The Sinking Dollar Ship

The Sinking Ship

Since its launch in 2008, the G20 has organised three summit conferences. The first meeting created an enormous expectation by the mass media and bloggers that it would the same magnitude of 1944 Bretton Woods that determined the dollar supremacy, replacing the pound. But it was a false alarm. No official resolution was made on the settlement currency. The third meeting in 2009, therefore, had no such expectations.

Nonetheless, there are signals that G20 summit is indeed a conference to discuss the leading currencies. The UN Commission of Experts on International Financial Reform, quite abruptly, announced that the dollar standard ought to be replaced with a new currency basket scheme, much in the same manner of IMF’s SDR or EMS’s ECU.
UN panel urges replacing dollar with currency basket (Reuters)
The Russian authority leaked to the media that Moscow intended to propose a discussion to establish a new international standard currency at the preparatory meeting for the G20. The Russian proposal is based on the SDR, just like the UN panel.
Russia wants to start debate on new reserve currency at G20 (Ria Novosti)
The Russians insisted that major developing countries such as China supported their plan. China doesn’t officially express that it wants a new standard currency instead of the dollar, but unofficially it has made a preliminary proposal and disseminated the dossier to G20 delegates. On surface, China cannot afford to throw the dollar to the bin as it owns huge amount of US treasury bills.
U.S. dollar: Another Sign of Accelerating Loss of Confidence (Seeking Alpha)
Bank of America's Bernstein Says Sell Bank Stocks After Rally (Bloomberg)


If G20 wishes to transform the international currency regime to a multi-polar model, currencies of developing countries such as the yuan, the rouble, or the riyal to be stable. Yet, as long as insufficient regulation is placed upon hedge funds and tax haven jurisdictions, they are reluctant to lift the dollar peg for the fear of speculative attacks. The primary goal for Germany and France is to strengthen the hedge fund regulation – this is because they know the euro alone cannot take over the dollar’s role as the settlement currency. The EU needs the stabilisation and internationalisation of the other G20 currencies. Brussels pressured traditional tax havens such as Switzerland or Singapore to revise their financial tolerance. Britain, which used to oppose to more regulations, also declared ‘the beginning of the end of tax havens’.
'Beginning of the end of tax havens' (FT)
Similarly, American mass media enthusiastically report that US corporations evade taxation by transferring their profits to offshore facilities, so tax havens should be bulldozed.
Trillions that the world could use - $11.5 trillion hidden in offshore havens (International Herald Tribune)

The US is already bankrupt
FRB has decided to print more dollars to purchase the leftovers from the bond market. It will buy $300 billion worth of long-term bonds in 2009. Furthermore, the FRB will buy additional $850 billion mortgage equities from Freddy Mac and Fannie Mae that are not selling well.
Fed to buy $300bn in Treasury bonds (FT)
Beside local buyers, the US bonds have been traditionally supported by Japan and Germany. Since 2008, however, China became the world’s largest creditor of the bond. But the Lehman shock caused a huge drop in bond appetite by foreign buyers. Depression in US lowered the export volume of China, which is now in capital shortage to buy more US bonds. By analysing China’s natural resource diplomacy, it is clear that Beijing is trying to decouple from the dollar. China aggressively buys mines and petrol fields across the world. Seventy percent of China’s financial investment was composed of the dollar. They want to lower the percentage to 50, and the other 50% to be composed of more liquid non-dollar assets such as mines. This is clever, as it can offset the loss from the dollar depreciation with the price rise of commodities.
China inoculates itself against dollar collapse (Asia Times)
Falling greenback fuels BRIC dollar reserve rethink (Reuters)


More than Guantanamo, Obama’s biggest challenge is budgeting. He has to roll out financial policy, more public expenditure to sustain the economy, and re-strengthen social security policy that was neglected by his predecessor Bush. They all cost money. US fiscal deficit may become record high. Already, America’s fiscal balance is negative $11 trillion. Obama announced that the federal government expected $7 trillion increase of fiscal deficit over the next 10 years. Congress, however, thinks it was an underestimation, and instead figures the true estimate to be $9 trillion. Rescue plans to banks were originally $500 billion, but they are now $3 trillion.
Much Bigger Deficits Seen in Budget Office Forecast (New York Times)
Although an independent budgeting, Medicare assumes government bailout in the event its balance sheet fails. Estimation of the total cost borne by the government ranges from $30 to 50 trillion. Approximately 50 million Americans have no health care coverage at all. Inclusion of this group to the Medicare is ethically correct, but financially a risky venture.
Medicare Meltdown (Wall Street Journal)

Tea parties
A number of social movement organisers in US dubbed themselves Boston Tea Party in 2009. Historically, it is a symbolic incident in colonial America, that civilian groups in Boston dumped tea leaf barrels into the harbour as a protest to British decision to grant exclusive rights to the East India Company to export tea leaves to the 13 Colonies. Bostonians were upset not to be able to send representatives to the parliament in London, while taxation was freely decided by the British. British common law already established the principle ‘no representative, no taxation’, which was employed by the colonists. Three years later, the 13 Colonies declared independence. It became an American tradition to name any movement to oppose taxation with no popular representation Boston Tea Party.

The 2009 Tea Party participants are dissatisfied at the worsening economic condition despite huge bailout efforts on large banks by the government. People were angry to know that the government admitted to give excessive remuneration to AIG directors, while the company was supported by the public money.
Editorial: A.I.G. Bailout (New York Times)
Treasury told to make bail-out banks invest in US (FT)
A federation called New American Tea Party mobilised 150 demonstrations against corrupt bankers across America.
Fed-up Americans mobilize: More than 150 tea parties (World Net Daily)


Obama and his advisor Summers expressed their anger against AIG, but it will be difficult for them to take tough measures. AIG had accepted $50 trillion worth of CDS, which was instrumental to trigger the crisis. AIG failure is the CDS failure, which will cause chain reactions to other financial institutions whose success depend on.
"Getting Tough" with Predator Financial Institutions (Global Research)
Unemployment rate in US deteriorates. Including the semi-unemployed (U6), the rate is already 13.6 percent. In key states like Michigan, California, or Oregon, the U6 unemployment rate is 20. This is as bad as the Great Depression of the 1930s.

The federal government can have the FRB to print more money. But state governments don’t have this option. Illinois announced that it intended to increase the income tax by 50% for those whose annual income exceeded $56000. The middle class is also upset. Potential for tax rejection is big. If the tax revenue becomes insufficient, governments won’t be able to pay coupons to bond holders. Foreign investors will stay away from US bonds.

Boston Tea Party in 1774 achieved the independence and the birth of a new nation, but the Tea Party in 2009 may result in the dissolution of the Union. In the US, civil rights such as democracy and civil obligations such as tax payments form a clear social contract. The United States was not created as a nation state curved by natural boundaries. It is based on contracts. If the majority of the people become dissatisfied with the current state of the federation, the US can become politically very instable. In New England, the cradle of the American Revolution, there are heated discussions on whether they should declare independence from the US.

New Hampshire in uproar over US Administration (Russia Today)