Now what?

I remember, as a child, and it must have been because I was really young (this would have been in the late 1960s while the hippies were finding out what a real good time was) and I had a fascination with Canadian money, that I was standing in line at a Canadian bank on one of our rare trips north. I noticed that everyone–and I mean everyone–knew the exchange rate with the U.S. dollar. It was a topic of conversation amongst strangers in line.

In a way, it makes sense. Much of what Canadians buy comes from south of the border. Cross-border trade has tripled since adoption of the North America Free Trade Agreement (NAFTA), and while exports to the United Kingdom have been rising dramatically, as of 2006, these run a distant second, to those to the United States, which amount to something like 35 times more. The U.S. trade deficit with Canada runs over $70 billion per year. The relative value of currency has a big effect both on Canadians’ abilities to purchase goods from and to sell goods and services to the U.S. and thus a major impact on Canadians’ everyday lives.

Recently, the Canadian dollar–known there as the “loonie”–has been increasing dramatically in value, “passing 106 cents US in after-hours trading yesterday — a modern-era high.” But the U.S. dollar has been tanking. The Wall Street Journal‘s daily Foreign Exchange closing e-mail newsletter put the cost of a euro at $1.4486 U.S. Both currencies were far lower against the U.S. currency not very long ago. Saudi Arabia has pegged its currency to the dollar, and prices oil in dollars. According to a story in the Financial Times:

If Saudi Arabia de-pegs and does nothing else, it will be sitting on two rapidly depreciating assets: $20,000bn in oil reserves and $800bn in US dollar reserves. . . . If it were to diversify its currency reserves or oil pricing regime, then it is almost certain that the dollar would weaken. As a result, oil prices in dollar terms would have to jump to keep oil demand growth from Asia in check. For speculators with this mindset, oil at almost any price looks cheap, especially when the market is pricing in another dollar-weakening Fed cut this month. . . .

Inflation remains modest in comparison to Saudi Arabia’s neighbours, most of which have inflation in the vicinity of 10 per cent. Additionally, the components driving the jump in inflation – food and rents – are unlikely to be significantly affected by a shift in exchange rate regime, the former driven by global agricultural demand and the latter by the influx of foreign workers into the country.

The Federal Reserve has indeed cut “the federal funds rate by one-quarter percentage point to 4.50 percent at the end of a two-day meeting.” Adam Robinson, who wrote the Financial Times article, believes the Saudis will remain “focused on protecting a buoyant outlook for the global economy, as much to assure itself of a buyer as to preserve its political alliance with the US” and thus avoid doing anything precipitous while quietly taking advantage of its increased leverage over the U.S.

Certainly the Saudis feel little financial pressure to take action. According to the Telegraph:

Mohammed bin Dhaen al-Hamli, president of Opec, told a conference in London yesterday that record oil prices are the result of speculative investment and international political tensions. “We are of course concerned about high oil prices,” he said. But “the market is increasingly driven by forces beyond Opec’s control”. . . .

Another oil minister, Qatar’s Abdullah al-Attiyah, pleaded: “Please don’t blame us for $93 oil… The market is out of control.” He said that the oil market is “very confused”, but added that this had nothing to do with an imbalance between supply and demand, but to factors outside Opec’s control.

And as long as the dollar continues to slide precipitously, the impact of higher oil prices–mostly set in U.S. dollars–is diminished for that portion of the rest of the world that has not pegged their currencies to the U.S. dollar. The impact of all this is largely on U.S. consumers, who, due to the subprime crisis, are also less able to use the value of their homes as ATM machines. “Consumer credit grew in September at its highest rate in nearly two years, according to official data showing that the dislocation in financial markets has yet to put credit card-wielding shoppers off their stride,” according to the Financial Times, but interest rates on unsecured credit are higher and there is some speculation that “people were using their credit cards to pay their bills rather than fuel consumption. Whilst credit card delinquencies have remained relatively stable, it does seem to indicate that people are going to slowly max out their credit cards and then fall behind on payments.”

Increased U.S. consumer debt needs to be financed overseas just like government debt. As interest rates go down, dollar-denominated assets thus become less attractive, and as the value of the dollar decreases, investors face growing losses. So the speculation in some quarters that I’m now seeing on a regular basis that investors will dump the dollar makes sense. That they continue to hold these assets and continue to claim they will “act responsibly” makes less sense.

And I can only think of the dot-com bust, when it seemed like all the venture capitalists folded up their checkbooks at once, acting–I felt–irresponsibly, and precipitating a crash that even as we head into another recession, I (and I presume others) have not recovered from. For me, it has been an educational experience; I returned to school and have increased my understanding of these events. Politically, I’ve moved far to the left as I have come to understand the devastating impacts of sheer greed and irresponsibility at an international corporate (beyond the ability of any national government to effectively regulate) level.

We have unleashed monsters who act according to their own perceived interests rather than out of any wider perception of “responsibility.” It is unreasonable to believe that they will continue to suffer losses out of any apparent sense of altruism. A lesson of my life has been that if it doesn’t make sense, it doesn’t make sense, and it will end. The situation I see now does not make sense.

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