From the Audience... Again

I received a most thoughtful reaction to Sunday's topic of China's People's Daily report, and I am compelled to yield the floor to follower Palladin's thoughts on the matter. To be sure, Palladin's comments are couched from the perspective of one who has insight and experience outside the reach of any hack passer-by. Ladies and gentlemen, please attend...

Is it actually possible that the call from China's People's Daily to "banish the U. S. dollar" might find favor with the international finance community? Certainly, the proposal should come as no surprise. In fact, the only surprise -- and it really does just befuddle me to no end -- is that anyone could be surprised by it. Several OPEC members, to include those who do not love us very much, such as Iran and Venezuela, and some that at least pretend to like us a little better, such as Saudi Arabia and Kuwait, have been suggesting for a year that the price of a barrel of oil -- now traded in U. S. Dollars, which is why several Arab Middle Eastern countries continue to peg their currencies to the dollar even though it is in decline -- should be marketed in Euros or some other currency, such as the Chinese Wong, instead. The dollar's value is propped up by its connection to oil; in other words, we may not be on the gold standard, but we certainly are on the oil standard.

I repeatedly am disappointed in educated, supposedly intelligent people -- mostly Republicans in my encounters, oddly enough -- who, when asked if they are at all concerned about the extent of our debt to nations like China and the vulnerabilities that may result, simply chant the mantra "if I owe you a dollar, I am at a dis-advantage to you, but if I owe you a million dollars, you are at disadvantage to me." That may be true for individuals, although I cannot think of any examples where this may be true. To make my case, if a person defaults on a $1M mortgage on a house, the bank may try to work out a deal with the borrower, but in the end, if no payments are forthcoming, that bank eventually will foreclose.

The dynamics of relationships between nations is quite different from that between individuals. As much as we want to believe the world simply is driven by market forces, the truth is there also are ideological factors at work as well. We may think the Communists and Islamic Fundamentalists simply are nuts for believing what they do -- and, maybe they are. But, that doesn't mean they are not true believers in their absurdities. I can see where a country like China might want to lead a coalition of nations in a campaign to bring down its only competitor, the United States because, as costly as it might be up front, there really is the opportunity for long term gain. And, we also have to consider what we would prefer not to believe: the Chinese honestly may believe the U. S. has become a force for inter-national financial chaos in this world, and for the good of world order and stability, it (the U. S.) must be unseated from its place of dominance regardless of the immediate cost.

The self-satisfied who take comfort in the belief that China, OPEC, etc., would not dare do harm to the U. S. economy because they hold too many dollars, and therefore, they too would suffer need to consider that we have entered a time when no one can evaluate with any accuracy the value of the dollar. Given that level of uncertainty, there really may be no advantage to holding on to those dollars, even if dumping them causes immediate pain. In fact, it might be wise to get rid of them quickly before they become more worthless than the paper on which they are printed.

If China, even unilaterally, does act on the suggestion of the People's Daily, we really will find ourselves impoverished. For one thing, where will we then turn to borrow the $700B we will need to finance the Paulson Plan, or any other aspect of the U. S. Government as well -- to include national defense and the wars in Iraq and Afghanistan? And, that only will be the first installment in a lengthy string of cascading ills.

Paladin