Sunday, May 18, 2008

Dollars losing its sheen

I still remember the name of an old movie “For a few Dollars more”, because of it`s title music. For years it lingered in my years. Perhaps the movie was made in early 70s, when gulf crisis and Breton Wood formula both emerged, to stay till to-day. The gulf crisis pushed the petrol price higher than ever imaginable and the fixed currency exchange rate, what was is vogue, switched to market driven force to determine the exchange rate of all the currencies. Off course the Soviet Bloc excluded them to be penalized later. It is all history now. However, for the second half of the last century, after the world war, dollar gradually reached to a height what can be called a safe heaven. The US economy, the Federal Bank`s apt guidance and the unmatchable technological innovation in US helped the dollar to its current position.
The new mantra, consumerism, what US economy has been advocating and what rest of the world is following till now , appears to be at stake. The dollar waning sheen is clearly perceivable. All major currencies are getting stronger day by day than dollar. What appears, that it is only matter of time that global economy rides on some other currency like Euro, or Yen. The free acceptability of certain currency depends on it`s real value in long run. That is shaken for dollars now. If it fails to recover, God blesses it!
Let us see how it all happened. It started during the regime of Bill Clinton. The American cultures of consumerism, what spells buy now pay later, was going well for many years. So the development continued, with the ever rising demands of consumer goods, the industrial productions, imports rose, so rose the off-take of credits. But like any other cycle, anything that is on rise has to come down sooner or later. It is natural but what mattered with the demand falling, the industrial growth stopped and few faced the closure. This resulted in creation of an army of unemployed generation and a huge amount of unpaid loans or bad credits.
The final blow came from subprime crisis. What is subprime, it is the loan, mostly given as refinance against housing properties to them whose credit rating is nil or too low. With the recession, down came the property price what shot up to 124% in past few years in a very short time. The loan amount bigger than the collateral values ( in this case the value of collateral being housing properties) turns the loan bad or risky. It is yet to be known the actual amount required to be written off as bad debt in US. Till date the amount written of by few renowned global bankers is alarming!
This subprime problem is aftermath, how the things going in US economy for almost half of the last decade let us see. The balance of payment position in US has been turning bad for quite some time now. What is “balance of payment”; it is the account maintained by central bank of any country for it`s inflow and outflow of foreign exchange. Inflow means what is earned on exports and outflow means what is spent for imports. Such transactions are maintained in current account with Federal Bank in US. Then there is a Capital Account, this is the account in which the inflows and outflows of foreign exchange is maintained for the investments made in foreign lands (outflows) and the investments comes in from foreign countries (inflows). In US , in both the current account and capital account recorded a shortfall or crisis. The shortfall in Current account is usually made up from internal accruals. Unfortunately in US, the consumer culture, never encourage savings. Now it is taking toll.

Higher the oil price, higher the outflow of dollars. Earlier the bigger chunk of this outgoing funds made a come bank, in terms of US bond investments by the oil exporters. Now, the US Fed bonds are no more lucrative or safe for them. So, the dollars are finding a more lucrative market like India, China, and Brazil, where it appreciates quickly or they are converted into bullions. The safest investment. Thus we find the gold and silver price are piercing through roofs!

The present measures to contain inflation, recession by reducing the interest rate, as prescribed by Governor or Federal Bank, may curb the pressure but unlikely to offer a solution.

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