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Crisis? What Crisis?
by Mark M. Rostenko
Editor, The Sovereign Strategist
December 6, 2004

For those of you who “live in a van down by the river” and didn’t hear the news, the dollar continued to skid lower last week. The U.S. Dollar Index hit a 9-1/2 year low and now stands within easy striking distance of its lowest low ever. But there’s some good news: I suspect we won’t have a dollar crisis.

Blasphemy! How can someone who has spent the better part of the past few years going on and on about how sorry the dollar is, how precarious and imbalanced is our financial situation, possibly suggest that the worst case scenario is not 100% certain?

I won’t dismiss the potential out of hand. We’re certainly poised for a crisis. But the nature of a crisis is that it’s usually unexpected. In fact, that’s a primary driver of a crisis. It takes folks by surprise and in their surprise they panic, thus feeding the crisis.

What makes me more than a bit leery of the potential for a dollar crisis is that last week I could hardly read four sentences in the financial press without running across the phrase “dollar crisis.” Everyone’s a bear on the dollar and rightly so. Like I said, when the folks who print the stuff say it’s going down, it’s going down.

But now there are too many folks trying to get on board the dollar crisis train. I’ve seen it all over the web. I’ve read it in the Financial Times. The Economist. The Boston Herald. The Japan Times. Stephen Roach of Morgan Stanley has talked about it. Paul Krugman of Princeton has written about it. Paul Volcker, Robert Rubin, even Alan Greenspan have voiced their concerns.

Listen: everybody knows the dollar is on its way down. This is no secret anymore. It’s the only option the U.S. has left with which to balance its huge imbalances. But if everybody’s so bloody worried about a dollar crisis, how come we’re not in a dollar crisis? Everybody’s talking crisis save for one critical player: the dollar market. You’d think if a crisis were so bloody certain that everyone knows it’s coming, the market would have gotten a head start and had, well, a crisis.

The reason we haven’t had a dollar crisis is fairly simple: right now, we can’t afford a dollar crisis. The dollar is the world’s reserve currency. If the dollar went into crisis mode, we’d all be in crisis. Punishing the U.S. for its excessively profligate ways would punish the entire global economy and the entire global economy doesn’t want to punish itself.

Sure enough, plenty of foreigners hate the stuff and would love to see it sink. The Wall Street Journal reports that beggars don’t even want it. “Give us euros!,” they say. The Chinese are lining up outside the Bank of China to trade dollars for yuan. And converting dollars to gold.

Regardless, central banks all over the world are still holding hundreds of billions of the darn things. And they’re not doing it so much by choice, but because they don’t want to hurt themselves. They’re playing the U.S. game because they have to play the game. If the U.S. leaves the party, the party’s over. For everyone. And who wants to end a good party? Who’s going to dump their largest holdings on the market in panic when doing so is certain to be a very expensive proposition?

I know. I’ll be tossed out of the bear club straight onto my skinny white rump. These ideas are preposterous. I’m naive. Do I really have faith that the central bankers and powers that be can continue to manage a system that in all likelihood should careen out of control? Not really. These morons are the problem, not the solution.

But I gotta’ hand it to them. These morons know how to say the right moronic things so that the various and sundry dingbats who listen to them actually have faith and act accordingly. Alan Greenspan, the man who has done more to separate Americans from genuine wealth than all the other Fed chiefs combined, is perceived as a hero. How do you explain that except to say the world is a very gullible place?

I think it’s gullible enough to buy the story and continue being “psychologically managed” away from crisis. There’s a reason why “dollar crisis” is so oft repeated in the news today. To desensitize the financial world to fears of a dollar crisis, thereby nipping the problem in the bud.

Make no mistake: The dollar is headed lower. Most likely a lot lower. To lows lower than any other lows ever. And then still a bit lower than that. I don’t doubt that for a second. The global fiat currency is based on nothing more than a lick and a promise and long-term it’s headed toward complete restructuring.

But I do question whether a dollar crisis is inevitable. Had talk of a dollar crisis remained the exclusive dominion of us bears, I’d believe it was inevitable. But it’s not any longer. It’s practically on the verge of becoming polite cocktail banter. A crisis when so many expect a crisis? I doubt it.

© 2004 Mark M. Rostenko
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