The Currency Trilogy Impact of USA Policy on the world Economy by Peter Lye - May 2005. In today's world although the US$, Euro
and the ¥ are the top currencies of choice for various reasons but it is the US$ that top the list. Of late, China's RMB is also beginning to feature more prominently on the global stage with the valuation of RMB against her major trading partner coming under scrutiny as her economy begin to grow in size as well as being more participative on the global trading scene. We would leave the issue of RMB in the parking lot not because it is not important but because the RMB is not used as extensively as the 3 currencies in international trade except mostly in trade for which China is a party to.
With the US economy being the largest in the world in term of GDP, she also have a unique position of having more than 50% of her currency circulating outside her shoreline. To compound the issue further, USA also faces the twin issue of a massive budget deficit on the domestic front and a burgeoning trade deficit on the international scene. This twin peak is further compounded by the fact that the rate of savings is far from sufficient to cover the gap created by this twin deficit that can snow ball itself into a major problem not only for USA but also the global economy as well.In a recent commentary on the US$, The Economist has liken one of the way by which USA is handling this problem to issuing checks by printing more US$ for which the USA does not need to pay for. This is especially so after the Nixon administration has abandoned the gold standard on which each US$ is exchangeable for a certain unit of gold.
Warren Buffet through his Berkshire Hathway fund has continued to bet heavily on the prediction that the US$ will slide against the ¥ and ?. Although he has lost substantially by doing so in the past few months, he added that the USA preferred prescription of having China free her fixed peg of the US$ to the RMB and allow the market to determine the RMB value. He highlighted that even if China take this prescription, it is unlikely to solve the big trade deficit between China and USA citing that the ¥ has appreciated more than 3 times and this has not helped to narrow the trade deficit between Japan and USA much. Previous experience with the ¥ points to the fact the devaluing the dollar might cause the trade deficit to widen further because of elasticity of trade in the short to medium term.The dollar is also the reserve currency of choice for many central banks and currency boards thereby creating a vested interest in them to protect the relative value of the dollar. This is not the first time that USA is thriving in debt. In the 18OOs, when the founder of JP Morgan George Peabody was selling US sovereign bonds in London, it landed him in hot soup when US decided to default.I see a dangerous situation developing. US cannot continue the twin deficit without paying for it. Somewhere down the road, the consumeristic party paid for by checks that will not be drawn on will come to an end. We can already see signs of this developing as central banks and currency boards start adjusting their basket of reserve currencies away from the dollar. Reality will start creeping home that there is no free lunch. US with its global influence is unlikely to yield to such pressure and start paying back the twin deficit. We are likely to see a repeat the bretton woods default that would put the global economy into a shock therapy. Why wear the pain alone when you can have the world to share your burden.
Peter Lye
lkypeter@gmail.comSafe HarborPlease note that information contained in these pages are of a personal nature and does not necessarily reflect that of any companies, organization or individual. In addition, some of these opinions are of a forward looking nature. Lastly the facts and opinions contained in these pages might not have been verified for correctness, so please use with caution.
