Mieczyslaw Karczmar

A diverse view to total apocalypse for the US Dollar.

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Mieczyslaw Karczmar


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Articles on Charles De Gaulle's Exorbitant Previlege

America’s privilege, the world’s worry
Nov 10th 2004 From The Economist Global Agenda
The dollar plumbed new depths against the euro this week. The greenback’s fall has unnerved European policymakers. But it is their Asian counterparts who have most reason to worry

CHARLES DE GAULLE, founder of France’s fifth republic, famously resented America’s paramount position in the global economy of the 1960s. The United States, he complained, enjoyed an “exorbitant privilege”. Because its currency, the dollar, served as the world’s reserve asset, America could live beyond its means, unconstrained by the periodic shortages of foreign exchange that haunted other, less privileged nations. Nicolas Sarkozy, France’s spirited finance minister, wants to inherit de Gaulle’s mantle as president of the fifth republic. Though somewhat smaller in stature than the great general, both physically and politically, Mr Sarkozy seems to share his outsized resentment of America’s economic privileges.
Mr Sarkozy has more to envy than de Gaulle ever had. Today’s America lives beyond its means more flagrantly than ever before. Its government will spend about $427 billion more than it raises in taxes this year. The nation as a whole is running a deficit of $571.9 billion on its current account with the rest of the world. These twin deficits, Mr Sarkozy points out, weigh heavily on the dollar. The currency’s fall, interrupted in February, has resumed. On Monday November 8th, it plumbed a new low against the euro of close to $1.30. Only if America restrains its deficits will the markets regain confidence in the dollar, Mr Sarkozy warned. “This is a unanimous message from the Europeans and the International Monetary Fund that we send to the United States.” On Wednesday, the dollar dipped again, this time breaching the $1.30-per-euro mark.

The dollar Oct 28th 2004US Election 2004: The budget Oct 7th 2004The dragon and the eagle Sep 30th 2004A fair exchange? Sep 30th 2004Unnaturally low Sep 30th 2004East Asian economies Sep 24th 2004Fred Bergsten on the world economy Sep 9th 2004The G7 meeting Feb 9th 2004Is the dollar too weak or too strong? Feb 5th 2004

China, South Korea, United States

The Federal Reserve outlines monetary policy. The US Treasury Department sets out America's fiscal polices and gives information on financial markets. The ECB gives information on the euro and euro-area economies. The National Bureau of Economic Research publishes Ken Rogoff and Maurice Obstfeld's paper, “The Unsustainable US Current Account Position Revealed”. The Institute for International Economics publishes research and policy information on exchange rates and monetary policy.

PeopleSoft and Oracle Dec 13th 2004Stock exchanges Dec 13th 2004OPEC Dec 10th 2004America’s spies Dec 8th 2004South American summits Dec 9th 2004The CAO derivatives fiasco Dec 10th 2004The Buttonwood column Dec 7th 2004
About Global Agenda


Mr Sarkozy no doubt fears that his American counterparts are quite happy to watch the dollar fall. Their professed commitment to a “strong dollar policy” might disguise a policy of benign neglect. America’s net overseas liabilities amounted to 23% of GDP at the end of last year, close to the record debts it amassed in 1894, according to Ken Rogoff and Maurice Obstfeld of the National Bureau of Economic Research. Crucially, the bulk of these debts are denominated in dollars. Thus America may be sorely tempted to dishonour its dollar debts, not by defaulting on them, but by devaluing them.
The immediate casualties of such a policy would be America’s East Asian creditors. By the end of last year, Asian central banks held $1.89 trillion of foreign reserves, the vast bulk of them in dollars. If these reserves lost value, Asian economies would suffer an almighty capital loss in domestic-currency terms. A recent study by the New York Federal Reserve counted the costs. If the Chinese yuan were to appreciate by 10% against the dollar (and other reserve currencies), China would suffer a capital loss worth almost 3% of GDP, the study found. If the won rose by 10%, South Korea would suffer similarly. The toll would be even greater in Singapore (10% of GDP) and Taiwan (8%).
To avert such an appreciation, Asian central banks would have to amass ever greater holdings of dollars. But this would only expose them to greater capital losses down the road. Alternatively, they might seek to avoid the consequences of a dollar fall, by diversifying into other reserve currencies, such as the euro. But that would only bring the dollar crashing down all the more quickly. In other words, Asian central banks are caught in an awkward dilemma: either they try to break the dollar’s fall, or they try to escape from underneath its collapse.
Despite this dilemma, Asia’s central bankers created less of a fuss on Monday than Europe’s did. Jean-Claude Trichet, president of the European Central Bank (ECB), described the dollar’s fall against the euro as unwelcome and “brutal”, repeating the melodramatic language he adopted in January. But why all the worry? In some ways, the stronger euro will do Mr Trichet’s job for him. It will contain euro-area inflation, which has remained stubbornly above the ECB’s ceiling of 2%. It will offset the higher dollar price of oil—last month’s worry du jour. And if the euros in their pockets gain in value, European households might be more willing to spend them, overcoming the caution that has held the European recovery back for much of this year.
It is true that the dollar has never been weaker against Europe’s single currency since its birth in 1999. But as recently as 1997 it was weaker against a basket of the 12 currencies out of which the euro was fashioned. Back then, no one described the dollar’s movements as brutal. Indeed, at times it seems that European resentment of America’s privileges is a little exorbitant.

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