[Allan Topol / AllanTopol.Com]
Lightning paced thriller writer
of International Intrigue
National Bestselling Author

Dumping The Dollar
by Allan Topol, [IMAGE]2004


Photo Courtesy: Julie Zitin
[Allan Topol / AllanTopol.Com] The photograph in the Chinese newspaper was staggering in its implications. It was lunch hour. There were huge lines in front of Shanghai’s downtown Bank of China filled with people anxious to get into the bank before they had to go back to work. The scene had all the implications of a run on a bank. With one difference. These Chinese people weren’t intending to withdraw their money. No, they had money in their hands, in bags and in briefcases. It was U.S. dollars.

They were hoping to convert these dollars into yuan, which is the popular term for the Chinese currency, also called the renminbi. It is easy to conclude that these people are speculators. They are betting that the Chinese government, which in the past has pegged its yuan to the dollar, may revalue its currency and each dollar will bring fewer yuan.

However, another possibility is that these Chinese have decided that it is not safe to hold dollars any longer. That over time, they expect the dollar to continue to erode.

This conclusion is not surprising in view of the U.S. government’s policy during the last couple of years of letting the dollar fall relative to the euro and most other world currencies except those pegged to the dollar like the yuan. Recently, the euro hit a new lifetime high of a $1.30 as the dollar continued to weaken. The shift between the dollar and the euro has been significant...fifty percent since 2001.

The Administration’s policy is intended to assist American manufacturers by making U.S. exports cheaper around the world and thereby increasing sales of U.S. manufacturing firms. At the same time, the hope is that by making imports into the U.S. more costly, Americans will buy less of those goods and the U.S. trade deficit will improve.

Thus far, the policy has not worked. U.S. balance of payments have not improved. Americans continue to consume, often with borrowed funds, those costly foreign imports. This seems to have made the finance gurus in the Administration even more aggressive about pursuing their policy of a weakened dollar.

The consequences, however, are not merely economic. There are strong political and national security implications which are troublesome.

The huge budgetary deficits which the U.S. is currently running are being funded to a considerable extent by foreigners, both central banks and individual investors. The U.S. must employ massive borrowing to sustain our increasing national debt. Thus far, these foreigners have shown a willingness to buy the U.S. Treasury obligations which fund our deficit.

Unfortunately, we have to realize that as the dollar slides, relative to the euro and the Japanese currency, foreigners who operate in these currencies are actually getting back less money for their investment than they put in. They are not only receiving a low interest rate, but a negative return. At some point, they will stop making the investment. Or at least the U.S. government will have to pay sharply higher interest rates to sustain our deficit. This is the most likely scenario.

The results will be catastrophic. Borrowing for the U.S. government will become more costly, further increasing the deficit. Also a sharp spike up in interest rates will upset the American domestic economy. It is hard to see why this result will not inevitably occur.

Then there is the threat to our energy supply—the Achilles heel of the American economy. OPEC and other oil producers quote crude prices in dollars. But what if they were to decide they could maximize their revenue by quoting in euros. If the dollar continued to fall the consequences would be costly for the American economy. Utilizing the numbers of the last three years, energy costs would be up an additional fifty percent.

Then there is the psychological impact of the weaker dollar. I remember a long time ago traveling in Europe and receiving a discount when I paid with dollars. That gave me a feeling of pride. I was an American and my country had the most sought after currency. Now, I feel fortunate when I’m not receiving a penalty for payment in dollars.

When Britain was at the height of its power, the pound sterling was the benchmark and the British were respected politically. When the dollar was the most sought after currency, we enjoyed the same respect. Politics always follows the money. It’s a variation of the golden rule that he who has the gold rules. My fear is that with the plunge in the dollar, political and military respect for the United States may fall as well.

Economics is a tricky business. Perhaps I’m in error in delivering this gloomy Thanksgiving week assessment. I certainly hope so. There is, however, enough that is troublesome about the dollar’s decline that should cause real concern for Americans.