Imperial over-stretch marks

Something has to give for America's overstretched imperial currency, says Bill Bonner.

Bill is away until 17 April. So in his absence, we'll bring you some of his most insightful, caustic and witty observations from the last 14 years. This article was first published on 14 October 2002.

In Absentia The Argentinian Outback

"America remains the unrivalled leader of the world the big power without which nothing good happens." Thomas L. Friedman, hallucinating

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America is the "single surviving model of human progress," said George Bush the younger, to the West Point graduating class, perhaps exaggerating just a little. He might have conceded, if he'd thought about it, that there are elements to the American model that might not yet have attained perfection.

The American model of human progress, it turns out, depends heavily on the kindness (or naivety) of strangers: America prints money; foreigners make products. The foreigners send their products to the US; Americans send their dollars abroad.

Alert readers will notice the defect immediately for what would happen if foreigners changed their minds? Then who will pay so that Americans can continue living beyond their means? And who will finance the US budget deficit, expected to rise about $400 billion thanks to increased military spending?

The system survives as long as foreigners are willing to accept US paper assets for more tangible ones. We don't know how long that will be, but we note that the value of paper tends to vary inversely with the amount of it available.

No Fed chief provided so much American paper as Alan Greenspan. In fact, as reported here on several occasions (we keep mentioning it because we can barely believe it) Greenspan has increased the world's supply of dollars more than all the Fed chairmen and all the Treasury secretaries in US history.

Still, the foreigners schlep and sweat and gratefully take surplus dollars in payment about $1.5 billion per day. Typically, when a nation's trade deficit rises to 5% of GDP, something has to give. What usually gives is the nation's currency; it goes down, making imports more expensive and exports more attractive.

So far, this has not happened, we are told, because the dollar is no ordinary currency but an imperial currency, the leading brand of the world's only remaining super, superpower. How that protects it from the age-old cycles of over-stretch and regret, we don't know. More likely, the dollar will eventually do what all over-stretched currencies do, imperial or otherwise; it will snap.

"I see one possible way out," writes Stephen Roach, "a sharp depreciation of the US dollar a significant depreciation of the dollar at least 15% to 20% on trade-weighted basis, in my view, would go a long way in cracking the mold of US-centric global growth"

"Oh no, I guess this means Mr Bush will begin his war soon," said a neighbour this weekend. She was a woman of about 70, in a hunting get-up, with knee socks and a big brown sweater. Her low voice, mannish hair and bright red face was slightly comical. But she was also carrying a 44 calibre pistol and waving it around the room. "But, heck, what's life without wars," she roared. "Every so often, maybe we need a war. I just hope the price of gas doesn't go up."

What set off my neighbour was the news that Congress has given the go-ahead, not by declaring war as required by the constitution, but by passing the buck to the president; Bush is free to attack America's enemy du jour Iraq. How Iraq achieved this honour is anybody's guess. But enemies come and go, along with models of human progress.

In the 40s, Germany and Japan were our enemies and the Soviet Union was our friend. Then, the roles reversed for the 50s and 60s. And then, in the 70s, Iraq was our friend and Iran was an enemy. And, of course, Cuba, North Vietnam and North Korea were our enemies at various times.

But who knows? Maybe a change of government will do as much good for Iraq in 2002 as it did for England in 1066. Today, we write not to criticise the president's war plans, nor Congress's pusillanimous dereliction it may all work out for the better, for all we know. Instead, we merely wallow in the absurdity of it all.

The durability of Christianity, we thought to ourselves during this Sunday's sermon, comes not just from the enormous promise that it makes, but also from its adaptability. Christians believe that if they can just get God on their side, everything will work out. Even dying is nothing to worry about; "Even unto the grave, Hallelujah" we chant, with faith that death leads to a better life without mortgages or election campaigns. And in the meantime, people are free to do almost any lunatic thing they want.

Jean Mayol de Lupe was an army chaplain in the French army in WWII. He was wounded, held prisoner by the Germans and eventually decorated with the same award later given to Alan Greenspan the Legion of Honour. Greenspan, a cynic might say, got his "cravat" for proving that you could inflate the currency and get away with it; Mayol de Lupe proved that you don't have to be an analyst or a politician to be a fool.

The 1930s were a great time to be a fool; there was a bull market in foolishness such as the world had never seen. It seemed as though nearly half the world was keeping company with socialism, communism or fascism. Mayol de Lupe was convinced that bolshevism was a great threat to Catholicism, and that the only thing that might save it was Hitler's National Socialism. After France had surrendered, he organised a voluntary corps of French soldiers to go to help the Germans in their war against the Soviet Union. Already 66 years old, he nevertheless went to the Eastern front himself along with his troops. The priest wore a Waffen SS uniform, ended his sermons "in the name of our Holy Father Pious 12th and our Fuhrer Adolf Hitler," and described the French volunteers' work "what a beautiful mystery, a wonderful tale, that our boys write with the points of their bayonettes."

In Mayol de Lupe's eyes, the Soviet Union was the Iraq of the hour and Nazi Germany the world's superpower. Many in Europe including many in France and Britain felt that the dynamic new Germany represented the force of the future, that it was "the only surviving model of human progress."

And so the poor old coot stretched on the Nazi uniform and went to war.

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