Le Monde, France
The End of Dollar as King
EDITORIAL
Translated By Elias Mokole
December 09, 2007
France - Le Monde - Original Article (French)
Will the fall of the dollar accelerate out of control? Will the euro, inflated like a balloon, rise without limit to $1.55, $1.60, $1.70 or more? As the headline in the British weekly The Economist declared last week, this black scenario brings "panic" to financial circles. The crash of the dollar is not the most probably scenario, but it is no longer considered to be impossible.
Since its backing by gold was ended on the 15 August 1971, the dollar has lost more than a third of its value against other currencies. Its fall, therefore, did not start yesterday. It had been foreshadowed by crises, particularly in the late 1980s when the Japanese sumo wrestler seemed to be able to shake the American empire. But neither run-of-the-mill devaluations nor other crises have managed to challenge the supreme role of the dollar as the core of the global monetary system.
On the contrary. Emerging economies of Asia and the rich nations of the Persian Gulf have, for convenience, attached ('pegged' in financial terms) their currencies to the dollar. It is as if the system born with the 1944 Bretton Woods Agreement, which died precisely on the 15 August 1971, had been restored de facto. Outside continental Europe, the planet has restored a virtual global monopoly - creating a "quasi-dollar zone." Economists called this system Bretton Woods II .
And it is this Bretton Woods II that now threatens to come completely apart. The dollar is now suffering from a myriad sources of distrust in the short and long terms.
The first factor is the weakness of the American economy. Will there be recession, or not? Martin Feldstein, a former advisor to Reagan, now estimates that the probability of a decline is 50%. Clinton advisor Larry Summers believes that there will be a recession, and predicts that it will be long, going "beyond 2010." The Federal Reserve is tempted to lower interest rates to give itself some air - but quietly - because doing so would risk reigniting fears of inflation. There is talk in the United States of the return of stagflation - low growth with inflation – a terrifying hydra that has not been seen in 20 years. All of these considerations dull the shine of the dollar.
The second reason is the sub-prime crisis. It is now believed to be under control, but after two weeks it has re-emerged, casting doubt on the solidity of American banks (what is their maximum exposure?). And will it worsen in early 2008? None of these things are reassuring to those who invest in dollars.
The third element, more well known but even more serious, is the trade deficit. It fell a little with the value of the greenback, which makes American-made products more competitive. But the trade gap remains at 5.5 % of GDP: the dollar would have to be devalued significantly further to balance the books and eliminate the deficit.
All of the ingredients have come together to continue the slide. But another factor may contribute to the acceleration: the elimination of the fixed exchange rates used by developing nations and, more generally, the use of holding of currencies as reserves and to make payments.
Brazilian Gisele Bündchen, the world's most highly paid model, is not the only person who wants checks, "in any currency other than the dollar," according to Forbes (the beautiful woman later issued a denial; she accepts all checks). Ann Lauvergeon, the CEO of Areva, wants to be paid in Euros for Chinese nuclear reactors. Venezuela and Iran will soon reject dollars for political reasons. [Editor's Note: Iran has already stopped accepting dollars as payment for oils. See relevant articles on the Watching America homepage] Certain Gulf Emirates have officially decided to keep the dollar. Developing countries have accumulated $3 trillion in reserves, or 75 % of the global total. But what will China do, with $1.4 trillion? "This record reflects China's growing influence on the global economy and finance," says Jacques de Larosière, former head of the IMF. In particular, he says that it shows that "the world of finance" has passed into its hands. Will China challenge the dollar? "It is not in their interest to implement aggressive diversification policies, which could trigger a fall in the American currency and a depreciation of their assets," Larosière emphasizes. But since 2005, a trend toward diversification has become evident. The acquisition of businesses using "national funds" in emerging countries are part of this strategy.
We are "at the beginning of a relative decline of the dollar," summarizes Professor Michel Aglietta. The only way to reverse the process, he continues, would be to reduce the trade deficit rapidly, eliminating the primary cause of the greenback's weakness. Else, holders of the dollar will gradually get out of it, praying that their sales do not trigger "panic" in foreign exchange markets.
The dollar has been dethroned; the monetary multi-polar world has been born. How will it end up? Certainly, there will be a period of fluctuating exchange rates, according to Michel Aglietta. Within this context, since the euro is not the only rising currency, Asia should soon unite monetarily. According to Jacques de Larosière, "the IMF should regain its lost influence, and the United States, China and Japan, the three main sources of the disequilibrium, should accept the multilateral game." The wait for the post-dollar monetary world promises to be neither stable nor fair.
http://www.lemonde.fr/web/article/0,1-0@2-3232,36-987417,0.html
