This UK Telegraph story below is a bit florid in its reporting based on selective quotations from an otherwise phlegmatic column by the Maverecon, Willem Buiter in the Financial Times titled Can the US Economy Afford a Keynesian Stimulus?
Its an interesting essay, and it is hard to argue with his thesis, since it has been the recurrent theme of this blogwriter since 2000. He is directionally correct.
But M. Buiter seems to miss the key placement of pieces in this stage of the game, seeing only one aspect of the play. He sees the weakness of the US, and the corruption and mismanagement of the US financial system, which, somewhat ironically, describes that of Europe as well (and Russia and China). The European banking system has been a house of cards for some time.
He believes that the rest of the world will shun US financial investments based on the broken myth of US financial efficiency. It was an illusion, and it has been dispelled. And we do not think that it was ever really the linchpin of the dollar hegemony.
Many private parties have already fled US financial investments, and in turn a great deal of money has come back to the US from the developing nations. So here we are.
The question is not whether the US can afford a Keynesian stimulus package.
The real question can the rest of the world afford a US Keynesian stimulus package? And if not, what will the world do about replacing the US dollar as the world's reserve currency and the basis for most international trade?
More specifically, how will China, Japan and Saudi Arabia migrate to an industrial policy that is independent of the need to export goods to the United States while maintaining low wages and domestic consumption, and relatively low defense spending?
China, not depending on the US military as a shield, will likely make the first moves, as they are reported to be making tentative steps in this direction, as in this overstated report from AsiaNews.it Chinese Yuan Set to Replace US Dollar. The odds are high that China will play into a US geopolieconomic strategy by attempting to do the obvious, in an obvious way.
This is not to say that there will be no change, ever. There will, since the dollar has not always been the faux gold standard, and will not always be.
But there is a decided lack of original thinking on the matter, and a definite lack of will to do much about it, in the rest of the world.
So until then, it is status quo, and the US can afford anything it wishes. Because it can, and it will.
That is the current position of the pieces on the board.
UK Telegraph
Willem Buiter warns of massive dollar collapse
By Edmund Conway, Economics Editor
05 Jan 2009
Americans must prepare themselves for a massive collapse in the dollar as investors around the world dump their US assets, a former Bank of England policymaker has warned.
The long-held assumption that US assets - particularly government bonds - are a safe haven will soon be overturned as investors lose their patience with the world's biggest economy, according to Willem Buiter.
Professor Buiter, a former Monetary Policy Committee member who is now at the London School of Economics, said this increasing disenchantment would result in an exodus of foreign cash from the US.
The warning comes despite the dollar having strengthened significantly against other major currencies, including sterling and the euro, after hitting historic lows last year. It will reignite fears about the currency's prospects, as well as sparking fears about the sustainability of President-Elect Barack Obama's mooted plans for a Keynesian-style increase in public spending to pull the US out of recession.
Writing on his blog, Prof Buiter said: "There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard. The US dollar and US Treasury bills and bonds are still viewed as a safe haven by many. But learning takes place."
He said that the dollar had been kept elevated in recent years by what some called "dark matter" or "American alpha" - an assumption that the US could earn more on its overseas investments than foreign investors could make on their American assets. However, this notion had been gradually dismantled in recent years, before being dealt a fatal blow by the current financial crisis, he said.
"The past eight years of imperial overstretch, hubris and domestic and international abuse of power on the part of the Bush administration has left the US materially weakened financially, economically, politically and morally," he said. "Even the most hard-nosed, Guantanamo Bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed."
He said investors would, rightly, suspect that the US would have to generate major inflation to whittle away its debt and this dollar collapse means that the US has less leeway for major spending plans than politicians realise.
