market-watchers the world over increasingly alarmed by spreading
economic problems, much hope and attention was focused on Japan last
weekend as finance ministers and central bankers of the Group of
Eight nations gathered, apparently to map out a coordinated global
response. In particular, the hope was that delegates would
conjure a plan to save the dollar from the dustbin and stop the price
of oil and food from pushing the world into crisis.
includes Britain, Canada, France, Germany, Italy, Japan, Russia and
the United States. With the exception of Russia, the members
represent the “Old West” that has dominated the
free-market world economy for almost half a century. As very
little of promise or substance emerged, we can only hope, against all
evidence to the contrary, that much was accomplished behind closed
ministers and bankers did not explicitly acknowledge, but what must
have been evident to them all, is that the source of the falling
dollar, and global economic instability, is the United States itself.
in the 1970s, the US began moving away from its heritage as a
producer nation to one in which consumers account for 72 percent of
gross domestic product. As a result, American wealth has been
massively run down by a combination of inflation, unsustainable debt
issuance and long-term devaluation of the US dollar. But
although Americans have in fact lost their wealth, they have yet to
ratchet down their lifestyles accordingly. This disconnect is
the source of global economic instability.
way to put America’s standard of living back in line with its
wealth, and to relieve the world of its economic imbalances, is
through an American recession and the continued fall of the dollar.
In fact, the downsizing of the American airline industry and the fall
of the housing market are symptoms of this trend. But recession
carries unpleasant political repercussions. As a result,
politicians always prefer to see one boom replaced by another.
the US, which would largely bear the costs of recession, prefers
serial bubble blowing and dollar devaluation as the best policy going
forward. The question is whether it can hoodwink, bully, or
otherwise convince the rest of the G-8 to go along. The problem
is that that the economic stagnation which is evident in the United
States is nowhere to be seen in the rest of the world.
the G-8 delegates into a difficult quandary. If they follow the
US’s lead to lower interest rates to avoid a recession, they
risk unleashing inflation, which is already a major problem the world
over. If they indicate increased rates to curb inflation, they
risk driving the US into a severe recession. Similarly, to
engage in a program of currency intervention to support the dollar
(which the US lacks the means or desire to do unilaterally) involves
the prospect for even greater overseas accumulation of dollar
reserves, which has already proven to be a huge drain on national
did the G-8 do? They talked and did little. Admittedly,
they discussed some laudable issues like world poverty and green
alternative energy (which will most likely be the next
government-financed asset boom). But there was no indication of
the G-8 policy statement that emerged at the meeting’s end
included no mention of lax lending in the United States or of
irresponsible central bank liquidity injections, or even of the US
freeze of on-shore oil drilling. Instead, the G-8 took
sideswipes at non-G-8 members, including unbridled criticism of the
oil-producing countries. U.S. Secretary of State Hank Paulson
had the temerity to maintain that higher oil prices were due not just
to changes in supply and demand, but also to a failure by oil-rich
nations to build enough wells and refineries. Talk about the pot
calling the kettle black!
all, it was deeply disconcerting to witness the G-8’s inability
to decide upon real initiatives but to seek to blame others instead.
It pointed to the fact that the severe problems currently faced by
holders of US dollars are likely to continue into the future.
John Browne is
senior market strategist – Euro Pacific Capital, Inc. of
Darien, Connecticut, USA. Euro Capital publishes the free, on-line