Last tango in Washington…
Washington will have to pursue the kind of “austerity” usually imposed on less developed nations like Argentina by the International Monetary Fund.
And let us not confuse the American Idol viewing segment of our meager readership: by “austerity” we mean millions suddenly shoved unceremoniously into the ranks of poverty; we mean poverty rates unseen in the history of the United States; we mean astounding levels of poverty COMBINED with unprecedented indebtedness trapping tens of millions.
Frightening as it might seem, the US Dollar is now looking fragile. While a glance at the US Dollar index indicates that the dollar seems to be rising in value, the events of the last couple of weeks has seen the dollar rise and fall and rise in price continually – in other words, the US Dollar has become volatile, just like the sharemarket. If investors finally decide that the US is no longer a worthwhile place to invest – and that feeling is closer now that at any time in history – then the result would be a dollar crash. Financial armageddon.
The only people stopping a dollar crash from occurring – and the only people capable of acting against the market to save the dollar – are foreign central banks. If capital flight occurs and investors dump the dollar, the only people capable of reversing it are the ones who control the supply of foreign currency. Thus the ECB, the Bank of Japan and the Bank of England could sell off their own currencies and purchase the US Dollars that are being sold by the frightened investors.
Yes America, your national financial security is now in the hands of foreign governments.
But why would these central banks choose to save the US Dollar? While such an action would help the US, it would also lead to further contagion. Just like Pandemic II, a crashing dollar would help to limit the crash to the US. Keeping the dollar higher via foreign central bank intervention would end up hurting the entire world more than if the US were left alone.
This is not to say that a dollar crash would not hurt other nations – of course it would, especially those nations whose economies depend upon US consumption. But the choice is not between good and bad, but between bad and worse. If the dollar crashes and foreign central banks do nothing, the result for the international community will be bad. But if the dollar is propped up by the international community, the result will be worse for them – the contagion would spread.
This assumes, of course, that foreign central banks would be able to act in unison to protect the US dollar without letting their own interests get in the way. It also assumes that these foreign central banks would also be successful in saving the currency of the world’s largest economy. While the US government was big enough to “bail” a number of important financial firms, it is questionable whether foreign central banks are big enough to “bail” the US economy. While the US might be too big to fail, it might also be too big to bail.