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61 of 61 people found the following review helpful:
4.0 out of 5 stars
The Downside of the Dollar Standard, July 26, 2005
Since the breakdown of Bretton Woods in the early 1970's and the end of the gold standard, the dollar has become the international reserve currency. The 20 years prior to 1970 international reserves increased only about 55%, but since 1970, with the adoption of the dollar standard, reserves have increased over 2,000%. This is primarily a result of US current account deficits, which last year ran about $600 billion - about 3% of GDP. Asian central banks hold about $2 trillion US dollar-denominated reserve assets. This surge in international reserves has created huge imbalances and it is the subject of this book by financial analyst Richard Duncan.
The dollar standard has allowed the US to finance incredibly large deficits by printing more dollars. The dollar standard has on the upside ushered in the age of globalization that has allowed Asian economies - first Japan, then the Tigers, and now China - to devolop by exporting to the US without importing equal amounts, leaving Asian central banks with large stockpiles of dollar reserves. And what can Asian central banks do with these reserves? About the only thing they can do is invest in US corporate stocks and bonds, T-bills, and US agency debt such as Fannie Mae and Freddie Mac. (We've been enjoying low mortgage rates because the Asian central banks buy up our debt so we can take out more.) And all these investments in return allow US consumers to buy more of their exports - call it vendor financing.
According to Duncan, these current account deficits and current account surpluses have already wrought havoc with the world economy: it caused the asset and stock market bubble in Japan in the 1980s; it caused the currency crisis in Malaysia and Thailand in the 1990s (Duncan was an analyst working in Thailand at the time and correctly predicted its occurence); and it is currently fueling the real estate boom in the US.
Asia's export-led strategies require that dollar reserves are reinvested in the US; this prevents their currencies from appreciating. Indeed, if the Bank of China or the Bank of Japan were to invest in the Euro or any other currency, the bankers and politicians of those countries would quickly protest because it would drive up their currencies and make their exports less competitive.
So then with the US increasing the world's international reserves at a rate of $600 billion a year, everyone is still happy for the time being. Asian countries are growing rapidly and American consumers have endless supplies of credit - using their homes as ATMs - however, this imbalance, unsustainable and in the long run, will precipitate an economic crisis. Even correcting this imbalance, if not done prudently, could precipitate a world economic slowdown.
This book was written before the recent decision by China to stop pegging the yuan to the dollar. This was a baby step in the right direction.
Duncan's analysis of the problem is very good, his policy recommendations, however, are questionable. He suggests, for example, giving global central bank status to the International Monetary Fund. That's a nonstarter for reasons obvious to Republicans. He also advocates a global minimum wage, giving workers more money to soak up excess supply. I can already hear the critics screaming no "world government."
The main problem that needs to be addressed - and Duncan stresses it many times - is that there needs to be a regulatory mechanism in foreign-exchange markets. Central banks intervene in currency markets for their own benefit - such creating an export strategy - instead of looking for ways to smooth global business cycles. China, with its revaluation of its currency, is looking to become a responsible global player - we hope. If the powers that be do not act in concert to coordinate a soft landing of the current imbalances, we will all be heading for some frightening times.
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158 of 171 people found the following review helpful:
5.0 out of 5 stars
The US Dollar Ponzi Scheme - Uncharted Waters, September 13, 2003
This review is from: The Dollar Crisis: Causes, Consequences, Cures (Hardcover)
Richard Duncan's "The Dollar Crisis" is written in a fairly straightforward manner. It is a distillation of ideas about the monetary system, and facts and figures and examples. He tries to highlight key facts and ideas, and repeat them sufficiently so you won't miss them. In this sense its rather good for someone who is not a specialist in this area, or has not been exposed lately to some of the concepts of international monetary exchange. I have an MBA, and a solid background in economics, and found the level to be just a little tedious in places but overall very good for review, and adequate for refreshing my memory. It may not appeal to readers with no experience in economics or financial matters, since they will need an introduction to what money really is all about, and how an economy functions. It will also not appeal to dogmatic economists, but then, nothing but their own schools ever do anyway. I am rather enjoying the book, and recommend it to anyone who wishes to delve further into the impact of the money system on macroeconomics and the world's finances, beyond the decision for 'the next trade.' This book is helping me to think about the dollar as a 'medium of exchange' in a more theoretical manner. It is helping me to focus some of my own thoughts on the subject, and provided a good of the international accounting system. We really are in uncharted waters. Never before in history has the world had a 'reserve currency' that is relatively unrestrained, with a 'master' who is willing and able to debase it to suit their policy needs, and manipulate markets in concert with their peers to prolong the situation and defeat the regulating systems of the markets, such as interest rates and exchange values. We are in a feedback loop of mutually assured financial destruction with Asia. We are supporting their economies by consuming their exports in a huge way, and they in turn are accepting our debt instruments (dollars) and using them to expand their own economies, as well as our own by buying our Treasuries, Corp bonds, GSE debt, and equities. It seems like an endless round of bubbles have been created as the Fed seeks to avoid crises and keep this Ponzi scheme going, because that's exactly what the dollar is these days. Make no mistake about that. It sets out some of the timelines nicely with the appropriate facts and figures, and helped me to understand the progression of events and the key decision points. I don't think of Mr. Duncan as an Austrian, since in the first half he avoids the dogmatism that Austrians often fall into, which is the weakness of a theory that has never been tested and refined, while being academically marginalized. Since I am an 'Austrian' you can take that as a sincere criticism if you are so inclined. As far as his solutions, I won't comment because I do not wish to give away the ending as they say, and I wish to highlight the book for its value in helping the reader organize a complex reality into some manageable ideas. In this Mr. Duncan exceeded my expectations.
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100 of 107 people found the following review helpful:
4.0 out of 5 stars
Good information & case for international diversification, January 2, 2004
This review is from: The Dollar Crisis: Causes, Consequences, Cures (Hardcover)
This book presents a fact and chart filled analysis of the recent history of the U.S. economic big picture, and how this fits into the global scenario. From this, Mr. Duncan explains his conclusions on why and when the U.S. dollar will plumment. He must be commended for all the research and the way the many charts and explanations build a solid case that there IS a considerable long term risk to the dollar, unless the current overall trends (public and private) in the U.S. economy change. As a layman student of the markets and economics, I found this a very interesting read, and believe that the information presented is valuable to everyone who has a lot of dollar denominated investments. My main concern, is the author makes the all too common mistake in assuming: a. His scenario is absolutely certain.
b. His timing (e.g. in our face) of the coming event is certain.
c. His solutions would work, and are a must. Having read maybe 100 investment books in the last 25 years and having gained a fair amount of experience and perspective, I'll opine that this is vastly overstating his case. More realistically, he makes a strong case for why there are serious risks in a dollar-dominated portfolio, and therefore implicitly makes a strong case for a significant diversification to a global or asset (i.e. real estate, art, etc) segment of a prudent investor's portfolio. If Mr. Duncan had invested solid effort at the end of the book in providing cogent information about what the typical American investor could do to protect him/herself, instead of trying to convince his audience that he's absolutely right and the problem is imminent -- then this book would have earned 5 stars. As it is, the reader is forced to come up with the (balanced portfolio) advice on their own, which may well require more investment experience than the average reader can be expected to have.
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