Don’t start me talking, I could talk all night
My mind goes sleepwalking while I’m putting the world to right
— Elvis Costello, “Oliver’s Army”
The opportunity for the United States to protect the long-term value of its currency has passed.
The Obama administration has responded to the financial crisis by taking on an unprecedented additional burden of debt, bailing out and buying up shaky banks and financial institutions, and increasing federal meddling in the operations of failing private enterprises. This poison cocktail — an inflated currency plus measures that are all but guaranteed to drive down productivity — is certain to deepen and extend the current recession and generate a run on the dollar before the economy fully recovers.
The rest of the world is beginning to sense that the United States will likely be unable to repay all its debts without degrading the value of the dollar. At some point the creditor nations are going to stop buying new Treasuries as the old ones come due, and when that happens the USA will not have enough dollars to pay off its outstanding notes. Inflation will be the only way out, and the funny money that the Fed has been spreading around for the last three quarters will have to be converted into dollar bills worth substantially less than they are now.
Last week’s meeting of the BRIC nations in Yekaterinburg was a preliminary attempt by the major developing nations to chart a way out of this dilemma. Russia and China hold large amounts of dollar-denominated debt, and are searching for a way to rid themselves of it and find an alternative reserve currency, one which will remain largely untouched when the dollar and the euro finally collapse.
Lula da Silva, the president of Brazil — another member of the BRICs — is confident that his country will be one of the leaders of the new order that emerges from the smoking ruins of American hegemony. According to AFP:
Time for ‘New World Order’: Brazilian President
ASTANA (AFP) — The global financial crisis has reduced the differences between nations and created the opportunity to form a new world order, Brazilian President Luiz Inacio Lula da Silva said Wednesday.
Speaking after a meeting with Kazakhstan’s President Nursultan Nazarbayev in the Kazakh capital Astana, Lula called on the global community to seize on the crisis to create a fairer world for developing nations.
A “fairer world” — what does that mean?
Presumably it means that the various corrupt sinkholes of the Third World will be able to scavenge the corpse of the industrial West with impunity as soon as American protection vanishes.
Or maybe not. Maybe Lula is more high-minded than that, and really does have the interests of the poor and downtrodden at heart.
He went on:
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“I want to say that before the crisis, there were many countries which had greater significance than others, and some countries which had no significance at all,” he said through a translator.
“After the crisis, everyone has become similar. We have the possibility to create a new world order and together we should improve our relations.”
He’s right about that — when the current global fever runs its course, everyone will be similar. But the similarity will likely result from the developing nations becoming more like the Third World, and not vice versa. In a decade or so, after Obama and the European Commission get through with us, we’ll all look like Zimbabwe.
The primary power brokers of the New Order will be Russia and China, if the BRIC discussions are any indication. Russia is much smaller than China, and still quite damaged from seven decades of communism, but given its military and nuclear capability, it manages to wield a lot of clout.
Asia News analyzes the results of the meeting in Yekaterinburg:
BRIC nations (Brazil, Russia, India and China) yesterday ended their historic first summit saying the world needs a more diversified international monetary system that is less dependent on the dollar. Russian President Dmitry Medvedev, who hosted the summit in Yekaterinburg, invited the four emerging nations to “create the conditions for a fairer world order”. But experts observe that their differences still outweigh their common interests.
Their primary common interest is to somehow maintain the value of the assets they hold as the dollar enters its inevitable decline. But it will be very difficult to engineer a new reserve currency without one country having control of it — the yuan, the rupee, the ruble: something has to replace the dollar.
It would be all but politically impossible to pool their various resources and create a new currency that is independent of any one country, at least in the amount of time they have to work with. After all, it took the European Union forty years to birth the Euro, and that was a group of nations sharing a contiguous geography under the military umbrella of the United States.
What happens when Russia and China run into a major dispute about the new currency? Who will mediate between them?
But the pressure is on. Something has to be done, and soon:
The four BRIC countries account for 40% of the world’s population and 15% of the global economy, for which they claim a greater voice and representation in international financial institutions. They said there was a strong need for a stable, predictable and more diversified global monetary system and urged support for a more democratic and just “multipolar” world order. There was no explicit mention of the US dollar or the United States in the statement, but the desire to remove it from the role of dominant international currency is evident.
However, a common vision on immediate steps is lacking. Medvedev called for a “more diversified” monetary system yesterday to reduce dependency on the world’s reserve currency. But China has over 2 billion US dollars in its reserve and does not want the American currency to lose its value now. Instead Beijing is in favour of a progressive extension of Yuan value across neighbouring states: yesterday the Chinese Communist Party’s official newspaper, the People’s Daily, explained in an editorial that the substitution of the dollar with other currencies had already begun through bi- or multilateral agreements between states and that the process will be gradual.
That’s the problem: how to get rid of all those dollars without taking a bath when their value drops.
There are so many players in this game: the Fed, the central banks of all the major countries, the World Bank, and the IMF, not to mention all the international corporations and wealthy speculators who hold large dollar reserves.
They’re playing a high-stakes game of chicken. Nobody wants the value of his stockpile to drop, and nobody wants to be the first to dump dollars.
But nobody wants to go second, either — especially if China or George Soros goes first. Once that happens, the dollar will go into freefall.
Hong Kong is up for grabs
London is full of Arabs
We could be in Palestine
Overrun by a Chinese line
With the boys from the Mersey and the Thames and the Tyne
Hat tips: C. Cantoni and heroyalwhyness.