The Coming Financial Crises?
Dr. Abbas Bakhtiar,
Wednesday 17 May the Dow Jones plunged 214 points to 11,206 — its worst point
drop since March 2003. The downward trend started a week ago and is a warning
sign of troubles ahead. This sudden drop has come as a complete surprise to the
unfortunate small investors and speculators. The so called “experts” point at
the sudden threat of inflation as the main cause of the recent reversals in the
actually surprising is the surprise of the “experts”. A cursory look at the
States’ finances will reveal the amount of
pressure that its economy is under.
became president in 2001, the United States’ public debt was 5.8
trillion dollars. Today the public debt stands at 8.3 trillion dollars .
Of this over $2.2 trillion dollars are held by foreigners .
States has a GDP of 12.4 trillion dollars. This gives U.S. a Debt/GDP
ratio of 66%, placing it in 35th place (out of 113) on the ranking of
the Debtor Nations .
The current account deficit of over 7 per cent has long passed its danger levels
of 4-5 per cent. In 2005 the U.S. government paid $325 billion
dollars only in interest payments alone.
are the future obligations such as Medicare, Social Security and government
pensions. These obligations amount to $54 trillion dollars. This huge problem
worried the former Federal Reserve Chairman Alan Greenspan. He told congress:
“As a nation, we may have already made promises to coming generations of
retirees that we will be unable to fulfil” .
think that this amount of debt would worry the president and the congress. But
apparently it does not. United States’ Congress recently
(March 2006) voted to increase the Federal debt limit to 9 trillion dollars. Any
other nation in similar circumstances would have had to approach IMF for help.
IMF would then have forced that nation to cut spending and devalue its currency.
But U.S. does not need to do this.
U.S. can just print some more
dollars. But how long can this continue before the world loose faith in the
greenback, sending it crashing to unimaginable levels.
countries such as Japan,
China and others that hold
most of the U.S. debts have been happy to indulge
the American deficit spending. This has been a two-way Street,
America has kept its market open to
their products and they have financed the Americans’ spending.
of U.S. dollar so far has been kept artificially high by Japan, China and oil-exporting countries.
These countries by buying US debts have has kept interests rates relatively low
in the United
States and allowed Americans to keep spending
even as their debts mount.
is only so much risk these lenders (Asian and oil-exporting countries) are
willing to take. Any serious devaluation of the Dollar will considerably reduce
the value of their national reserves (mostly kept in dollars) and the value of
their debt holdings (certificates, bonds, etc.). At the same time, the
devaluation will affect their exports to the U.S. A weaker
dollar makes their products more expensive in U.S., thereby
reducing their export earnings. Most Asian countries keep up to 70 per cent of
their reserves in dollars. China with the reserves of over $800
billion dollars already begun to slowly reduce its dependency on dollars by
converting part of its reserves to other currencies .
Asian countries –with their vast dollar holdings- follow suit, then it will be
disastrous for the value of dollar. No-one is interested in holding a weakening
threat against the dollar comes from countries such as Iran and Venezuela. Iran recently registered an Oil Bourse to compete
with Bourses in New York and London. The threat comes
from the currency in which the oil is to be sold in Euro. Iranians are going to
make the Euro the standard currency for oil transactions. Some sympathetic
countries such as Venezuela and others may join in. If
the Iranians succeed in this, the pressure on dollar will be catastrophic.
Nearly every country has to hold a certain amount of dollars in reserve for oil
purchases. If the dollar continues to weaken in value, and there is the
possibility of purchasing oil in Euro, then these countries would unload their
dollars for safer currencies such as Euro. What will then happen to the value of
there is not enough pressure on the dollar, the U.S. government keeps spending money in an
un-winnable war in Iraq and
is considering starting another one in Iran. The total cost of
Iraq war, including the future
payment to the disabled soldiers, replacement of equipment, etc., is estimated
be between 1 to 2 trillion dollars .
on Iran will substantially increase this
cost. Even if there is no attack, the tense situation in the region will keep
the oil prices at uncomfortable levels, contributing to both a reduction in
U.S. growth and an increase in its
current American deficit and its long-term financial obligations, if goes
un-answered, will sooner or later lead to either a marked increase in interest
rate or a substantial devaluation of dollar. On one hand, a substantial increase in
interest rates will lead to a major recession in USA which will
be felt immediately around the world. On the other hand, a substantial
devaluation will cause financial chaos in the world. What is needed is to
seriously reconsider the international role of the dollar as the world currency.
In other words we need a new Bretton Woods Agreement .
At the end
of the WWII 45 nations gathered at
a United Nations Monetary and Financial Conference in Bretton Woods, New
Hampshire to address the problems of reconstruction, monetary stability and
delegates agreed to establish an international monetary system of convertible
currencies, fixed exchange rates and free trade. To facilitate these objectives
the delegates agreed to create two international institutes: the International
Monetary Fund (IMF) and the International Bank for Reconstruction and
Development (the World Bank). An initial loan of $250 million to
France in 1947 was the World Bank’s
there has already been considerable criticism of the roles of IMF and the World
Bank. The above mentioned problems and the ongoing trade imbalance in the world
have to be addressed by a similar gathering. Sooner or later, both the
States and the rest of the world have to
address the existing problems. This problem is not United States
alone. We can not ignore the largest economy on earth. It is said that if
States sneezes, the world catches cold. We have
to either make sure that United States doesn’t catch cold or
vaccinate ourselves against it.
Bakhtiar lives in Norway and
is currently writing a book about the reasons behind the United States involvement in Iraq and Iran. He's a former associate
professor of Nordland
University, Norway. Bakhtiarspacefirstname.lastname@example.org
... Payvand News - 5/23/06 ... --