Analysis: Blame the dollar

The US economic power horse is running out of ideas and cash as it jostles with a massive national debt, housing and financial crises, rising inflation, and a depreciating currency.

This has all contributed to a growing tendency to live off credit amassed through petrodollars and foreign loans, leaving repayment for future generations.

Today, in much of America, communities and suburbs are dealing with a drastic increase in foreclosures and short sales. This has not been helped by the fact that gas is selling at over $1 a litre ($4 a gallon).

Standard monetary tools such as lowering or increasing interest rates can no longer provide quick fixes to the situation for both economic and political reasons.

Raising interest rates would compound the mortgage crisis while lowering it would drive the value of the US dollar abroad even lower.

But exercising control over the money supply could also damage the US economy: increasing the supply would lower the dollar's value even more, while decreasing supply would exacerbate the loans crisis.

In any case, control over the money supply would be anathema to US economic policy given the country's 'addiction' to deficit financing and run-away consumerism in recent decades.

So the US Federal Reserve is left virtually helpless.

It has, however, tried to help Wall Street by becoming a temporary lender and allow many investment firms the opportunity to avoid bankruptcy. Such an action by the Fed has not happened since the stock market fiascos in the 1930s.

The US government, however, can apply one clear fix to the situation - cut back overspending on a massive scale.

But this option too is off the table in an election year where 'victory' is being promised in endless wars on 'terrorism'.

And it is the recent wars in Afghanistan and Iraq that have contributed the lion's share to sapping America's resources...

Despite a trend by some economists and politicians to blame the current food and energy commodity price hikes on Opec or overpopulation, there is a clear picture emerging of deep structural problems in the world economy.

In particular, the main currency used for global trade in commodities, the US dollar, has been in steady decline not just against the Euro, but also against most other convertible currencies.

According to the US Federal Reserve, the dollar has dropped by around 65 per cent against the Euro, 31 per cent against the British Sterling, 45 per cent against the Canadian Dollar, and by 59 per cent against the Australian Dollar over the eight-year period since June 2000.

While the causes for this slide are debatable (and largely attributed to poor fundamentals in the US economy), the global impact of such a major drop in the value of the dollar is undeniable for two important reasons.

First, most global commodities traders utilise - and favour - the greenback over other currencies, despite a severe decline in its purchasing power.

Secondly, most countries - mainly in east Asia and among the major oil and gas exporters of the Arab Middle East - use the dollar as their reserve currency.

But they are paying the price. Despite their booming economies and elevated public spending, they are experiencing depreciating terms of trade and rising inflation.

More importantly, they have seen the value of their strategic currency reserves drop with the dollar's waning global strength.
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Full story at link by Massoud Hedeshi, international development expert, in Vienna// Al Jazeera English