Celebrate the Bush visit; short the U.S. dollar

Here is how to properly welcome George Bush to Canada. Drop in at a branch of one of our local currency monopolies, and borrow as many U.S. dollars as they will let you have. Then sell the same dollars. Buy bonds denominated in Euros. Get a rate of return that covers the interest charges on the U.S. dollar loan. Watch the value of the U.S. dollar drop. Celebrate the impending collapse of the U.S. currency on George's watch; be pleased you are helping make it happen.

Do not mistake me for your financial advisor, but this tidy operation will net you a profit, as well as limiting the imperial reach of the republic to the South. When you sell your Euro bonds to pay back the U.S. dollar loan, the Euro will have gone up against the U.S. dollar, so it will cost you less to repay the loan, and you keep the difference.

You could do the same thing using Canadian dollar bonds, but you cannot trust the Bank of Canada. They have a track record of lending a helping hand to the U.S. monetary authorities by, say, buying U.S. dollars, which would limit your gain.

This little speculative manoeuvre has been going on for many months, enriching many currency dealers, and so-called investors (roughly speaking, those who think the minimum wage is too high) in the process. It is considered a one way bet, since no one thinks the U.S. dollar will start to go up. Therein lies a tale.

Recently, the Group of 20 Finance Ministers met in Berlin and let it be known that the dollar was not on the agenda. So it fell, making money for Europeans short the dollar. U.S. Treasury secretary John Snow expressed little interest in the fact that dollar was sinking. Therefore, it sank further, prompting one British dealer to remark he would sell any currency that John Snow was in charge of.

Last week one of the Wall St. gurus (editors prefer “guru” to charlatan; it's shorter) used the New York Times op-ed page to argue against panicking over the fall in the greenback. We are witnessing “a classic current account adjustment” he opined.

A current account adjustment takes place as a result of a falling dollar because what Americans can buy abroad diminishes as their money loses value. At the same time, what they can sell is supposed to become more competitively priced. So, the outflow of U.S. dollars for the purchase of goods and services should shut off, and the fall in the dollar slows, and eventually stops. Right. But only so long as the currency speculators agree to play along.

The Wall St. guru, Stephen Roach of the very august Morgan Stanley, thinks the currency billionaires will take their cues from the international trade position of the U.S. When Americans buy more than they sell, the money men go short the U.S. dollar for sure. But, what if the trade position does not respond very much to a falling dollar?

New York Times Op-Ed columnist Paul Krugman, an aggressive critic of the Bush administration, gave an interview letting on that more was at stake in the U.S. dollar decline than trade flows. He pointed to the central banks of Japan and China as having something to say about where the dollar ends up.

The amount of money currently flowing out of the U.S. because of the current account deficit is staggering, over one-half a trillion dollars a year. The trick is that it comes back. Overseas purchases of U.S. government securities brings the money in as a short-term flow on the capital account.Who buys? The central banks of China, Japan and Korea, who are orchestrating what has become a de facto dollar bloc. Krugman blames the Bush people because the U.S. has to count on these central bankers to keep buying U.S. currency, and, especially, not to dump their huge holdings onto a market where there are so few other buyers.

Krugman is a top rated economist, currently on leave from writing for the Times to write a textbook making economics understandable, but that does not mean he understands all of what is going on. He does not like Bush or his policies, and he blames the U.S. budget deficit for giving the Far East a hammer to hit the U.S.

But the Asian bankers are buying dollars to keep their currencies in line with the U.S. dollar. This allows them to maintain their exports to the U.S.; and China, Japan and Korea win against Europe as well. With cheaper money they have huge cost advantages against European manufacturing rivals such as Germany, in every market in the world, including Germany.

So long as Asian central banks keep buying, and holding, U.S. government bonds, the current account adjustment is not going to happen the way Roach pretends, because the Asian currencies will not rise against the dollar.

And the great danger to the U.S. dollar does not come from George Bush giving Asia a lever over the U.S. as Krugman would have us think. It comes from the U.S. citizen practicing the capitalist ethos.

Brought up from birth to believe that no one is going to help you, other than yourself, and that you must pursue your self-interest, just wait until the average American starts to short the dollar in order to make some money.

This would not just be populist rage, as in, I am no sucker, therefore I am getting out of our currency, at a profit. It could also signal a sort of democratic insurrection similar to the one going in the Ukraine right now. It would mean U.S. citizens saying to the government, I no longer trust you to manage our affairs, and I do not like what you are doing to our money,

The bullying Treasury Secretary under U.S. President Nixon, Texan John Connally is still remembered in Europe for saying: “The dollar is our currency but its your problem.” This was shortly after the 1971 U.S. default on its commitment to convert dollars held by foreign governments into gold at $35 an ounce. In effect, Connally put the world on a paper dollar standard. The Europeans responded by floating their currencies, i.e. by refusing to buy more dollars, and 30 years later by establishing the Euro.

In a world where, like not a few U.S. Democrats, most people are not able to vote in U.S. elections, there is a way to vote against U.S. policies. All you have to do is borrow and then sell the U.S. dollar.

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