[The Economist, U.K.]

 

 

Le Monde, France

The End of King Dollar?

 

"The dollar has been dethroned; the monetary multi-polar world has been born. How will it turn out? … the post-dollar monetary world promises to be neither more stable, nor more just."

 

By Eric Le Boucher

 

Translated By Julian Jacob

 

November 8, 2007

 

France - Le Monde - Original Article (French)

Will the decline in the dollar accelerate out of control? Will the euro, inflated like a balloon, rise without limits to $1.55, $1.60, $1.70 or more? As the headline in the British weekly The Economist said last week, this black scenario brings "panic" to financial circles . The crash of the dollar isn't the most likely scenario, but it's no longer regarded as impossible.

 

Since abandoning its convertibility into gold on the 15th of August, 1971, the dollar has lost more than a third of its value against all other currencies. The fall of the greenback, therefore, didn’t begin yesterday. It has already been shadowed by crises, particularly in the late 1980s when the Japanese sumo seemed to disrupt the American empire. But neither run-of-the-mill devaluations nor other types of crisis have managed to challenge the supremacy of the dollar as the linchpin of the global monetary system.

 

On the contrary. Emerging economies in Asia and the wealthy Persian Gulf countries have, for the sake of convenience, attached ('pegged' in financial jargon) their currencies to the dollar. We could say that the system born of the 1944 Bretton Woods Agreement , which died precisely on the 15th of August, 1971, has been de-facto restored. Outside continental Europe, the planet has resumed a virtual worldwide monopoly - creating a "quasi-dollar zone." It's a system that economists have called Bretton Woods II .

 

And it is this Bretton Woods II that now threatens to come completely apart. The dollar is now subject to an immediate and long-term lack of confidence.

 

[Editor's Note: Some economists have referred to the system of currency relations which evolved after 2001, in which currencies, particularly the Chinese renminbi, remained fixed to the Dollar, as Bretton Woods II. The argument is that a system of pegged currencies is both stable and desirable ].

 

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 there is a 50 percent chance of a dip. Clinton advisor Larry Summers believes there will be a recession, and predicts that it will be long, extending "beyond 2010." To allow itself some breathing space the Federal Reserve is tempted to lower interest rates - but only reluctantly - because this would risk rekindling fears of inflation. There is talk in the United States of a return of stagflation  - weak growth with inflation – a terrifying hydra that hasn't been seen in twenty years. All of these perspectives badly tarnish the luster of the dollar.

 

The second reason is the sub-prime crisis. It is now believed to be under control, but after a fortnight it has re-emerged, casting doubt in the soundness of American banks (what will be the real limit of their losses?). And will it worsen in early of 2008? In terms of the dollar, none of this is reassuring to investors.

 

The third element, better known but weightier still, is the trade deficit. It shrunk a bit due to the decline in the greenback, which makes American-made products more competitive. But the trade gap remains at 5.5 percent of GDP: the dollar would have to devaluate significantly more to balance the books and eliminate the deficit.

 

All the ingredients have come together for the slide to continue. But an added factor could cause an acceleration: the dismantling of the fixed exchange rate adopted by developing nations and, more broadly, the use of other currencies for reserves and for making payments.

 

Brazilian Gisele Bündchen, the world's highest paid model, isn't the only one who wants checks, "in any currency other than the dollar," according to Forbes (the beauty later denied the quote, saying she accepted all checks). Ann Lauvergeon, the CEO of Areva, wants China to pay for nuclear reactors in euros. Venezuela and Iran will soon reject dollars for political reasons.

 

Certain Gulf Emirates have officially decided to retain the dollar. The developing countries have accumulated $3 trillion in reserves, which amounts to 75 percent of the global stockpile. But what will China do, weighed down with $1.4 trillion? "This record reflects China's growing influence in the global economy and in finance," says Jacques de Larosière, former managing director of the IMF. But in particular, he says that it shows that "the world of finance" has passed into its hands. Will China challenge the dollar?

 

"It's not in their interest to engage in aggressive policies of diversification, which could precipitate the decine of the American currency and lead to a depreciation of their assets," Larosière stresses. But since 2005, a trend toward diversification has become evident. Business acquisitions by "sovereign funds [state-controlled]" in emerging countries are part of this strategy. 

 

We are "at the beginning of a relative decline of the dollar," explains Professor Michel Aglietta . The only counterforce, he continues, would be to quickly reduce the trade deficit, exhausting the primary cause of the greenback's slump. Alternatively, holders of the dollar will gradually get out of it, praying that these sales don’t cause "panic" in foreign exchange markets.

 

The dollar has been dethroned; the monetary multi-polar world has been born. How will it turn out? Undoubtedly, it will pass through a period of fluctuating exchange rates, according to Michel Aglietta. Within this framework, since the euro isn't the only one rising, Asia should organize monetary union soon. According to Jacques de Larosière, what also needs to happen is that, "the IMF should regain its lost influence, and the United States, China and Japan, the three main sources of imbalance, should accept the multilateral game."

 

Meanwhile, the post-dollar monetary world promises to be neither more stable, nor more just.

 

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