The dollar has lost more than a tenth of its value relative to other major currencies since its March peak.
This decline seems to have been triggered by growing nervousness among central banks and other foreign investors about continuing to recycle their trade surpluses into US paper assets.
The Americans are trying to print their way out of their crisis instead of accepting the pain of the required restructuring of their economy, and are even simultaneously pursuing expensive and no longer affordable grand initiatives such as healthcare reform and carbon capture.
Consequently their budget deficit is heading towards 13% of annual national output; unfounded liabilities, towards four times gross domestic product.
The Americans expect the rest of the world to continue financing their excesses.
A weaker dollar passes some of the pain of the crisis on to foreigners as it encourages American exports and discourages imports. But it makes the US a less attractive place for foreign nations to invest their trade surpluses.
This increases the risk that foreign investors will refuse to continue pouring their money into US bonds without the incentive of higher interest rates – making it much harder for the US authorities to stimulate their economy.
Ethnic Chinese – in China itself, Taiwan, Hong Kong and Southeast Asia – may account for half the foreign holdings of dollar assets, says the Shanghai-based analyst Andy Xie. But their demand for such assets has been waning recently, he claims, as they start to look to China’s currency, the renminbi, as a better place to store their accumulated wealth.
The Chinese government has already denounced the Federal Reserve’s decision to print money to buy Treasury bonds as a “policy mistake”, and is increasingly investing, not in the critically-important long-dated securities, but in shorter-dated paper whose values will be less at risk from quantitative easing.
A US government default on its foreign liabilities – which would have catastrophic impacts on the global economy – is still only a remote possibility. But it is becoming less unthinkable.
Before that happens, we would see the outbreak of a currency war as other nations resort to measures to protect themselves against paying the price for American profligacy.
• This article was written by Martin Spring in On Target, a private newsletter on investment and global strategy. Email Afrodyn@aol.com to be included on the recipient list.