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Bank Of England Policymaker Predicts Unprecedented Dollar
Collapse
Warns that within five years global dumping of dollar
assets could be complete
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A former member of the Bank of England's Monetary Policy Committee
has predicted a massive collapse of the dollar within the next
two to five years, warning that a government increase in spending
under President elect Obama could be disastrous.
Willem Buiter, who served the BOE from June 1997
to May 2000, has stated that he expects to see the plug pulled
from under the dollar as foreign investors turn away from the
dollar and other US backed assets including government bonds.
Writing for the Financial
Times, Buiter, now a Professor with the London School
of Economics European Institute, comments: "There will, before
long (my best guess is between two and five years from now) be
a global dumping of US dollar assets, including US government
assets. Old habits die hard. The US dollar and US Treasury bills
and bonds are still viewed as a safe haven by many. But learning
takes place."
Buiter, who has previously advised the World Bank,
the IMF and the European Commission, points out that the dollar
has managed to stay afloat due to the misguided notion that the
US can make more capital on overseas investments and interests
than foreign investors can make on US assets - a hypothesis that
economists have referred to as "American alpha".
However, he believes the global financial crisis
has exposed the fatal flaws in that assumption.
"The past eight years of imperial overstretch, hubris and
domestic and international abuse of power on the part of the Bush
administration has left the US materially weakened financially,
economically, politically and morally," Prof Buiter writes.
"Even the most hard-nosed, Guantanamo Bay-indifferent potential
foreign investor in the US must recognise that its financial system
has collapsed."
Buiter warns that a Keynesian-style increase in
public spending, the economic stimulus plan mooted by President
elect Obama, will not work in the long term because underlying
the fundamentals of the US economy is what he describes as a "deep
structural rot".
"If the authorities go ahead with the short-run
Keynesian stimulus without having convinced the global capital
markets and domestic producers and consumers that there will be
a timely reversal, the policies will not work." Buiter states.
"If the government is believed to be fiscally
continent (future taxes will be raised and/or future public spending
will be cut by enough to safeguard the solvency of the state)
but turns out not be so after all, the Keynesian fiscal policy
will be effective in the short run (as long as the public believes
in the fiscal virtue of the government) but will become highly
contractionary once the truth dawns." he continues.
Buiter also states that he expects Federal authorities
to allow the dollar to depreciate under an inflationary monetary
policy, rather than default on Federal debt.
"The US Federal government has taken on massive
additional contingent liabilities through its bail out/underwriting
of the US financial system (and possibly other bits of the US
economic system that are too politically connected to fail)."
Prof Buiter comments. "Together will the foreseeable increase
in actual Federal government liabilities because of vastly increased
future Federal deficits, this implies the need for a future private
to public sector resource transfer that is most unlikely to be
politically feasible without recourse to inflation. The only alternative
is default on the Federal debt. There is little doubt, in my view,
that the Federal authorities will choose the inflation and currency
depreciation route over the default route."
Buiter warns that this course of action on behalf
of the Federal government is unsustainable and will ultimately
lead to a massive dollar collapse.
"If I can figure this out, so can anyone in the US or abroad
who follows recent economic developments. The dawning of the realisation
will lead to the dumping of the assets." he concludes.
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