About the Mass Exodus from the Dollar to New Currency Zones

On Thursday, information was made public not only about the start of the next regular quantitative easing program of the U.S. Federal Reserve, but also data on the rate of economic growth. The data was not very optimistic: The Fed lowered its forecast on the rate of U.S. economic growth. Its experts believe that in 2012, the growth of the U.S. gross domestic product will be about 1.7 percent, versus the prediction of 1.9 to 2.4 percent that was announced in June of this year.

Moreover, inflation is predicted to rise. Nothing surprising in that, in a situation of increased quantitative easing, although it’s pretty difficult to speak of inflation under conditions of two opposing tendencies — deflation, because of falling demand, and inflation, because of quantitative easing. At any rate, Fed experts expect that in 2012, its level will not exceed 1.8 percent, having previously estimated that it would not exceed 1.7 percent. They also confirmed earlier predictions concerning unemployment levels, which should remain around 8.2 percent this year.

We note that the official gross domestic product figures are pretty seriously overrated — in terms of falling inflation and in terms of various kinds of statistical tricks, a sort of “hedonistic index.” But even according to those figures, it turns out that the per capita gross domestic product still falls when U.S. population growth is factored in. And that, in part, explains the Fed’s decision on quantitative easing.

The thing is, it is impossible to make a more or less optimistic forecast in the current situation. However, the Fed included long-term improvement in its forecast, namely, that the U.S. economy will grow at an accelerated pace in the next two years. Thus, in 2013 and 2014, gross domestic product growth is expected to reach 3 percent and 3.8 percent, respectively, versus the previous figures of 2.8 percent and 3.5 percent. Unemployment will drop to a level of 7.9 percent and 7.3 percent, whereas this year’s June report predicted 8.0 percent and 7.7 percent, respectively. However, everyone understands that this is purely pre-election smoke and mirrors — there is no real basis for such optimism. And what will the financial authorities do in such a situation?

In connection with this, the Fed has yet another problem: the obviously accelerating formation of independent currency zones in the world. The U.S. financial authorities actively struggle against this, but they have not had any particular success, and overall, they won’t; objective processes will continue to develop. But as these alternative zones develop, interest in the dollar sharply declines, and for the U.S., this is a catastrophe. Without the whole world purchasing its Treasury bonds, financing its deficit will be extremely difficult.

Well, more precisely, it will be possible only through net issuances; that is, their size will have to be increased, as the sphere of the dollar’s circulation decreases! This will not simply cause inflation, it will lead to extremely high levels. And that, in turn, will cause the destruction of the real U.S. economy — just like Russia in the 1990s.

Actually, it is the understanding of this situation will induce everyone to force the exodus from the dollar — the faster this is done, the less the loss will be. Yes, it stands to reason, those who have amassed large dollar reserves will lose by this — but that is all the more reason not to collect even more of them. However, there are some finer tactical political points, such that we won’t be too harshly blamed by those who buy U.S. Treasury bonds today.

In any case, for the U.S. financial authorities it is crucial to slow the process of establishing alternative currency zones at any cost. This is one of the reasons that the acceleration of issuances of the dollar is not a good solution in any way. But today, there is no good solution to be seen, so Bernanke sticks with the last one. The funniest thing would be if Obama lost the election anyway — because Romney has already publicly said that printing money is senseless.

In general, the continuation of the American administration’s policy— whether it is Obama or Romney — is very interesting. There is no good exit from the situation, but one cannot sit on one’s hands, either, and anyway, that is not the American way. What they will think of after the elections is a big question, but sooner or later they will have to publicly recognize that the U.S. role in the world will have to decline significantly. And that will cause a great number of accounts to come due. Not so much financial as political. The U.S. does not like to pay and does not know how to pay; that means that they will begin to very painfully beat their heads on the table. The story of the murder of their ambassador is very typical — a very painful blow, but how to answer it is not very well understood. And it seems to me that such situations will soon become common.

The saddest thing — for the Americans, naturally — is that the country’s financial authorities, who theoretically must “manage” the situation or at least tell the politicians the truth, are not doing so. Actually, they can’t, because they have no theory to explain the crisis. But as a result, politicians are always developing predictions that demand resources which are not available at the moment they are needed. That is a pretty typical situation for the sunset of an empire, but no less destructive for all that. And we, in the very near term, will have to witness the consequences of that situation.