Fleeing the Dollar Flood

Extrait de: Fleeing the Dollar Flood, The Wall Street Journal, APRIL 21, 2011.

The world tries to protect itself from U.S. monetary policy

Members of the International Monetary Fund emerged from their huddle in Washington last weekend resolved to keep every option open to slow the flood of dollars pouring into their countries, including capital controls. That's a dangerous game, given the need for investment to drive economic development. But it's also increasingly typical of the world's reaction to America's mismanagement of the dollar and its eroding financial leadership.

America decline

The dollar is the world's reserve currency, and as such the Federal Reserve is the closest thing we have to a global central bank. Yet for at least a decade, and especially since late 2008, the Fed has operated as if its only concern is the U.S. domestic economy.

The Fed's relentlessly easy monetary policy combined with Congress's reckless spending have driven investors out of the United States and into Asia, South America and elsewhere in search of higher returns and more sustainable growth. The IMF estimates that between the third quarter of 2009 and second quarter of 2010, Turkey saw a 6.9% inflow in capital as a percentage of GDP, South Africa 6.6%, Thailand 5%, and so on.

This incoming wall of money puts the central bankers in these countries in a bind. If they do nothing, the result can be asset bubbles and inflation. Brazil (6.3%) and China (5.4% officially but no doubt higher in fact) are both enduring bursts of inflation, as are many other countries. These nations can raise interest rates or let their own currencies appreciate, at the risk of slower economic growth. Rather than endure that adjustment, many countries are resorting to capital controls and other administrative measures to try to stop the inflow.

Euroview: No Bottom For The Dollar Seen Yet 4/21/2011 9:21:45 AM

With normalization of US monetary policy still to be decided and a pick-up in global risk appetite there is no sign of the dollar bottoming just yet

Over the past year, Brazil has introduced taxes on stock and bond investment and raised bank reserve requirements; Indonesia has introduced holding periods for government bonds; South Korea has limited banks' ability to engage in foreign-currency financing, among other things; Peru and Turkey have taken action, too. Yet their currencies have in many cases continued to rise and the money keeps coming in.

So it was little surprise earlier this month when IMF chief Dominique Strauss-Kahn joined the parade and endorsed capital controls as a necessary "tool" to be used on a "temporary basis," ending the fund's long-time commitment to free flows of capital. The last time the fund did this was amid the Mexico monetary crisis of the mid-1990s.

The IMF wanted its members last weekend to endorse guidelines on when they would use such measures. Brazil's finance minister spoke for many when he refused, calling capital controls necessary "self defense" measures against "spillover effects" from other countries' policies. He meant the U.S.

As if to underscore the point, U.S. Treasury Secretary Timothy Geithner responded by pointing the finger right back at developing countries, essentially updating Treasury Secretary John Connally's famous line to a delegation of Europeans in the 1970s that the dollar is "our currency but your problem."

The larger story is that the world is starting to protect, and perhaps ultimately free,
itself from America's weak dollar standard.

The European Central Bank recently raised interest rates and may do so again to prevent an inflation breakout. China is allowing more trade to be conducted in yuan, a first step toward making it a global currency. At a meeting of developing countries—the so-called BRICs—in China recently, leaders called for "a broad-based international reserve currency system providing stability and certainty." They weren't referring to the dollar.

Even in the U.S., Americans are buying commodities (oil per barrel: $111) and gold ($1,500 an ounce) as a dollar hedge, and the state of Utah recently took steps to make it easier for citizens to buy and sell gold as a de facto alternative currency. Whether or not these prove to be wise investments, they are certainly signals of mistrust in Washington's economic stewardship.

At an economic town hall this week, President Obama blamed "speculators" for rising oil prices. He should have mentioned the Fed and his own Treasury, which have encouraged the world to invest in hedges against the falling dollar. Chairman Ben Bernanke and Mr. Geithner have deliberately pursued a policy of unprecedented monetary and spending stimulus to reflate the economy and boost asset prices. The bill is coming due in a weak dollar, food and energy inflation, and the decline of U.S. economic credibility.