Euro Officially Surpasses Dollar
By NoQuarter on January 2, 2007 at 1:16 PM in Uncategorized
(Bonddad is a valued contributor at several prominent blogs — see his posts at Daily Kos, and at his blog, The Bonddad Blog. Bonddad permitted me to repost this piece posted today at Daily Kos, and generating many comments in the Recommended List. I thought the post of particular importance regarding Bush’s insane spending spree, the U.S.’s international standing, and the plans and/or threats by various nations, past and present, to switch to the euro. - SusanUnPC)
Euro Officially Surpasses Dollar
By Bonddad
The financial press reported last week that the euro, the new currency created only five years ago and used by most European nations, has supplanted the U.S. dollar as the most widely used form of cash internationally. There are now more Euros in circulation worldwide than dollars.
This alone is not necessarily troubling, as the dollar remains the world’s most important reserve currency. About 65% of foreign central bank exchange reserves are still held in dollars, versus only about 25% in euros. And the European Central Bank faces the same inflationary pressures that our own Federal Reserve Bank Governors face, including a growing entitlement burden that threatens economic ruin as both societies age. European politicians want to spend money just as badly as American politicians, and undoubtedly will clamor to inflate– and thus devalue– the euro to fund their creaky social welfare systems.
Still, the rise of the Euro internationally is another sign that the U.S. dollar is not what it used to be. There is increasing pressure on nations to buy and sell oil in euros, and anecdotal evidence suggests that drug dealers and money launderers now prefer euros to dollars. Historically, the underground cash economy has always sought the most stable and valuable paper currency to conduct business.
This is what happens when supply-side economics and rampant “shop ’til you drop” consumerism is the dominant economic policy of a nation.
The US government has run massive fiscal deficits for the last 6 years. Despite the accounting tricks used to mask the deficit’s true size, the Bureau of Public Debt reports that total outstanding debt on September 30 2001 was $5,807,463,412,200.06 and currently stands at $8,593,076,179,156.67 — an increase of 48% in six years. At the same time, the US government has cut taxes and gone to war, which has increased discretionary expenditures over 30%. Here’s a graphic representation of the “MBA President’s” fiscal policy (the top line represents expenditures):
The US consumer has continually increased individual purchasing for some time. This has resulted in a mammoth trade deficit:
To finance this deficit, foreign governments have doubled their purchases of US Treasuries over the last 6 years:
Instead of savings, the US consumer has gone into debt to finance US growth.
U.S. savings:
The end result of these policies is simple: Despite the many protestations of a “strong dollar policy” has come under continued assault in the currency markets. Here’s an 8-year chart of the dollar.
A devalued dollar leads to several basic economic problems.
1.) The US Federal Reserve’s ability to lower interest rates in the event of an economic slowdown is hemmed in. A devalued dollar means the US has a higher probability of importing inflation. The Federal Reserve is charged with price stability. If it lowers interest rates and the dollar is decreasing in value, it may import inflation.
2.) The possibility of the dollar being shocked by a random economic event are higher. Consider that over the last few weeks Thailand implemented draconian currency controls that sent its markets down 10% in a day. While the government reversed policy within 24 hours, if they hadn’t have done so, it is possible the effects would have eventually bled over into the dollar.
3.) Right now foreign central banks are playing a giant international game of chicken. No one want to see their official reserves decrease in value. So, they all want to slowly sell dollars and buy more euros. However, by selling dollars they may create a selling panic that further decreases their respective currency reserves. In the current environment the possibility of one government making the wrong move is higher simply because of the dollar’s precarious valuation.
– By Bonddad, posted at Daily Kos. His own blog is The Bonddad Blog.
This was inevitable given the economic policies of George Bush and Dick “Reagan proved deficits don’t matter” Cheyney. It is going to be catastrophic for the US when Bonddad’s #3 plays out. International financial markets are now largely unregulated, money can be transferred at will, and there are no mechanisms to stop the collapse of a currency except the (often ineffectual) efforts of central banks. But when the game of chicken ends, it will be the central banks who are dumping dollars, not propping them up.
When the run on the dollar starts, it will play out with frightening speed, because the last person still holding dollars will be the big loser.
That would be you and me, by the way.
I got the euro is going to crash this year and the British will look fantastic.
Running Quarters:
fourth quarter and we have not yet seen tangible evidence of a market recovery,” That doesn’t sound good at all.
US dollar can close itself to other currencies and recover fine, by the ways……..
Bonddad is a Democratic campaign consultant and his economic analysis is that of a hysterical crackpot. The US federal budget deficit is 1.9% for 2006, unremarkable by any yardstick. The fact that the Euro is the #1 cash currency now is simply the result of the fact that Euroland contains more people than the US: 320 million vs. 300.
Guthman –
You missed a key point which I mentioned in the article.
the Bureau of Public Debt reports that total outstanding debt on September 30 2001 was $5,807,463,412,200.06 and currently stands at $8,593,076,179,156.67 — an increase of 48% in six years.
The unified budget — which you refer to — takes the Social Security “surplus” into account. The problem is this money is spent and replaced with government debt. Hence, the US government has issued over $550 billion of net new debt per year for the last four years.
Bonddad,
the money in the Social Security surplus accounts is not already spent, it is merely earmarked, as you well know. It was intended to accrue there earning ludicrously low returns since it can’t be invested productively. No other G-8 government has such a surplus, therefore it is simply preposterous to speak of a net debt issuance of $550 billion and to then unfavorably compare it to the debt/GDP stats of other G-8 countries. But I understand: it sells well in the Amen Corner and so brings in consulting gigs. Serious “analysis” this isn’t. Sorry Doc.
Guthman –
If the deficit is under control, why has the US Treasury issued over $550 billion in net new debt each year for the last 4 years? Go to the Bureau of Public debt to verify the figures if you like. But, the answer is simple: the deficit isn’t under control in any meaningful way.
In addition, I never compared the US debt/GDP situation to any other G8 country in the article.
Many said this would be the strategic result of tax cuts for billionaires and trust fund babies.
Bush doesn’t care, the 20s revisited.
Gatsby parties on at Crawford like it West Egg…
Guthman,
No Quarter has, for the most part, evolved into a Democrat blog. It’s not particularly surprising that it would feature the theories of a Democrat consultant.
I don’t know if Bonddad is a Democratic consultant, and haven’t asked him.
Retired, his post was interesting to me not because of any party platform or ideology but because it expresses concern about the U.S. economy, which I have certainly heard a lot of prominent conservatives complain about mightily — including one of my favorites, Andrew Sullivan. I doubt Andrew or I would vote for many of the same candidates, but his IDEAS and OPINIONS are valuable. And one of his opinions is that conservative principles have been abandoned by the current Republican politicians.
I never voted for Bill Clinton. I’ve probably voted for more Republicans than Democrats in my life. But, to keep this post short, i’ll just say that I cannot believe that people actually voted for George W. Bush, given his utter lack of qualifications, evident to even me as early as 1998, when millions were being poured into his campaign chest, making him the sure “puppet” candidate. I wasn’t crazy about Gore, but voted for him. Even so, I never imagined in my WILDEST DREAMS that this nation would be dragged into such a horrendous mess like Iraq, and handle Katrina so ineptly, cruelly, and selfishly (benefiting Bush’s corporate patrons).
If you have ideas for posts, send me an e-mail. I’m quite open to suggestions. But, whatever you may think of Bonddad’s opinions, it’s a big mistake, imho, to write him off as a Democratic consultant without considering his arguments.
“The fact that the Euro is the #1 cash currency now is simply the result of the fact that Euroland contains more people than the US: 320 million vs. 300.”
I guess that also explains why the Euro is worth $1.32, when not so long ago it was worth less than a buck.
I guess the number of Yuan in circulation also dwarfs the Euro and Dollar together. Or not.
“No Quarter has, for the most part, evolved into a Democrat [sic] blog.”
There is a political re-alignment happening in this country. To some extent it corresponds to the divide between fantasy and reality.
Historically neither party has had a monopoly on realism in its policies, far from it. However, recently the Republican party has become the party of fantasy, from tax cuts to unlimited defecit spending to peace and happiness through wars of aggression.
I suppose it is natural that a site that tries to stay anchored in reality would appear Democratic to some people. For my part, I just think the old labels are growing increasingly irrelevant.
‘I guess the number of Yuan in circulation also dwarfs the Euro and Dollar together. Or not.’
Probably does but the Chinese government does not allow the value of the Yuan to be determined by the market. As a day trader in the spot FOREX I have seen the dollar’s plummet first hand over the last 3 years and it does worry me. THe fact that the Fed stopped publishing the M3 numbers this year also greatly worries me as it signals to me the liklihood that the Fed is wantonly ‘printing’ dollars at the same time the world’s bankers are slowly divesting themselves of their dollar holdings. Those dollars are gonna come back to the US eventually and that spells trouble. Also, when the oil bourses of the world start selling oil in euros instead of dollars…big trouble. I’m a technical trader, meaning I basically read charts as opposed to studying the economic numbers, but color me very worried.