Monday, December 04, 2006

The dollar melts as Iraq burns

Comment is free: The dollar melts as Iraq burns [James Galbraith] : "So here's the big question: is the age of the dollar economy lurching toward an end? Are China, Japan, Saudi Arabia and other big holders of T-bonds about to start a rush, or even a stately promenade, toward the exits? Let's hope not, because the world is unprepared to replace the dollar with anything else. The euro is not suited for the job, and a joint dollar-euro system would need better central bankers than either America or Europe has got. An end to the dollar system would therefore be chaotic, inflationary, and very tough on world trade. The best argument for the dollar has always been: it's not in anyone's interest to bring it down.

Could it happen, though? Yes, it could. And it could be connected to that other unfolding disaster. As the 'Pax Americana' goes to hell in Iraq - producing a nervous breakdown among the pro-war elites - let's remember that security and finance are linked. Typically, the country that provides global economic security enjoys the use of its financial assets in world trade. And when the security situation changes, that privilege can be revoked. The consequences are unpleasant. Ask the British: after the sterling area folded, it took a generation for the UK to come all the way back.

That is partly why Economists for Peace and Security - a group I chair - opposed the Iraq war from the beginning. As far back as 2002, we understood - as the economically illiterate neo-imperialists did not - that a world system very favourable to America was on the line. And it was not, as they seemed to think, just a matter of military might. We knew that if the war undermined confidence in the power, good faith and common sense of the United States, that could lead toward disastrous changes on the financial front.

Four years in and with no end in sight, that risk may finally be catching up to the almighty dollar."

Something we have been talking about for a long time here at home. Wonder why our "fearless leader" can't wrap his head around this one?

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