Collapse of the US Dollar

Global Imbalance - An imminent Dollar Crisis by CA M.R. Venkatesh, Chennai Part of INDIA RE-DISCOVERED A Seminar on Global Economy By SWADESHI JAGARAN MANCH and VISION INDIA TRUST

The skew in the global financial system -- commonly called 'global imbalance' -- seems to be fast spiralling out of control.

For some time now economists have been engaged in the mother of all debates: whether the US dollar would collapse by as much as 40% when compared to other currencies (some are even betting on the US dollar going belly-up) or whether there would be an orderly devaluation -- that is, a gradual revaluation of other currencies vis-�-vis the US dollar.

In effect, the question that is confronting us is not 'whether' but 'when' and by 'how much.'

This global imbalance can be understood in economic terms by simply examining the massive size of America's twin deficits -- trade and budgetary. Put modestly, Americans have been living way beyond their means, consuming much more than what they could possibly afford and, in the process, borrowing far beyond their capacity for too long.

This was facilitated by a policy of maintaining weak currencies across the world, notably in Asia. This policy of maintaining a competitive exchange rate for their currency to boost exports has resulted in a race to the bottom amongst various countries.

Nevertheless, this arrangement suited countries, both Asian (with a huge unemployed population) and American, (as it provided cheap imports for its huge consumption binge).

While the going was good, everyone profited and expected the arrangement to continue indefinitely. Unfortunately, linearity as a concept has limited appeal in real life, much less is global macroeconomics.

No wonder, of late, countries are discovering that this arrangement has its limitations. The current account deficit of the United States translates into current account surplus of exporting countries. To cover this deficit, US borrows: this corresponds to the forex reserves of exporting countries. The crux of the issue is that no other country, barring the US, has such a huge consumption pattern and an ability to absorb this huge export surplus.

In substance, countries are producing their goods, exporting it mostly to the US, and parking the resulting export surpluses with the US to facilitate US to finance its imports!

Clearly, the global imbalance is a by-product of this mindless competition by various countries to devalue their own currencies and the reckless consumption in US. Naturally, it is indeed tempting to blame US consumption for this crisis. However, one must hasten to add that the emerging economies -- notably Asian countries, especially after the1998 currency crisis -- with their fixation for weak currencies, are equally to be blamed.

The net result? Well, consider these facts:

Global Imbalance - An imminent Dollar Crisis
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