by Jerome a Paris
Tue Feb 26th, 2008 at 06:05:17 PM EST
Greenspan tells Gulf to drop dollar
Alan Greenspan, the former chairman of the US central bank, or Fed, has said that inflation rates in Gulf states, which are reaching near record levels, would fall "significantly" if oil producers dropped their US dollar pegs.
Speaking at an investment conference on Monday in Jedda, Saudi Arabia, he said the pegs restrict the region's ability to control inflation by forcing them to duplicate US monetary policy at a time when the Fed is cutting rates to ward off an economic downturn.
"Bubbles" Greenspan, the man who did more than anyone on the planet to ensure that there would be inflation on a global scale by bringing interest rates down to insanely low levels and flooding the markets with cheap credit is now trying to con Americans one last time by engineering a de facto default by the US on its foreign obligations, via devaluation.
Remember that Greenspan's lax monetary policy was accompanied by the largest ever tax cut for the rich. In effect, he created a lot of money, and Bush ensured that all of it went to the richest Americans in the form of inflated and untaxed asset prices (asset wealth is even more unequally shared than income). Of course, in the absence of actual wealth creation in the underlying economy, most of the money was not real, but it was as real as existing money, and both lost value relative to hard assets, like oil or commodities (or even gold). But both lost value in parallel, which means that the new repartition of money created by the Bush-Greenspan persists, resulting in a very real transfer, at the end of the line, form the middle classes and poor to the very rich.
We're now in that losing value, or "revelation" phase. All dollars are losing value, but assets, especially those invested abroad, can be more easily protected than wages. Silly middle class Americans - the only "assets" they bought from abroad were cheap, no-pollution-or-labour-standards-included junk and these do not appear to keep their value over time.
Greenspan words do matter because one of the reasons the current bubble lasted so long is the mercantilist policies of the East Asian emerging economies and the oil exporting countries. Both share an unusual dependence on exports for their growth, and, more to the point, on dollar-priced exports. For them, pegging their currencies to the dollar made a lot of sense as a way to ensure that their products remained competitive in the global market, by avoiding all the uncertainty linked to variable exchange rates (and all the pain potentially associated with a appreciating currency). But it did mean that they had to live with America's monetary policy. and it meant that they were paid in dollar IOUs than in actual goods. But the dollar was as good as gold - or as good as the word of the US government, right?
But Bush happened. IOUs were created out of thin air on the largest scale ever. And inflation happened. And it spread to those dollar-accumulating countries, as they had too many dollar IOUs sloshing around, and had to buy their stuff from non-bubbly euro invoicing countries.
And now Greenspan tells them - "gotcha, suckers - all these IOUs you got from us, you'd better dump them because they're not good for much." Which could of course cause a self-fulfilling prophecy as dollar holders see the value of their reserves drom, are tempted to sell, and these sales cause further drops. So far the sang froid of all these countries has been quite remarkable, and the fall of the dollar very orderly, but a fall it has been, and a quite big one - from 1.23 euros in 2000 to 0.67 today is a quite remarkable 45% drop...
The $1.5047 euro, the $101 barrel, and the $950 ounce of gold are just people trying to play catch up with Greenspan's legacy. They reflect that foreigners are left to hold the bag on an unprecedented scale for US profligacy, and are unlikely to be taken for fools once more.
The times of living above the country's means are over. Pity that once a very small chunk of the population did get to live about its means, and now everybody has to pay for their excesses. But the culprits do have a name: Bush and Greenspan.