm gonna dump $10 billion'. So he dumps his dollars and suddenly the market thinks, 'My god, this is it!' Of course, the first guy out is OK, but you sure as hell can't afford to be the last guy out.

"You would then see an immediate cascade effect -- a world financial panic on a scale that would dwarf the Great Depression of the 1930s."

Prestowitz says the panic could be started by something as simple as a hedge-fund miscalculation.

"We had exactly that scenario in the US recently," he points out, "when a big hedge fund called Long Term Capital Management went belly-up. These guys were pros. They had two Nobel prize-winning economists writing their trading algorithms, and their traders were the creme de la creme among New York bond traders.

"They made a big bet -- a trillion dollars leveraged 20 to one, and they blew it. They went belly-up. That threatened to bring down the whole system so US Federal Reserve chairman Alan Greenspan had to organise a bail-out through the Federal Reserve Bank of New York.

"Now consider this: there are currently 8000 hedge funds in the US alone. Every day $6 trillion of derivative instruments trade on international markets. If there are four people in the world who understand those trades, I'd be surprised. So the potential for another disaster is not insignificant. This is why Warren Buffet, chairman of investment giant Berkshire Hathaway, is betting $US21 billion against the dollar. This is why currency speculator and hedge fund manager George Soros has also made a big bet against the dollar.

"Soros is one of the greatest currency speculators of all time. He was the guy who broke the British pound in the early 1990s by betting $US10 billion it would fall. He made a quick billion when it did. In 2002, he warned that the greenback was in danger of losing a third of its value. Of course, it could be argued that Soros is a professional hedge fund manager whose job is to play the ups and downs of currencies and his remarks could be seen more as manipulation than prophecy. And yet, in conversations with me, Soros has expressed concern about the market fundamentalist view that prevails in Washington and parts of Wall Street.

"This is the belief that markets are self-correcting and best left alone. Soros calls this a dangerous siren song. Far from being self-correcting, he emphasises, markets tend to excess. They over-shoot. Anyone with any experience of markets knows this.

"When markets are going down, all the weaknesses get concentrated, and you need intervention at the right time to stop things from getting out of control. If the dollar started to melt down, the results could be really nasty. A 1930s-style global depression is not out of the question."

To underscore the point that he is not alone in this, Prestowitz cites Paul Volcker, head of the Federal Reserve before Greenspan, who has said publicly there is a 75 per cent chance of a dollar crash in the next five years.

"No wonder people look at this and say, 'Holy cow!'," he says. "No one knows for sure what will happen, but clearly the global markets could implode very quickly. The lack of an alternative to the dollar is the only reason it hasn't taken a big fall already."

Prestowitz, formerly a trade adviser and negotiator for former US president Ronald Reagan, believes the US will continue to be the world's most powerful economy for the foreseeable future. But he foreshadows an inexorable decline, a trend that is likely to continue "depending on the way we play our cards".

"Right now, we're playing them just about as badly as it's possible to play them, and that has geo-political implications." he says. "We've outsourced trying to deal with North Korea to China, we really can't deal with Iran, so we've outsourced that to the EU, which is struggling, and Iran is cozying up to China. Other bad actors like Zimbabwe's Robert Mugabe and Sudan are cozying up to China.

"America's global hegemony is already under challenge, and that challenge is going to become more and more evident as the extent of the relative US economic decline becomes evident. Right now, the US dollar is probably 40 per cent overvalued versus the Japanese yen or the Chinese renminbi. How's the US going to look as a global power when the dollar is at 50 per cent of its current value?"

Three Billion New Capitalists by Clyde Prestowitz is published by Basic Books at $US39.95

Share this post


Link to post
Share on other sites
To underscore the point that he is not alone in this, Prestowitz cites Paul Volcker, head of the Federal Reserve before Greenspan, who has said publicly there is a 75 per cent chance of a dollar crash in the next five years.

Ok - So in real terms what would this mean potentially for the United States client states of the UK and Australia? By that I mean - How is the GCS03 on the street affected?

Share this post


Link to post
Share on other sites

Great article - especially enjoyed - "Soros has expressed concern about the market fundamentalist view that prevails in Washington and parts of Wall Street.

"This is the belief that markets are self-correcting and best left alone. Soros calls this a dangerous siren song. Far from being self-correcting, he emphasises, markets tend to excess. They over-shoot. Anyone with any experience of markets knows this."

Share this post


Link to post
Share on other sites
Great article - especially enjoyed - "Soros has expressed concern about the market fundamentalist view that prevails in Washington and parts of Wall Street.

"This is the belief that markets are self-correcting and best left alone. Soros calls this a dangerous siren song. Far from being self-correcting, he emphasises, markets tend to excess. They over-shoot. Anyone with any experience of markets knows this."

Yeah and George Soros, destroyer of national economies, knows this better than anyone else. He did however get hammered by the Aussies when he went to disinvest on a day that the National Australia Bank decided to bring their money home. :lol::lol::lol: Every dog has its day :ph34r::ph34r::ph34r:

Share this post


Link to post
Share on other sites
Three Billion New Capitalists by Clyde Prestowitz is published by Basic Books at $US39.95

Perhaps Mr. Prestowitz's hedge against a forthcoming economic collapse is by selling a lot of books ? No conflict of interest there then ? :rolleyes:

I'm not saying that such a meltdown wouldn't happen, and I don't have the economic expertise or knowledge to say that it wouldn't - but I think we have to be careful just accept articles like this with open arms, just because it suits us .....

Edited by Warwickshire Lad

Share this post


Link to post
Share on other sites
The Australian

"No wonder people look at this and say, 'Holy cow!'," he says. "No one knows for sure what will happen, but clearly the global markets could implode very quickly. The lack of an alternative to the dollar is the only reason it hasn't taken a big fall already."

Isn't gold the alternative?

Share this post


Link to post
Share on other sites

One thing to check is if you have a lot of cash spread it around a few banks. Check with the banks is it covered by the government if it collapses. I think most banks are covered upto 10 K. Its worth checking.

Gold would be a good investment if the US dollar plunges and a wheelbarrow to carry all the $ notes down to the corner shop (if it hasn't been looted) to get a loaf of bread.

Share this post


Link to post
Share on other sites
stop talking about gold, i havn't bought enough yet and all this talk will get into the papers and push the price up before im ready.

Shhhhh

How much is enough?

I'm of meagre means and have been adding to my Silver Hoard quite a bit lately (Silver first then gold)

Share this post


Link to post
Share on other sites
Where do you keep it...?  :huh:

Stashed around the house. I haven't got much :ph34r:

I managed to pick up a few that have a decent nuministic(sp. due to Bourbon) value for a song and I intend to trade them for either more bullion coins or for gold coins (probably for gold coins). Well that's the plan. :ph34r:

Edited by GCS15

Share this post


Link to post
Share on other sites
How much is enough?

I'm of meagre means and have been adding to my Silver Hoard quite a bit lately (Silver first then gold)

You could start by investing 10 % of what you earn and possibly a percenatge of what you have saved, whatever you feel comfortable with. I am not a gold expert but have read some of the billionaires are already buying gold. It also best to do a google search on price of gold during depression. When times are good gold tens to be lower.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.