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[ThatHawaiiGuy]

Think gold forget the dollar

DUBAI WATERSHED/Michael Power
WHAT will history remember about 2003? That the eradication of Saddam Hussein's Iraq was but a pyrrhic victory for the US? That the Battle of Baghdad was a mere skirmish ahead of a much more seismic defeat in the Middle East? That the US won a war at the northern end of the Arabian Gulf only to be drubbed in nearby Dubai a few months later?

Let me explain: the decision made at the G-7 meeting in Dubai last week to weaken the dollar was a watershed in the rapidly unfolding some would say unravelling global economy.

And although the Americans see a drooping dollar as a triumph, my own view is that it signifies the beginning of the end of Pax Americana.

Any economist can tell you the US is living off borrowed money. Many will tell you it is also living off borrowed time. The big question is how long will it be before Uncle Sam feasting on a fix of 2,7bn worth of other nations' money per working day suffers from a bad case of cold turkey?

But before you start celebrating the prospect of the humbling of the hegemon, there is a catch. And it is a big one. Unfortunately, we are all hooked on the same habit. The globalised financial and trading system is high on a drug manufactured not in the Republic of Colombia but the District of Columbia: namely the US dollar.

Unrestrained production of the US currency is the cocaine that drives today's global economy. (It seems fitting that the US treasury secretary goes by the name of Snow!)

Once every three years, the International Monetary Fund-World Bank meeting is held away from the DC factory. This time, it was the turn of Dubai to play host to the circus of high finance, now characterised by armies of Armanis up to their necks in Nokias.

Yet the refreshing result was that discussions touched on subjects that had the Americans been the hosts would have been, if not untouchable, rude. It was a surreal scene: amidst the shimmering skyscrapers of Arabia, the world's moneymen talked openly of heretofore heresies like "Has the US bitten off more than it can chew in Iraq?", and "Is China about to eclipse the US?"

The general conclusion was "no": the US was still in charge. But it was telling that this was the first meeting that such a conclusion needed to be qualified by that all-revealing word "still". It begs the question: "For how much longer?"

The debate in Dubai centred on whether the coming collapse of the dollar would be a smooth retreat or an unseemly rout. Few officials from any nation wanted the latter, but markets often seem to go out of their way to snub their noses at such public sector wishes.

So brace yourselves: with the US now addicted to debt, needing 70% of the world's mobile savings to feed its growing habit, the question must be asked: are we entering the Teotwawki zone? Is this "the end of the world as we know it"?

How on earth did we get here? What has the world done to create such a dangerous reliance on a fiat currency, one backed by blind faith rather than something more tangible like gold?

The simple answer is that US consumers have developed eyes bigger than their wallets and the rest of the world (more fool us!) have been willing to sell to Joe Six-Pack on credit. Asia in particular exports tons of Toshibas only to be paid with Fed-printed dollars that are then recycled into US treasuries that in turn help finance the US budget deficit.

So the world turns. And as this merrygo-round gathers speed, the childish exhilaration we all feel grows. But it is not hard to predict it will all end in tears.

Meanwhile, many of the world's poorest nations nearly all also drowning in their own dollar debt came to Dubai to beg for time to carry out their own restructurings. They arrived a bedraggled bunch, a week after the developed world had drenched them in the cant of Cancun (now cynically renamed "Can-can't"). So, not surprisingly, they came not to raise the dollar but to bury it.

US officials actually claim they won the debate in Dubai in getting the Group of Seven to accept that foreign exchange markets should allow "a smooth adjustment of international imbalances based on market mechanisms". If so, this too will be a pyrrhic victory.

Already the central banks of Asia which are the main underwriters of the US's excesses are starting to doubt the dollar. Should they put all their foreign exchange nest eggs in the dollar basket? Increasingly the answer though few would admit to it in public is "no".

The US, from being the lender of the last resort to the global economy in the 1950s and 1960s, has become the borrower of the first resort in 2003. And like any banker faced with a runaway borrower, this is spreading a chill through the minds of the lenders of Asia.

Post 9/11, we have entered a dangerous period not just in global geopolitics but also geo-economics. The metric of value long central to global commerce the dollar is no longer the true north about which the world of finance can easily navigate.

The US triumphant last man standing after the Cold War slugfest is now faced with that most insidious of enemies: the Pete from Peoria who cannot say no to that interest-free Nissan.

Is there a silver lining to this cloud? Probably not. But there is a golden one, and SA can at least take some comfort in that. For the first time in my investment career during which time I regarded admitting as much as akin to committing a professional foul I am a gold bull.

And, at the risk of mixing metaphors, I predict this bull will run riot in a China shop, not an American one.

Power is portfolio manager, Investec Asset Management.


Oct 02 2003 07:48:16:000AM Business Day 1st Edition

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03 October 2003


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