Most people of a certain age who have spent time in Europe and the United States will remember the legendary Monty Python Dead Parrot sketch, which involves an irate customer bringing back a parrot that the pet shop owner has sold him, only the bird is actually dead and was nailed to the perch.
The few readers not familiar with the sketch will simply have to take my word that this is one of the greatest moments in television history, although it is fairly trivial to search the Internet and watch all the various versions that will pop up. Readers in some countries where the Internet is proscribed may find it tough, but hey, if you made it to Asia Times Online, the next few steps cannot be that difficult.
It is impossible to improve on the original, but perhaps there is a version of it somewhere that goes with the customer taking the dead parrot to another person, who only claims to have passed it on in situ from another customer, and so on till the parcel finally arrives at the original seller, namely the US government.
Watching Fed chairman Ben Bernanke and his comrade-in-arms, Treasury Secretary Hank Paulson, over the course of the past two weeks, I cannot help but imagine quite what kind of scenes would be playing in Washington when irate central bankers holding the US dollar call in to complain.
A tragedy of inflation and global recession as this may all well end up to be, there is the funny side. The world’s chosen reserve currency, the one constant in a changing financial landscape for the past 30 years, is now officially relegated to second-class status thanks not so much to its champions in the US government, but because of buyer behavior – that is the buyers that are constantly passing the parcel of damaged goods that the US dollar has now become.
Nailed to its perch
My general disregard for central bankers has been summarized in a previous article How central bankers could save the world (Asia Times Online, December 8, 2007), which captures the vicious cycle of Asian countries along with other emerging nations holding too much of their citizens’ hard-earned savings in the form of US dollar assets, thereby both damaging their citizens through the artifact of higher inflation at home, but also increasingly causing asset bubbles around the world – of which the current US subprime problem is but the most recent version.
All this happens because Asian central banks have artificially nailed their currencies to the US dollar through currency management regimes – also known as pegs. China is by far the biggest offender on this front now, but is only following the lead of others such as Japan and South Korea before it in following the idiotic International Monetary Fund orthodoxy of turning one’s country into a factory for US consumption goods.
China’s government has a preoccupation with employment; due to a political structure that ill affords economic volatility. Mao Zedong’s “iron rice bowl” for China is however subjected first to the inflationary heating of global growth and excessive Chinese investment in some sectors such as real estate, and must now face a new cold spell from a global recession as first the US and then Europe with Japan all slide into negative economic growth.
Increasingly, it appears likely that while GDP growth will remain relatively strong in China at 6-8% in the next five years, it will still slow down enough to expose structural weaknesses. The iron rice bowl for all intent and purposes is going to crack as Chinese exporters first lose their major market and have to start firing people, while a belated widening of the currency trading band will keep local asset prices as well as food relatively unaffordable for millions of people.
In turn, this means more government mismanagement in the form of price controls (see article “Pork-barrel politics“, Asia Times Online, June 16, 2007) and political upheavals as people inevitably rise up against a government using pretexts such as endemic corruption. Help though may come from an unexpected corner for China.
Other Asian countries across both the Pacific Rim and the sub-continent have followed similar policies, with India serving as a notable exception last year as it allowed its currency to rise mainly to subvert inflation at home. This year, the complaints of local businessmen and panicked selling in the local stock market by foreign investors have pushed the Indian rupee back towards marginal depreciation, although in my view the trend is unlikely to survive for too long.
Another thing that is unlikely to survive into the next year will be the Indian government, as the usual compromise budget statement of last week shows accelerated revenue deficits even as capital spending remains woefully inadequate. Growth in India is likely to slow down to the 5-7% range for the next five years and while that is still strong enough for most countries, it is just not good enough against the country’s potential growth of over 8%.
India being a raucous democracy, I expect this unnecessary slowdown in growth will help push the current government out of power within 12 months when national elections are due.
Pining for the fjords
Meanwhile, back with the dead dollar, its patrons are concocting new brews to keep the charade of life going, much like the shop owner in the Monty Python sketch hits the cage to demonstrate that the parrot is indeed moving. One such action is aimed at holders of my favorite reserve, namely gold (see In gold we trust, Asia Times Online, September 8, 2007).
The US government is now forcing the IMF to sell its gold holdings, as it attempts to puncture the value of the precious metal and hopefully jolt some current holders to buy US dollar-denominated assets instead. Presumably, the idea for the IMF is to sell its gold and buy some US financial assets, in what constitutes an eerie turn to fact from satire at least from this columnist’s perspective (see A good use for the IMF – Bail out America, Asia Times Online, March 17, 2007). As all the central banks that bought into the myth of US financial companies have realized of late, this course of action will simply lead to more losses for the IMF and leave the institution at a new nadir of relevance as far as the emerging financial order is concerned.
The question then becomes what can replace the US dollar and an obvious contender is the euro. The more sensible policies of the European Central Bank have in contrast to the Fed allowed the euro to gain much ground and it is now worth 50% more against the US dollar than the bottom that was reached not over five years ago, in the days before the “war on terror”.
Unfortunately though, Europe doesn’t have the demographic potential to sustain itself in the top spot, while its politicians are short-sighted beyond belief by pursuing idiotic socialist policies at a time when a comprehensive embrace of capitalism is called for. Between politics and demographics, it is difficult to see Europe emerging as anything other than purveyor of dangerously expensive goods to an overtaxed population. In time, as today’s computer manufacturers in that continent found out, the rest of their industrial space will not be so much taken over as overtaken by Asia.
Thus, the euro in the Monty Python sketch would be the slug that is offered by the shop owner to mollify the customer – yes, but does it sing? Not really – well that’s no substitute, is it?
Searching for other substitutes would mean skipping all of the Middle East – not just for the volatility but also because of the absence of meaningful economic value addition. As sellers of commodities, Middle Eastern nations could never get their currencies as reserve holdings for processing nations such as Asian countries. For much the same reason, countries in Africa and South America are rendered irrelevant for this purpose.
So what replaces the US dollar in global reserves? Like a kingdom where the regent is dead and lies rotting on the throne, the world searches around for a new prince who will take the mantle and all that goes with it. To be continued …