BREAKING: CHINA TO DUMP ONE TRILLION IN U.S. RESERVES!!!!
BREAKING: CHINA TO DUMP ONE TRILLION IN U.S. RESERVES!!!!
BEIJING, CHINA. -- Sources with a U.S. Delegation in Beijing have told The Hal Turner Show the Chinese government has informed visiting Bush Administration officials they intend to dump One TRILLION U.S. Dollars from China's Currency Reserves and convert those funds into Euros!
China was allegedly asked to withhold the announcement until Bullion Markets closed for the weekend to prevent an instant spike in gold and silver prices. This delay will give the world the weekend to consider appropriate actions rather than have a knee-jerk reaction which could see the U.S. Dollar totally collapse in value Monday.
According to this Senior source, China told the U.S. delegation they no longer have faith in U.S. Currency for several reasons:
1) The Federal Reserve Bank ceased publishing "M3" data in March, making it nearly impossible for anyone to know how much cash is being printed. China said this act made it impossible to tell how much a Dollar is worth.
2) The U.S. Dollar has lost upwards of thirty percent (30%) of its value against other foreign currencies in the recent past, meaning China has lost almost $300 Billion simply by holding U.S. Dollars in its reserves.
3) The U.S. has no plans whatsoever to reduce deficit spending or ability pay down any of its existing debt without printing money to pay it off.
For these reasons China has decided to implement an aggressive sell-off of U.S. Dollars before the rest of the world does so. China reportedly told the US delegation; "we are the largest holder of U.S. Currency and if the rest of the world unloads theirs before we unload ours, we will lose our shirts."
Early this week, in an unusual move, the Bush administration sent virtually the entire economic "A-team" to visit China for a "strategic economic dialogue" in Beijing Dec. 14 and 15.
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke lead the delegation, along with five other cabinet-level officials, including Secretary of Commerce Carlos Gutierrez. Also in the delegation is Labor Secretary Elaine Chao, Health and Human Services Secretary Mike Leavitt, Energy Secretary Sam Bodman, and U.S. Trade Representative Susan Schwab.
The Bush administration wanted to get China's cooperation in preventing a dollar collapse. The Hal Turner Show has been told the effort failed.
According to the source, Fed Chairman Bernanke left the meeting "pale and in a cold sweat" as the implications of China's decision seemed to sink in.
The implications are enormous: The U.S. Dollar is likely to collapse in value against all other major currencies as early as Monday, December 18.
This would cause a worldwide sell-off of dollars, create almost immediate "hyper-inflation" in the US and also impact world markets at a level "worse than the Great Depression of 1929."
Arabs to the rescue?
In a strange twist of fate, Arabs and OPEC may come to the rescue of the U.S.!
Senior officials in OPEC made clear that they too would be severely harmed if the U.S. Dollar collapsed, and hinted they "would not be inclined to sell oil to any particular nation that intentionally caused such a collapse."
This was a thinly veiled threat to China, which depends heavily on OPEC oil for its rapidly developing energy needs.
The OPEC officials even went so far as to say "Since China lacks the ability to project their military power, OPEC nations need not worry about any Chinese military response to an oil cut-off."
Such brutally candid remarks will not sit well with China; and signal ominous things for the U.S. .
Arabs and OPEC will want something in return for saving the U.S. from economic collapse and it is already widely speculated what they want will be a complete change in U.S. backing of Israel in the Middle East.
If such demands are made by the oil-rich Arabs, the U.S. would be left with little choice but to virtually abandon the jewish state to preserve itself.
U.S., China Clash on Currency
U.S., China Clash on Currency
Both Countries Assertive as Economic Talks Open in Beijing
By Ariana Eunjung Cha
Washington Post Foreign Service
Friday, December 15, 2006; Page D01
BEIJING, Dec. 14 -- U.S. and Chinese leaders clashed publicly on the opening day of strategic economic talks, with Treasury Secretary Henry M. Paulson Jr. pushing China to revalue its currency and Chinese Vice Premier Wu Yi saying Americans do not have a full understanding of the situation.
After standing by as U.S. officials criticized her country's economic policies in the media during the past week, Wu set the tone for the meeting with assertive introductory remarks that spanned 20 typed pages and 5,000 years of Chinese history.
"Some American friends are not only having limited knowledge of, but harboring much misunderstanding about, the reality in China," Wu said, according to a copy of her remarks provided by the Ministry of Foreign Affairs. For example, Wu noted that China needed to create enough jobs to absorb an estimated 300 million rural workers -- equal to the entire population of the United States -- into its urban economy in the next two decades.
Paulson was equally aggressive in his follow-up speech, saying that the U.S. government's "strong view" is that China should allow its currency, the yuan, to be more flexible. Most countries allow the value of their currencies to be set in global markets, but China intervenes to keep its currency pegged to the dollar at an exchange rate that many Western economists regard as skewed in China's favor.
The Chinese economy "would be more effective under a regime where currency values are determined in a competitive, open marketplace based upon economic fundamentals," Paulson said. A revaluation of the yuan upward would make U.S. goods cheaper in China and Chinese goods more expensive in the United States.
Throughout the day, U.S. officials pushed on issues such as trying to resolve the huge trade imbalance between the two countries and making sure that China lives up to commitments it made five years ago when it joined the World Trade Organization. By the afternoon, they said they were optimistic.
"They were very much in a receiving mode," Labor Secretary Elaine L. Chao said in an interview with reporters. "They were listening very carefully."
Commerce Secretary Carlos M. Gutierrez said that the meeting "exceeded expectations" and that "it was a very candid . . . honest, solid dialogue."
High-level U.S. officials, interviewed after the close of meetings for the day, said the two sides agreed on many things in principle, such as the need to keep their economies open to other countries. But specific measures and a timetable were less clear, with the United States pushing for rapid change and China seeking to move cautiously.
Skepticism toward foreign trade, particularly with China, played a major role in the recent U.S. elections, and proposals for punitive tariffs or other protectionist measures could gain support in Congress next year.
"I sense that they have an understanding of the stakes," Gutierrez said. "And the stakes are very large. You are talking about a lot of business, a lot of jobs on both sides. We are their No. 1 customer."
While most of the day was focused on U.S. requests of Beijing, China also listed some priorities: fewer obstacles to the export of U.S. technology and to Chinese investment in the United States. The complaint about U.S. export controls, in particular, led to some tense exchanges, U.S. delegates said,
"They would like no restrictions, and we have restrictions, so there are certain things that they would like that we can't give on," Guttierez said.
U.S. Trade Representative Susan C. Schwab said in an interview that she told the Chinese that their country was "slowing if not backsliding" on economic reforms.
Paulson is a former Wall Street executive who has made dozens of trips to China. He has taken command of the Bush administration's economic discussions with that country and took a high-level delegation of Cabinet members and others with him on this trip as he seeks to make progress toward resolving thorny disputes.
The format of the meeting included formal presentations and broad debate on issues such as China's transport problems and the U.S. culture of easy credit.
Perhaps the meeting's most anticipated and sensitive talks -- about whether China should allow the yuan to rise in value -- were anchored by a statement from Federal Reserve Chairman Ben S. Bernanke, who accompanied Paulson on the trip.
Bernanke said an increase in the currency's value would benefit China, according to U.S. officials present at the talk.
"Other people piped in to say the U.S. has a very interested stake in China's economic well-being," Chao said.
Re: U.S., China Clash on Currency
It can dump all it wants and buy Euro's just as worthless.
The U.S economy is THE engine of the world economy. Pull it down and EVERYONE goes down. Who will buy China's cheap Walmart trinkets and Nike sneakers? If China goes down then the Australian economy goes with it as China dont need all that gas and all that iron ore and nickel...and on it goes.
Once you understand that the system is quite meaningless, you will understand that the economy is simply being chugged along till the time is right to firstly collapse the U.S economy and then of course the WORLD ECONOMY. Then REAL chaos can begin and ALL those wonderful Homeland Security measures can be shoved in by the Democrats with bareely a whimper by desperate Americans willing to line up and take their subcutaneous I.D chip to eat. Also, Americans will be eager to "sign up" to the wavering U.S military to get by and go kill muslims for the Zionist/Globalist's who want traditional Islam smashed...the last active bastion to Zionist world takeover.
With the "East Coast Blue Blood" Bush having finished his job of...
1) Making Christians look stupid and in need of diagnosis and imprisonment.
2) ENERGISING the wavering Left wing.
3) Getting people BEGGING for a reinvigorated and powerful U.N to prevent singular imperiaql powers from running amok.
4) Descending the U.S into economic chaos with government policies to stupid and to numerous to mention.
Who needs a suitcase bomb in New York?
All that Problem-Reaction-Soloution can give will be obtained by economic chaos rather than muslim extremists.
U.S. lawmakers urge action after China meeting
UPDATE: U.S. lawmakers urge action after China meeting
By Doug Palmer, Reuters
Friday, December 15, 2006; 5:22 PM
WASHINGTON (Reuters) - Lawmakers on Friday urged the U.S. and Chinese governments to follow two days of high-level talks on trade and economic concerns with concrete action.
"Dialogue and action must go hand-in-hand. For example, greater flexibility for China's currency is overdue. Postponing further reform not only endangers our bilateral economic relationship, but also put's China's prosperity at risk," incoming Senate Finance Committee Chairman Max Baucus, a Montana Democrat, said in a statement.
The U.S. trade deficit with China could reach a record $240 billion this year, fueling the belief in Congress that Beijing is deliberately undervaluing its currency by 15 to 40 percent to give Chinese exporters an advantage in world trade.
U.S. Treasury Secretary Henry Paulson told reporters the two countries had agreed during the meetings in Beijing to bring more balance to the U.S.-China trade relationship.
U.S. officials also told their Chinese counterparts "in the clearest possible terms" that China needs to move toward a more flexible currency exchange rate policy, Paulson said.
But Sen. Charles Schumer, a New York Democrat who is one of China's harshest critics in Congress, said he expected Beijing to continue dragging its feet on much-needed reform.
"Every few years, with a lot of fanfare, the Chinese say they will begin a new round of serious discussions and drag the process out for a long time. At best, we end up with crumbs. The Chinese economy is advanced and sophisticated enough that they could start playing by the rules right away if they really wanted to," Schumer said.
While Baucus and Schumer focused their remarks on the need for China to act on U.S. trade concerns, Rep. Sander Levin, a Michigan Democrat, said Congress and the Bush administration need to take several steps.
Democrats will again ask the U.S. Trade Representative's office to formally challenge China's currency practices at the World Trade Organization even though USTR has rejected that request a number times in the past, Levin said.
Lawmakers will also reintroduce legislation requiring the Commerce Department to consider China's "currency manipulation" as a subsidy under U.S. trade laws so companies can apply for countervailing duties to offset it, Levin said.
Levin also urged the Treasury Department to formally label China as a currency manipulator in a semiannual report that is now two months overdue.
Many U.S. financial services group applauded this week's talks as an important step forward to Chinese reform, but some other industry associations were less impressed.
Kevin Kearns, president of the U.S. Industry and Business Council, said Paulson and a U.S. delegation that included Federal Reserve Chairman Ben Bernanke and U.S. Trade Representative Susan Schwab were "content to engage in idle diplomatic chitchat" when stronger action was needed.
"Since the Bush administration won't respond effectively to China's currency manipulation, illegal subsidies, intellectual property theft and other transgressions, Congress needs to seize control over China's trade policy," Kearns said.
Did you know that Iran is the biggest oil supplier to China? Now Iran will only accept Euro from the
Did you know that Iran is the biggest oil supplier to China? Now Iran will only accept Euro from the Chinese Government, guess what?
U.S. dollar facing imminent collapse?
U.S. dollar facing imminent collapse?
Fed in bind as Paulsen, Bernanke head to China
Posted: December 10, 2006
5:38 p.m. Eastern
Jerome R. Corsi
Even as the stock market is hitting new record highs almost every day, the Federal Reserve and Treasury Department are quietly coordinating a devaluation of the dollar that the Bush administration hopes will be a slow decline rather than a dollar collapse.
This week, in an unusual move, the Bush administration is sending virtually the entire economic "A-team" to visit China for a "strategic economic dialogue" in Beijing Dec. 14 and 15.
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are leading the delegation, along with five other cabinet-level officials, including Secretary of Commerce Carlos Gutierrez. Also in the delegation will be Labor Secretary Elaine Chao, Health and Human Services Secretary Mike Leavitt, Energy Secretary Sam Bodman, and U.S. Trade Representative Susan Schwab.
The Bush administration wants to get China's cooperation in preventing a dollar collapse. That's the conclusion of John Williams, an experienced professional econometrician, who writes the "Shadow Government Statistics" blog.
Williams has re-created M3, a money-supply measure whose data the Federal Reserve simply stopped publishing after issuing a technically worded March 2006 announcement.
Williams reports M3 is currently growing at close to a 9.6 percent rate and trending higher, compared with an 8 percent rate early this year, when the Fed quit reporting the measure.
"The Fed is pumping liquidity into the U.S. economy," Williams told WND, "and the Fed evidently did not want the markets to follow too closely what the Fed was doing with the money supply."
China today now is holding a historically unprecedented $1 trillion in foreign exchange reserves. During the Thanksgiving holiday, an announcement by China that their central bank planned to diversify foreign-exchange holding away from the dollar caused the dollar to drop in value on international currency markets. Since then, the dollar has hit a 20-month low against the euro.
"This was almost an orchestrated announcement," Williams claimed. "Around Thanksgiving the markets were thinly traded. I'm not sure who was playing games there, but the signal was clearly heard."
"You're dealing with mass psychology here," Williams argued. "The central bankers around the world know they are going to take a hit on their dollar holdings. None of the central bankers want to start a dollar panic, but none of the central bankers want to be the last out of the dollar, either."
Williams explained that the Federal Reserve is in a bind.
"Raising rates would kill any chance of avoiding a recession, but in terms of the dollar, we can't raise the rates fast enough when the dollar starts to slip quickly."
Are we experiencing a dollar collapse?
"Not yet," Williams answered. "I believe we're going to have a dollar collapse, but the Fed is going to do its best to slow play the dollar's decline in value, so that it takes a year or two for the dollar value to reach its low point."
Williams explained the risk of collapse the dollar faces:
"There will be a central bank, most probably in Asia, who will start the move away from the dollar and when it happens, you're going to see other central bankers covertly trying to follow. The move will magnify very quickly and it could become a full-fledged panic and a dollar collapse."
The Fed is struggling right now to contain inflation and stimulate economic growth. All the Fed is doing right now with all their grand policy shifts is using a lot of propaganda and market massaging to try to prevent a financial panic."
Recent reports have shown that U.S. gross domestic product growth slowed to 1.6% in the third quarter, the lowest in more than 3 years.
Will a declining dollar help narrow the U.S. trade deficit with China?
"You could take a 30 percent decline in the value of the dollar," Williams argued, "and it wouldn't make much of a dent in our trade deficit with China, not as long as Bush administration trade policy continues to be one-sided in favor of China."
"The Fed is faced with an impossible circumstance with the trade and budget deficits being run by the Bush administration," Williams told WND, "and they are just playing games with the markets and the public by not publishing M3, the broadest measure of money supply and the best indicator we have of long-term activity."
M3 is the broadest measure of the total money in the economy, including checking and savings accounts, cash, time deposits, and money-market funds. Economist Milton Friedman, one of the key economists contributing to the conservative theories that led to the development of "Reaganomics," argued that money supply is a key measure correlated both with economic growth and inflation.
Re: Did you know that Iran is the biggest oil supplier to China? Now Iran will only accept Euro from
Oil, trading in Euro's, asteroid collisions etc...they'll all provide an excuse to SMASH Israels enemies in the region. You can tell the world that the Iraq war is about oil, petro dollars, and greed. BUT! Whatever you do, DO NOT tell the world the chaos in the Middle East is about making the region safe for Israeli expansionism and hegemony. To become a great power there itself with access to an energy supply and land to swell jewish numbers.
China needs 50 billion in DIRECT foreign capital investment from the West to maintain it's economic growth. It needs to sell trinkets to the U.S consumers to get hard currency to buy Iranian oil. When the U.S economy collapses...WE ALL go down. China and Iran included.
While we all await the suitcase bomb in New York from Bin Ladin, we find the Zionist/Globalists getting one up on us through their East Coast Blue Blood Bush...destroy the U.S economy, smash Iraq and get troops into the region, re-invigorate the Left and the U.N and have the peasants BEGGING for One World Government to prevent all this economic and social chaos. THEN...buy up ALL the public utilities for a song and make people get chipped and sign up to fight for Israel to smash the Islamic enemy...or you dont eat or drink.
Indeed...the World Economy will go down. It should have imploded 30 years ago. The point is it's by "design"...not bad management.
Enjoy the totalitarian state where ever you are. I'm going fishing. It's getting boring to watch the scam unfold. I want a new one with more explosions and twists and turns.
Re: Did you know that Iran is the biggest oil supplier to China? Now Iran will only accept Euro from
That is putting it mildly, don't you think?
And, you want a new one with more explosions and twists and turns.
Hard to believe!
Dollar will continue to depreciate
Dollar will continue to depreciate
At the end of last month, the US dollar against the Euro depreciated to its lowest in the last 20 months on the New York Foreign Exchange Market, while the dollar against the British pound depreciated to the lowest in 14 years. On Monday, the Euro closed at 1:1.3251 against the dollar and the previous day it closed at 1:1.3200. The pound closed at 1:1.9587 against the dollar and the previous day it closed at 1:1.9525. The dollar to Swiss Francs also fell to 1:1.2014 from 1:1.2049 the previous day.
The weak dollar is a reflection of the long-term depreciation of the US dollar. Over the last three years, the US dollar against the Euro has depreciated by 35 percent and against the Japanese Yen, 24 percent. Since February 2002 against a package of currencies, the US dollar has depreciated by 23 percent.
Various indicators suggest that the US dollar will continue to depreciate. Why?
One of the main reasons for the depreciation of the US dollar depreciation is the slowdown of the domestic economy.
Ge Huayong, Executive Director of the International Monetary Fund in China, told reporters that from a macro-economic perspective, the US dollar will continue to depreciate because of the global economic situation. Various indicators suggest the US economy will slow between the end of this year and the beginning of the next while there is good reason to expect European economic growth. The Japanese economy is showing signs of a revival while the emerging market economies of countries like China and India continue to have strong growth momentum.
The changes in the global economic situation have led to a change in the floating direction of foreign investment, another factor in the depreciation of the US dollar.
Ge Huayong said that from a micro-economic point of view, the main reason for the depreciation of the dollar was market speculation on forex reserves. It was anticipated that some countries with large foreign exchange reserves in US dollars would be looking to reduce their US dollar reserves. The European Central Bank increased the interest rate again to encourage investors to sell their dollars and buy Euro. The US real estate market has slowed leading to a significant downturn in consumer confidence.
Another reason for the depreciation of the dollar is that the US government has not yet intervened. Analysts say the US government has been compliant in the depreciation of the dollar. The depreciation of the dollar promotes the export of US products and reduces trade imbalances. In the long run, the stimulus of demand and an increase in savings will help reduce the double deficit to a point where it is sustainable. In the meantime, the depreciation will substantially reduce the US' foreign debts. The advantages of the depreciation outweigh the disadvantages, so the government is unlikely to intervene. It is interesting to see that the US government supports the depreciation, but that both US Treasury Secretary Henry Paulson and his predecessor John W. Snow believe that a strong dollar is in the interest of America.
Some American researchers believe that the policy of a strong US dollar has died. The US hopes the dollar will depreciate in an orderly fashion, but are not willing to announce this openly. If they did so, the rate of depreciation would accelerate and the country is unwilling to let the dollar fall so quickly.
US decision-makers believe the depreciation is a good way to resolve imbalances in the US economy. However, the American people are complaining. Domestic goods are very cheap, but due to depreciation, imported products are increasing in price. More importantly, it will be more expensive for Americans to travel to Europe, Japan or any other country. Many people have already abandoned their travel plans to Europe because of the expense.
The depreciation of the US dollar and the appreciation of the RMB have reduced China's export competitiveness. Due to a decrease in the import of Chinese-made Christmas gifts to the US, there is a shortage of Christmas gifts on the US market. It is expected that Santa Claus might not have so many gifts to send out this year.
The US dollar cannot depreciate too quickly as this would be a big problem for the world economy. British economists say that if the US dollar depreciates too quickly, it will affect the "global bubble". It will cause new inflation pressure so that the banks will not be able to shield the collapse of the real estate market. If that happened, the whole world would be affected.
Ge Huayong agrees with this. He says the US dollar must depreciate gradually in an orderly fashion by just a small margin at a time so as not to affect the world economy. If the dollar depreciates on a large scale, the global economy would have to bear the consequences and emerging economic powers like China would take a heavy blow as much of their foreign exchange reserves are in US dollars.
However, Mr. Ge believes that there are many positive things about the US economy and the complete US financial market which are keeping the dollar stable and the possibility of a crash to a minimum.
By People's Daily Online
A CURRENCY IN DECLINE - How Dangerous is the Dollar Drop?
A CURRENCY IN DECLINE - How Dangerous is the Dollar Drop?
December 12, 2006
By Christian Reiermann
Is an end of an era looming in the foreign exchange markets? The dollar has been depreciating against the euro for weeks. Currency experts and the German government don't yet see this as cause for alarm. The US currency's role as a lead currency isn't as important as it used to be, they say.
Like most central bankers, Jean-Claude Trichet, the president of the European Central Bank (ECB), has a penchant for cryptic comments. Injecting a certain degree of incomprehensibility is a signal to the professionals that he's competent. And when it comes to laymen, industry jargon has the desired effect of generating the necessary respect.
Last Thursday the public was treated to yet another example of Trichet's convoluted speaking style. A number of risks, the ECB president said, could jeopardize a generally favorable economic outlook in the euro zone. They included, according to Trichet, "concerns regarding possible uncontrolled developments triggered by global economic imbalances."
What Europe's most powerful protector of the currency was actually saying was this: The gradual decline of the dollar in the foreign currency markets in recent weeks could pose a threat to the economy. What Trichet was also trying to broadcast is that the ECB has recognized and is aware of the threat.
Nevertheless, the European Central Bank in Frankfurt again increased its key interest rate on Thursday by a quarter percentage point to 3.5 percent, which makes the euro more attractive to international investors. The central bankers had no choice but to take the step, having already announced their intentions weeks ago.
Experts have been predicting for some time that the dollar would eventually go into a nosedive, and now that time seems to have come. The US currency has lost five percent of its value against the euro since late October, and 13 percent since the beginning of the year. The euro is currently fluctuating around a value of $1.33, which is only 3 cents away from its all-time high in 2004. And yet Trichet's counterpart Ben Bernanke, the chairman of the US Federal Reserve, has done nothing but look on as the dollar plunges.
A sea change appears to be taking place on the international financial markets. For years, global capital flowed in only one direction, with $2 billion going into the United States every day. Investors viewed the world's largest economy not only as a bastion of stability, but also as a place that promised the best deals, the most lucrative returns and the highest growth rates.
The Americans, for their part, welcomed foreign investment. For them, it was almost a tradition to save very little and spend more than they earned -- essentially achieving affluence on credit. Foreigners financed the Americans' almost obsessive consumer spending, which spurred worldwide economic growth for years.
Because the US government was unable to fall back on the savings of its citizens, it too was forced to finance its budget deficit with foreign capital. Both consumer spending and the federal deficit kept the dollar high, because the rest of the world was practically scrambling to invest in the United States.
This phase seems to have come to an end, at least for the time being. "There are fundamental weaknesses in the American economy. This could not continue in the long term," says Alfred Steinherr, chief economist at the German Institute for Economic Research (DIW).
Investors pulling out
Investors worldwide are becoming sceptical and starting to pull their money out of the United States. They have realized that a people and a country cannot live beyond their means in the long term. The US dollar's exchange rate is starting to crumble as a result of this withdrawal.
The depreciation is causing growing concern about what will happen to the global economy if the United States loses its role as an engine of growth. If German cars, machinery and services become more expensive, will the German economic recovery end before it has really started?
The German government isn't worried yet, at least not officially. Nevertheless, experts in the finance and economics ministries have been keeping a close eye on developments. Although they continue to believe that the changes still fall within the scope of long-term averages, they don't rule out that the situation could worsen.
They believe that a first critical threshold for the competitiveness of the German economy will be reached at an exchange rate of about $1.36 per euro, and that Germany could see major difficulties at rates in the neighborhood of $1.50. If there is turbulence in the foreign currency markets, the government in Berlin will find itself in an especially challenging position. In early 2007, Germany will assume the chairmanship of the so-called G8 group of seven major industrialized nations plus Russia.
Worried about the dollar: The guardian of the euro, European Central Bank President Jean-Claude Trichet.
The G8 has repeatedly engaged in crisis management to deal with problems in the international financial system. It did so in the 1980s, when the combined forces of the G8 were needed to put a stop to the soaring dollar. It stepped in with equal verve a few years to forestall a decline in the American currency with the so-called Louvre Accord.
There are two principal causes behind the most recent development. Both have to do with the fact that Europe is becoming more attractive for international investors compared to the United States. On the one hand, interest rates in Europe and the United States are moving in opposite directions. "The ECB will continue to raise its key rates next year, whereas interest rates appear to have peaked in the USA," says Joachim Scheide, an expert on the economy at the Global Economic Institute (IFW) in the northern German city of Kiel. This means that financial investments denominated in euros are yielding higher interest and are in greater demand internationally, which in turn leads to a rise in the euro.
The prospects for growth are also shifting. The US economy is cooling off. The government recently lowered its 3.3 percent growth forecast for 2007. If Americans consume less as a result of a decline in foreign capital investment, the United States could even face a prolonged period of more modest growth.
Germany has shed 'sick man' image
By contrast the euro zone economy is robust. Germany, in particular, has surprised many with a stream of good economic news. Unemployment dropped below the psychologically critical threshold of four million in November. The Ifo business climate index, which measures the expectations of businesses, is at its highest point in 15 years, while consumer confidence has reached a five-year high.
In the last quarter of this year Germany, long considered the sick man of Europe, will have transformed itself into an engine of economic growth. According to analysts at Postbank, Germany's annual growth, projected at 3.4 percent, will even exceed that of the United States this year.
This is the kind of news that fuels the expectations of investors who now prefer to invest their money in the euro zone. The result is an increase in the exchange rate for the European Union's common currency. But how will the decline in the dollar's value affect future economic development? Could it cause a major imbalance in the global economy, or will the global economy, and Germany, get off lightly?
Pessimists are quick to come out of the woodwork whenever a major shift in the financial markets approaches. Many economists and bank analysts, especially in the United States, believe that the correction will happen very suddenly, with the dollar depreciating by 10 to 30 percent within a short period of time.
This would inevitably cause an adjustment crisis. Growth rates would plunge worldwide and a global recession, coupled with a drastic jump in unemployment, could follow.
This doomsday scenario is by no means the majority view. Some experts, especially in Germany, are more optimistic. "The US trade deficit has grown in the course of a few years," says IFW expert Scheide. "It will also gradually decline over a period of several years."
Scheide expects the dollar to lose another 10 percent in value against the euro in the next five years, a scenario that would be much easier to handle for the German and European economies. Companies would have sufficient time to adjust to changes in exchange rates. "In that case even an exchange rate of 1.40 wouldn't be disastrous," said DIW analyst Steinherr.
Germany is a good example of how effectively this can work. Despite the fact that the dollar has lost half of its value against the euro since 2002, exports have not been adversely affected. Indeed, they even increased from €651 billion ($861 billion) to €786 billion ($1.04 triilion). The Germany economy exported more than ever before in October.
Another reason is that the dollar zone is no longer as important for German exports as it was only a few decades ago. Leaving aside exceptions such as the auto industry, other regions of the world have long since become more important to the German economy than the United States, where Germany now sells less than one-tenth of its exports. Germany exports more than 40 percent of its goods and services to other countries within the euro zone, 13 percent to eastern Europe and nine percent to Asia. The turbulence surrounding the dollar has had virtually no effect on German exports to neighboring European countries. Most of the EU's new members have tied their currencies to the euro, and exchange rate risks evaporated for western Europe with the introduction of the euro.
The euro even prevents the kinds of major upheavals in Europe that occurred in the past whenever the dollar fell. When that happened, German businesses and consumers were routinely forced to bear a greater burden of adjustment than the economies of neighboring countries. In the past, if the German mark gained 10 percent in value against the dollar, the French franc or the Italian lira would only gain six or seven percent. As a result, the German mark was overvalued relative to other European currencies, which translated into economic disadvantages for the German economy.
This mechanism was eliminated when the euro was introduced. Now all member states carry the same burden.
The consequences of a declining dollar for the German and European economy will be determined in large part by the way other currencies develop relative to the dollar. "It would be fatal if only the euro were to rise," says DIW analyst Steinherr. "Then it would only be the euro zone that would have to bear the burden of adjustment." But the foreign currency markets suggest a different development, as the dollar is also losing value in relation to other important currencies.
The British pound, for example, rose to new highs last week. Even more importantly, the currencies of east Asian growth regions are also appreciating against the dollar. The Thai Baht, for example, gained about 15 percent against the dollar in 2006, while the South Korean Won gained 10 percent. Even the Chinese Yuan, which slavishly followed the dollar in the past, gained more than three percent. Virtually every economy is bearing part of the burden of adjustment.
The decline in the dollar also has its advantages. For Germany, the greatest advantage is that Germans pay less for oil. The oil price is mainly set in dollars worldwide. If the dollar declines, the same amount of oil costs Europe fewer euros, and the money the Europeans save can be spent on other goods.
A similar dynamic applies to exports from the dollar zone. If the decline in the dollar continues, computers, software licenses and machinery from the United States will become less expensive. Both developments would represent a windfall for companies and people in the euro zone, because the same amount of money would buy more goods.
The perils of a currency crash are not nearly as great as they were in the days of the dollar's absolute dominance 30 or 40 years ago. Globalization has led to the development of a number of growth centers in the world economy which share the burden of turbulence. Gone are the days when an American finance minister could boast: "The dollar is our currency, but it's your problem."
Translated from the German by Christopher Sultan
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