The Daily Reckoning
Paris, France
Friday, 5 March 2004
The Daily Reckoning PRESENTS: The Dollar Standard System -
and perhaps American preeminence - is on the way out. But
you can't say we didn't tell you so. This DR Classique was
originally aired on 14 October 2002.
IMPERIAL OVER-STRETCH MARKS
by Bill Bonner
"America remains the unrivaled leader of the world - the
big power... without which nothing good happens."
- Thomas L. Friedman, hallucinating
America is the "single surviving model of human progress,"
said George Bush the younger, to the West Point graduating
class, perhaps exaggerating just a little. He might have
conceded, if he'd thought about it, that there are elements
to the American model that might not yet have attained
perfection.
The American model of human progress, it turns out, depends
heavily on the kindness (or naïveté) of strangers: America
prints money; foreigners make products. The foreigners send
their products to the U.S.; Americans send their dollars
abroad.
Alert readers will notice the defect immediately... for what
would happen if foreigners changed their minds? Then who
will pay so that Americans can continue living beyond their
means? And who will finance the U.S. budget deficit,
expected to rise about $400 billion thanks to increased
military spending? [Ed note: This year, the budget deficit
is projected to reach $521bn... ]
The system survives as long as foreigners are willing to
accept U.S. paper assets for more tangible ones. We don't
know how long that will be, but we note that the value of
paper tends to vary inversely with the amount of it
available. No Fed chief provided so much American paper as
Alan Greenspan. In fact, as reported here on several
occasions (we keep mentioning it because we can barely
believe it) Greenspan has increased the world's supply of
dollars more than all the Fed chairmen and all the Treasury
secretaries in U.S. history.
Still, the foreigners schlep and sweat and gratefully take
surplus dollars in payment - about $1.5 billion per day.
Typically, when a nation's trade deficit rises to 5% of
GDP, something has to give. What usually gives is the
nation's currency; it goes down, making imports more
expensive and exports more attractive. So far, this has not
happened, we are told, because the dollar is no ordinary
currency - but an imperial currency, the leading brand of
the world's only remaining super, superpower. How that
protects it from the age-old cycles of over-stretch and
regret, we don't know. More likely, the dollar will
eventually do what all over-stretched currencies do,
imperial or otherwise; it will snap.
"I see one possible way out," writes Stephen Roach, " a
sharp depreciation of the US dollar... a significant
depreciation of the dollar - at least 15% to 20% on trade-
weighted basis, in my view, would go a long way in cracking
the mold of US-centric global growth... "
[Ed note: Since this essay was penned, the dollar has
fallen as much as 30%, and is still 24% down. Yet there is
still a long ways to go... ]
"Oh no, I guess this means Mr. Bush will begin his war
soon," said a neighbor this weekend. She was a woman of
about 70, in a hunting get-up, with knee socks and a big
brown sweater. Her low voice, mannish hair and bright red
face was slightly comical. But she was also carrying a 44-
caliber pistol and waving it around the room. "But, heck,
what's life without wars," she roared. "Every so often,
maybe we need a war. I just hope the price of gas doesn't
go up."
What set off my neighbor was the news that Congress has
given the go-ahead, not by declaring war as required by the
constitution, but by passing the buck to the president;
Bush is free to attack America's enemy du jour - Iraq. How
Iraq achieved this honor is anybody's guess. But enemies
come and go... along with models of human progress.
In the 40s, Germany and Japan were our enemies and the
Soviet Union was our friend. Then, the roles reversed for
the '50s and '60s. And then, in the '70s, Iraq was our
friend and Iran was an enemy. And, of course, Cuba, North
Vietnam and North Korea... were our enemies at various
times.
But who knows? Maybe a change of government will do as much
good for Iraq in 2002 as it did for England in 1066. Today,
we write not to criticize the president's war plans... nor
Congress's pusillanimous dereliction - it may all work out
for the better, for all we know. Instead, we merely wallow
in the absurdity of it all.
The durability of Christianity, we thought to ourselves
during this Sunday's sermon, comes not just from the
enormous promise that it makes, but also from its
adaptability. Christians believe that if they can just get
God on their side, everything will work out. Even dying is
nothing to worry about; "Even unto the grave, Halleluiah"
we chant, with faith that death leads to a better life
without mortgages or election campaigns. And in the
meantime, people are free to do almost any lunatic thing
they want.
Jean Mayol de Lupe was an army chaplain in the French army
in WWII. He was wounded, held prisoner by the Germans and
eventually decorated with the same award later given to
Alan Greenspan - the Legion of Honor. Greenspan, a cynic
might say, got his "cravate" for proving that you could
inflate the currency and get away with it... Mayol de Lupe
proved that you don't have to be an analyst or a politician
to be a fool.
The 1930s were a great time to be a fool... there was a bull
market in foolishness such as the world had never seen. It
seemed as though nearly half the world was keeping company
with socialism, communism or fascism. Mayol de Lupe was
convinced that bolshevism was a great threat to
Catholicism... and that the only thing that might save it
was Hitler's national socialism. After France had
surrendered, he organized a voluntary corps of French
soldiers to go to help the Germans in their war against the
Soviet Union. Already 66 years old, he nevertheless went to
the Eastern front himself along with his troops. The priest
wore a SS Waffen uniform, ended his sermons with "in the
name of our Holy Father Pious 12th and our Führer Adolf
Hitler," and described the French volunteers' work... "what
a beautiful mystery, a wonderful tale, that our boys write
with the points of their bayonettes."
In Mayol de Lupe's eyes, the Soviet Union was the Iraq of
the hour... and Nazi Germany the world's superpower. Many in
Europe - including many in France and England - felt that
the dynamic new Germany represented the force of the
future, that it was "the only surviving model of human
progress."
And so the poor old coot stretched on the Nazi uniform and
went to war.
Your editor...
Bill Bonner
P.S. After the war, Jean Mayol de Lupe was arrested and
jailed for notorious collaboration.