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Chinese Experts Analyze the Dollar Crisis


From the Vol.1, no.26 issue of Electronic Intelligence Weekly

World Economic News

Chinese Experts Analyze the Dollar Crisis

"Dissecting the U.S. Crisis" is the title of a signal article published in China's Financial Securities Daily Aug. 27, by Yan Yaling, a researcher at the Financial Research Center of the Bank of China. The article departs from the usual cautiousness and reserve on the part of China's leading financial institutions, in publicly discussing the situation of the U.S. financial system and dollar. Here are some excerpts, in rough translation:

The U.S. financial and economic system is now facing six major, simultaneous crises, the author writes: "The post-Sept 11 political crisis; the crisis of confidence in financial reporting of companies; the financial deficit crisis; the investment crisis connected with the fall of the U.S. dollar; the structural trade deficit crisis; and the crisis of ineffectualness of lowered interest rates. Add to this: the instability of the dollar vis-à-vis the increase of oil and gold prices; the weakening of the U.S. economy and lack of perspective for recovery; the lack of continuity in the economic policy of the U.S. government; the imprecise and provisional character of its responses to the present challenges, resulting in a collapse of confidence in the U.S. economy, an attitude of passivity and ineffectiveness—it goes without saying, that all this is having an effect on the reputation of the dollar, and since the negative influences on the U.S. economy have increased in number, one cannot underestimate the potential for a drastic worsening of the situation."

The author elaborates on the political aspect, saying: Given the inadequate and mismatched economic policies of the U.S., the internal institutional contradictions have been clearly revealed; and with the mid-term elections, the U.S. political crisis is showing more and more sharply. There are two main aspects of this: First, the psychological state of latent panic and anxiety is a major factor affecting the economy and contracting credit operations. But even more important is that judgments concerning the economic performance of the present government will have a major effect on the coming mid-term elections, exposing the government to potentially severe attacks and challenges. From the foreign policy standpoint, the tense atmosphere connected with military conflicts in Afghanistan, Middle East and other areas, the complex shifts in international relations, especially the element of instability connected with political upheavals in Latin America, and so on, have multiplied the attacks and criticisms of the U.S., which is beset with difficulties both at home and abroad.

Speaking of the crisis of confidence in business, aggravated by the endless series of scandals and massive losses on the stock markets, the author points to a chain reaction which is casting doubt on the whole U.S. market system.... Given the scale of U.S. companies and the effects of globalization, the author says, this affects not only the internal U.S. situation, but also the effectiveness of the multinational corporate and financial groups, causing an obvious tendency for collapse of stock markets around the world, affecting Europe, Latin America, and Asia to varying degrees, and leading to a general crisis of business confidence.

Inside the U.S., the interconnection and exacerbation of many contradictions has made it difficult for the Bush Administration to master and coordinate the situation; there are more and more indications of a policy crisis. Particularly grave is the investment crisis connected with the depreciation of the dollar. The United States is the greatest debtor country in the world.... In this period of economic contraction and depression, the risks, hazards and anxiety connected with the dollar have become obvious. Everybody knows that the dollar is seriously overvalued, by 20% or even 30%; and this is the general view in the international markets. The mismatch between the real strength of the economy and the level of the dollar ... has been aggravated by a vague and contradictory policy of the government. Both investment and speculation are tending to drive the dollar down, seriously undermining confidence in dollar-denominated capital.... Under conditions of a reversal in the exuberance of the stock markets, consumers and investors, this cannot but affect the direction of flow of international capital ... creating the environment for capital funds to choose to attack the dollar.

The U.S. trade deficit is another key problem. Latest trade figures ... indicate the deficit this year will reach over $400 billion, and according to pessimistic predictions, it could reach $600 billion next year.... The continued increase in the trade deficit over years in a row not only means the U.S. is paying for foreign goods at the expense of domestic goods, but ... represents a hidden risk and danger to the whole structure of the economy. At the same time, the global dependence on U.S. trade aggravates the distortion of the U.S. economic structure.... In the face of shrinkage of the domestic economy, with its obvious impact on the consumers, the long-term imbalance in trade structure is negatively impacting on economic confidence, causing the latent crisis of confidence and the latent panic to turn into a real explosion....

The Federal Reserve's reduction of interest rates has not had the anticipated effect ... there has been an obvious change in the reaction of the markets. In addition, since dollar interest rates have already reached a 41-year low, the room for further maneuver has greatly narrowed.... The interest rate was lowered 11 times during 2001 without having any real, fundamental effect on the economy, which finally slid into recession, while the interest rates themselves have become trapped in a narrow base line, aggravating the factors leading to a drop in the dollar. At the same time there are rather large fluctuations and instabilities in the U.S. economy....

Summarizing the dilemma of the U.S. financial system today, the author notes that the main cause of the dollar weakness, is the contradiction between U.S. economic policy and reality.... Every day, the U.S. needs more than $1 billion from abroad to compensate for the current account deficit, but now the inflow of capital has shrunk.... Judging from the real data, there is at present no recovery in consumption and investment. Especially fixed capital investment has gone down.... Added to that there is the drastic fall in stock prices and in company profits, the aggravation of structural contradictions in the economy and so on. All of this means one must take into account the fictitious appearance of U.S. economic statistics.

The author concludes that the situation of the U.S. dollar will depend on both domestic and international factors, but: the degree of risk and the multiplicity of crises is growing, and more shocks are coming.

In the context of the fact that the Chinese are among the largest holders of dollar reserves in the world, and have wanted to believe in the prospects of a U.S. recovery, this article is extremely significant.

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