“Soft despotism is a term coined by Alexis de Tocqueville describing the state into which a country overrun by "a network of small complicated rules" might degrade. Soft despotism is different from despotism (also called 'hard despotism') in the sense that it is not obvious to the people."

Saturday, October 24, 2009

The Return and Triumph of King Dollar

Dollar hegemony for another century

By Ambrose Evans-Pritchard Economics Last updated: October 21st, 2009

Let me stick my neck out.

The dollar will still be the world’s dominant reserve currency in 2030, sharing a degree of leadership in uneasy condominium with the Chinese yuan. It will then regain much of its hegemonic status as the 21st century unfolds. It may indeed end the century even stronger than it was at the start.

The aging crisis in Asia — and indeed the outright demographic implosion in Japan and China, not to mention China’s water crisis — will soon be obvious to everybody. Talk of Oriental supremacy will start to sound overblown at first, and then preposterous.

Japan is about to go bankrupt. It is on the cusp of a fiscal crisis that will change perceptions of Asia dramatically. The IMF says gross public debt will reach 218pc of GDP this year. This is compounding very fast. It will be 246pc in 2014.

The Hatoyama government is spending as if there is no tomorrow. It plans to issue ¥50 trillion or $550bn in fresh bonds. I have no idea when this will spiral out of control. It could take another two or three years. It could start next week. Yes, I know that Japan has been borrowing merrily at ever lower rates for 20 years without the sky falling. The 10-year yield is 1.3pc. What happens when it rises to global levels of 3pc to 4pc? People made the same sort of arguments about the global boom before it suddenly tipped over.

This blog does not attempt market timing, nor does it offer investment advice. But I am absolutely certain that pundits consigning the dollar to its death have missed an even more dramatic currency and debt story in Japan. The yen will top ¥200 to the dollar before this is over. Jim O’Neill from Goldman Sachs has already begun to hint at this.

Apologies to readers who feel confused about my view on the dollar. I have written a string of NEWS pieces over recent weeks quoting the currency experts and Asian officials slamming America, or exploring the dollar demise thesis.

People assume that I share these views. I do not. Furthermore, I suspect that at least some of China’s grumbling about the dollar slide over recent months has been a ruse to lower the yuan (pegged to the dollar of course) against the euro, yen, and even sterling. The goal is to protect export margins. (Surely premier Wen Jiabao knows that China’s $1.6 trillion or so invested in US bonds is a sunk cost. Forget about it. The holdings are the consequence of their own currency manipulation in the first place.)

The fact that Asian central banks are accumulating $600bn or more a year in reserves by running huge trade surpluses is proof enough that their (mostly rigged) currencies are undervalued by 30pc to 40pc against the West. To that extent, I agree entirely with HSBC currency guru David Bloom that this is untenable. If these countries continue to resist currency appreciation they will overheat and succumb to asset bubbles — if they haven’t already in China.

Where I am less sure is that this will necessarily be resolved by a falling dollar. The evidence so far is that Asia will put off the day of adjustment as long as possible because they are addicted to mercantilist export strategies — and export oligarchs control the political systems (bar Japan). In which case they will lose competitive edge the old-fashioned way, by wage inflation for year after year until the world comes back into alignment. If so, the dollar will not fall at all. It may rise.

Nor do I really agree that this is in essence a story of the two sick sisters: Britain and the US.
They are certainly sick. But as readers know, I think much of Europe is equally sick — Spain, Italy, Greece, Ireland, the Baltics, are even sicker — even if the lag-times are longer. The IMF keeps telling us that Europe has failed to come clean on its bank losses. Germany’s BaFin regulator says the same thing. Are they wrong?
It all has echoes of the early 1930s when the Anglo-Saxons were crushed in the first two to three years, and the French bloc was crushed over the subsequent three years. What goes around, comes around.

Charles Dumas from Lombard Street Research says Washington must be chuckling as the weak dollar gives it time to rebuild America’s industrial core. The “inflationistas” — ie, those convinced that the dollar is being debauched despite the fact that core inflation in the US is falling and that the M3 money supply is contracting — are playing straight into the hands of the United States.

Nobel Laureate Gary Becker told me a few weeks ago that America’ spectacular gains in productivity – growing at a trend rate of 2.25pc to 2.5pc — is laying the foundation for a much stronger US recovery in the long-term than most people seem to realize. Compare that with 0pc to 1pc for the eurozone. In Italy it is negative.
The UN expects America to add roughly 100m people by 2050, keeping its age balance in relatively good shape through a mix of immigration and a healthy fertility rate — now 2.12 live births per woman, still above replacement level. This compares to: Taiwan (1.13), Korea (1.2), Japan (1.22), Ukraine (1.25), Poland (1.27), Spain (1.3), Italy (1.3), Russia (1.4), Germany (1.41), China (1.77), Britain (1.96), and France (1.98). Some of this data may be slightly out of date, but the picture remains valid.

Professor Becker said a collapsing birth rate is extremely hard to reverse, and the cultural effects are insidious. Old societies are status quo. They are slow to embrace new technologies. Young minds are the source of hi-tech invention.

The EU is fully aware of the danger. “What is at risk in the medium to long run is nothing less than the sustainability of the society Europe has built and the viability of its civilisation,” said an EU report (initially suppressed) by former Dutch premier Wim Kok as long ago as 2004. Nothing has been done since despite endless warnings from the Commission.

China’s work force will peak in absolute terms in six years, and then go into sharp decline. I have no idea how people square this with claims that China will soon replace the US as world hegemon. The stark reality is that China will hit a Japanese-style demographic crunch before it becomes rich. Sheer size will give it weight. But mastery?

Of course, if the US were stupid enough to enact the 10-year spending plans projected by the White House — with a deficit of $1.9 trillion in 2019 on Congressional Budget Office estimates — the country will be ruined. I do not think America has so far lost its senses that it will commit suicide in this fashion. In any case, the bond markets will react long before we get there. They will force a change in policy. That change will imply higher US savings, and less import growth. The export surplus powers that live off America’s market are going to take it on the chin.
At the end of the day, America is a unified nation forged by wars, under the rule of law, with a (largely) unifying language and patriotic creed, and one of the oldest and most deeply-rooted democracies in the world. As the Supreme Court demonstrated during Watergate, it can break presidents who violate the law.

It is often stated that a currency reflects the strength of an economy over time. Actually, it reflects the strength of a society. Who really thinks that Europe’s old-aged home is a better bet than America, even if they can hold the euro together as the gap widens further between Germania and Club Med? Or thinks that China’s half-reformed Communist regime is ready for global leadership. Remember the little girl in a red dress with pigtails who `lip-synched’ the opening ceremony of the Beijing Olympics? Believe what you will.


  1. 2050? 2100?

    I can't even "Imagine" a crystal ball that powerful.

    I've got a hunch he's underestimating China, though.

  2. Ambrose creates some economic ambrosia.

  3. Rufus, please help me understand the basis for your "hunch". Evans-Pritchard makes a pretty compelling long-term argument. Your hunch must rely on some logic, or else it is just a guess. I'm just curious, and despite an economics degree and an MBA, remain somewhat mystified by the process of currency valuation. So please don't take this request as smarmy, I'm really just trying to understand.

  4. I'm also googling currency valuation for background.

  5. It really is "just a hunch," jwillie. I haven't thought it through any further than that.

    It's just a big old country of "industrious," intelligent people that are, finally, being given a chance to engage.

    Just a Hunch.

  6. Let's be honest. Who in the entire world could have foreseen that the country our "ping-pong team" saw would be the country we see, today. What was that? 1970? '71?

    Remember "UNIVAC?"

    Rotary phones? AT&T?

    Fifty Years is a long time. 100 years?

  7. Damn, looks like Coach Acky has blown it, sold the farm with one bad call. We had fought back from 21 down with a series of marvelous long plays, at half it was 28 to 24, their lead.

    We were kicking off, and the coach orders a totally unexpected onside kick that would have looked like a work of genius if it had worked, which of course it didn't, and they had it in the end zone in two or three plays.

    We are down now 42 to 24, threatening to score, but seem to have lost our big mo, looks like a long trip home.

    Has been a great game so far, though, all in all.

    Well, there is still a little over a quater to play. Things could change again.

    I'm sure you are all interested in this.


    Well heck, we just scored, it's now 42 to 31.

    This is like trying to predict the currencies. Harder maybe.

  8. Or, what kind of odds could you have gotten on this bet Sept 12, 2001?

    The President of the United States in 2009 will be a Black, Socialist by the name of Barack Hussein Obama!

  9. Oh, did I mention that his father is a Kenyan Communist?

  10. I agree more with this article than I do many of "Ambrosia's."

    I don't think that WE will, suddenly, turn into chopped liver. We have our "Constitution" working for us. That's Powerful. We have our massive GDP. THAT'S Powerful. We have our Mighty Military Machine. That's Powerful. We have our Scientific, and Technical Prowess. THAT'S Powerful. We have our Capitalistic System. That's Powerful.

    All in all, a pretty impressive scorecard.

    China's lacking ALL of those things. However, they have a Billion.Two "Ambitious," Hard-working people, and pretty smart, if Communist, Leadership. Judging from their history, they're unlikely to blow their bucks on foreign adventures, and, although they have an "aging" population there's nothing to make me think they will be a Big Drag on the 600,000 or 700,000 Younger Workers.

  11. The most Achilles of the Achilles Heels of Any Communist Country is Agriculture. Agriculture CANNOT truly "Thrive" without Private Ownership of land.

    Agriculture, and the ability to adapt to shrinking petroleum supplies will tell the tale on China. I think they will be "stressed," and "challenged;" but, as I said, I, really, wouldn't want to bet against them.

  12. The most Achilles of the Achilles Heels of Any Communist Country is Agriculture. Agriculture CANNOT truly "Thrive" without Private Ownership of land.

    Agree with that. Sometimes it's hard to make it work with it.

    Interestingly Obama's Kenyan father's thesis was on the collectivation of land.

    We have our "Constitution" working for us.

    Got to disagree there. If it were working Obama wouldn't be President.

    Well, turned out Nevada/Reno 70, Idaho 45. Coach is on post game giving credit to Nevada, when his major mistake with the off side kick turned the tide. We lost the chance to win on the first play of the second half. Coach's call.

    Dreams die hard, had great hopes for us this year.

  13. Yeah, If I were in charge of "permitting" I think I'd just shoot myself.

  14. 35,000 kilowatts is pretty small. A town of two, or three thousand, maybe? Depending on "industry?"

    Then there's the cost of the Battalion of Marines to guard the danged thing.


  15. I guess a little larger than that. Six, or seven thousand?

  16. Bobal, driving around Pocatello I saw houses with really nice medium sized windmills going like crazy, I betcha they had enough juice left over to make a nice chunk selling it back.

  17. Rising Debt a Threat to Japanese Economy

    Gross public debt mushroomed during years of stimulus spending on expensive dams and roads, and this year it passed 187 percent of Japan’s economy.

    That debt could soon reach twice the size of the $5 trillion economy — by far the highest debt-to-G.D.P. ratio in recent memory — and the biggest, in real terms, the world has seen. Japan’s outstanding debt is as big as the economies of Britain, France and Germany combined.

    Still, officials insist that Japan is better off than the United States by some measures.

    One hugely important difference is that Japan is rich in personal savings and assets, and owes less than 10 percent of its debt to foreigners. By comparison, about 46 percent of America’s debt is held overseas by countries such as China and Japan.

    Moreover, half of Japan’s government bonds are held by the public sector, while government regulations encourage long-term investors like banks, pension funds and insurance companies to buy up the rest.

  18. A little slow at the bar tonight, huh?

  19. Like I said, Japan is Different.

    Japan is the Bumblebee that's not supposed to be able to fly. But, it do.

    I think China could be similar. But one Steroids.

  20. But, ON Steroids.

  21. Haven't been in Pokey for years. It was the first Idaho town to elect a black mayor.

    After lisening to 1 1/2 hours of Boise State football pre game analysis, I've figured out what the new growth industry could be in the US. Football pre game analysis, predictions, sspeculations of coming football poll resuts. These guys are pretty good, Boise being a football city.

    These guys seeminly don't care about another thing, dance around the nation's football scene in an amazing way.

    Expect Boise to beat Hawaii tonight about 37 to 7. Don't take it from me. I got it from them.

  22. It's Hawaiian Air, what else can they do, they have no ground game v Boise State Ground and Air, tonight. Boise's got an air defense too, they say.

    The Boise station has been playing that song "Wipeout".

    It's tough beening an Hawaiian, but somebody's got to do it, huh, al-Doug?

    Maybe Doug has just gone to the game, that's why it's so quiet.

  23. Look at it this way, Bob. You could be from Missouri. They were down 35 - 7 before the cheerleaders got their pom-poms shaking.

  24. "in bed"

    Coach Peterson expects the defense to tighten up considerably tonight, is demanding some real performance, like three turnovers. On the field.

  25. Over there their shake their leis.


    Here’s the story from De Telegraaf, as translated by our expatriate Dutch correspondent H. Numan (follow the link for the video):

    ‘Camera in a private residence violates privacy of intruder’

    EMMEN — Police in Drenthe province placed video images of an intruder on the Internet. Doing that damages the privacy of an intruder, is the opinion of the Lawbreakers Association [yes, it really exists — translator]. The Association filed a complaint with the National Ombudsman.

    The images show the suspect searching the living room of an 88-year-old woman in Emmen. The cameras were put in place by the woman’s family, because it isn’t the first time this suspect broke in to her house. The family handed the tapes in to the police.

  27. Boise State 54--Hawaii 9

    Coach Pete as the call him prevailed on the defense, they got six turnovers.


    Well out west the camera would probably prove you could shoot the intruder.

    But check with your lawyer.