Financial appocalypse soon?

James Cumes writes in the Asia Times:

When everyone in the house is crazy, only the sane seem like fools. So it was when the financial addiction spread everywhere. Then everyone who was not taking his daily dose of heroin or cocaine became the fringe-dweller, the oddball, the brake on progress, the party-pooper at the greatest no-cash-down, how-to-spend-it shindig that our planet has ever known. Debt piled on debt everywhere: in households, corporations, public finances and international deficits, in magnitudes that had never been even glimpsed in the most creative imaginations before. . . .

The “value” of the creative financial paper circulating the globe is calculated, as close as one of our “experts” can reasonably count it, to be US$480 trillion. The Bank for International Settlements puts its count at $600 trillion. In fact, we do not know what the precise sum may be, but we do know that it is so mind-boggling that it seems to lie outside all reality.

The value of the dollar is in decline, raising the specter of a collapse:

“This is all pointing to a greatly increased risk of a fast unwinding of the U.S. current account deficit and a serious decline of the dollar,” said Kenneth Rogoff, a former chief economist at the International Monetary Fund and an expert on exchange rates. “We could finally see the big kahuna hit.” . . .

[T]he dollar could be adjusting gradually as the U.S. economy becomes driven less by lending on the back of rising home price.

The problem, as every economist knows, is that the current account deficit – about $770 billion – is still colossal in absolute terms.

And foreigners are being asked to provide those dollars at a time when the subprime turmoil is threatening to spill over into the broader economy.

Put another way, at a time when the psychology of crisis has gripped financial markets, intangible attitudes toward the dollar have become all the more important. And with growth strong elsewhere in the world, there are appealing places to go besides the dollar.

Cumes argues that the result could spread around the world:

The dollar is almost certain to decline in value, perhaps precipitously, especially in gold and key-commodity terms, and force a reduction in demand for imported goods. This will be in part beneficial for US exports; but domestic industries, especially in the more basic consumer sectors, are unlikely to be able to replace, at least in the short term, supplies from overseas. No longer the consumer without limit, the US will almost certainly infect other countries with its slowdown, recession or depression, and that in turn will reduce growth, investment, employment and output around the world.

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