Customer Reviews

The Dollar Crisis: Causes, Consequences, Cures , Revised and Updated

5 star:		(40)
4 star:		(19)
3 star:		(10)
2 star:		(4)
1 star:		(7)

 

 

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.

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.

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.

This was a very informative book for me, although I would recommend it only for those who have a reasonable understanding of economics, and who are familiar with international trade, foreign exchange, and Keynesian and monetarist theories. The author does explain these things, but you really need to know about them beforehand.

The data and charts the author uses to inform the reader about what is going on in global trade and finance are impressive. I would wager that a book like this would have been impossible before the advent of readily available computer data. There is some repetition in the book, however, but it is convenient repetition.

Before reading this book, I was aware of the problems the endless U.S. trade deficits are creating. However I was not aware of just how pervasive the problem is, and how one country after another gets hit hard by a powerful financial crisis followed by an intractable economic contraction.

First the exporting countries get hit. An export country normally recycles most of its dollar surplus back into U.S. investments. What this means is that the U.S. pays for the excess goods it imports by selling either debt instruments, or real property, to the exporting country. But also, enough of the export country's dollar surplus gets converted into the local currency to cause a stock market and real estate boom and a rising currency. An example was Japan in the 80s: up and up went the markets, while the exporters were having an increasingly difficult time making a profit, because of the increasing local costs and an increasing currency exchange rate. Finally, the high stock market levels can no longer be justified and balloon goes pop, and we have a mess that can take a decade or more to clean up, as in Japan. And the author gives a convincing case for why China will be next on the hit list.

The importing country, the U.S., in turn gets hit too. The recycled dollars from the exporting nations fuel a stock market boom, as in the 90s, with lots of new IPOs and new industrial capacity being created--and over capacity too. At the same time, U.S. companies, finding it ever harder to sell at home in the face of the ever rising tide of cheap imports, find themselves making smaller profits, and so less able to justify their stock prices. The collapse becomes inevitable, and happened starting in 2000.

But what made this book an eye-opener for me is the author's well documented argument that we have experienced only Phase One of the U.S. contraction, in which the Fed reacts to the contraction by reducing interest rates drastically, and so mortgage interest rates, and so fuels a counteracting housing boom. Now, the contraction in each country that's hit is intractable, the author asserts, taking a decade or more to recover from, and none of the reviews posted on this website seem to have made any comment on the author's prediction that Phase Two of the U.S. contraction is therefore still to come. All that is covered in the second half of the book.

The author, writing nearly three years ago, predicted that the low U.S. interest rates would cause a housing boom, and a lower dollar, which indeed they have. He also predicted that the low rates would give the contracting U.S. economy a stimulating respite, which they also have, because of people refinancing their homes and then using the funds to buy consumer goods. That stimulates production at home, but more imports too. However, the low-interest-rate Fed stimulus will grind to a halt, says the author, by 2004 at the latest, when housing prices reach an inevitable unaffordability level, and stop going up, even start coming down. At this point, the consumer binge fueled by home refinancing will stop, because everybody is up to their necks in debt, and can't refinance any more. The contraction will then resume with a vengeance--unless the Fed postpones the inevitable once more by pumping massive amounts of liquidity into the economy.

Well, we seem to be just past the housing-boom price peak, the flood of imports is worse than ever, and over capacity is everywhere, and so far the author's been dead right about how things will unfold. The ball's now in the Fed's court. Phase Two of the U.S. contraction is inevitable, says the author, its exact nature, and when it happens, depending only on how the Fed tries to stop it! To me it looks like the Fed has decided to flood the markets with liquidity as the solution, while raising interest rates slowly to keep the dollar up. This should keep prices, including home prices, from falling for now, and may even make the stock market go up in another speculative bubble, as in the late twenties. But if the author is right, this will provide just a bit more short term relief before the inevitable massive contraction prevails and dollar falls much further.

If you want to understand what's going on, buy this book. Many disparaging reviewers have made much of the author's curative proposal that the long-term problem of trade deficits might be solved by a slow increase in the minimum wage in exporter countries like China ($5 per day at present). The discussion about this takes up only the last few pages of the book. The measure might well help, but it will be a long time before anything like that happens, if ever. The proposal can be treated as merely a largely irrelevant speculative addendum for purposes of debate. Don't let it stop you from reading this eye-opening book.

For the uninformed, semi-informed or even the informed who are willing to connect the dots about today's seemingly strange economic times, this book will guarantee a cold sweat. Duncan's book is a comprehensive, one stop portrayal of the prevailing bubble economics that have dominated the planet over the last decade. That process is currently running full tilt and seems terminal. He presents (sometimes redundantly, but bears repeating) the mechanics and impacts of the massive Dollar recycling operations (engendered by America's 5% of GDP trade imbalance: $500 billion plus annually). This in turn creates malallocations of capital, overcapacity, and rolling asset bubbles and busts, that regularly require costly bailouts and cleanup operations. Of course the bailouts are affected by applying even more "liquidity" in the form of more dollars and debt that the world (and especially the US) sorely does NOT need. This monetarism encourages even more moral hazard and bizarre economic behavior (borrowing against inflated assets such a homes to buy even more foreign made goods).

The strength of Duncan's book lies in his use of an excellent set of tables and graphics, that allow the reader to piece together the variables and evolution of the dollar and credit bubble. He also offers a clear and concise snapshot of the history of several late 20th century bubbles such as Thailand, Japan and the United States. Additionally an understandable description and history of the reserve system of international trade and capital flow is presented. As the book was writtten in June, 2002, the inquistive reader may be tempted to try and update the book's data. The updates can be tracked by going straight to the sources (Federal Reserve flow of funds data, etc.)that Duncan provides. I can only advise the reader to take anti-nausea medication and skip lunch during this process, as the picture is not pretty.

The basic thesis of this book is easily stated in a few short sentences: The world is on a United States Dollar standard. The dollar standard is inherently flawed and increasingly unstable. Its collapse will be the most important economic event of the twenty-first century.

Mr. Duncan is based in Asia and has a first hand view of what he is talking about as well as the theoretical background to understand what's happening. Or at least he has a different view than we have here. ==His comments from a strictly monetary standpoint are pretty good. But I'm afraid that his conclusions don't quite agree with mine.

First, one thing he urges as at least a partial solution is a Global Minimum Wage. You gotta be kidding. France can't even agree with the rest of Europe on how to do things. Are you really saying that the kid in Zimbabwe driving an ox team dragging firewood is to get paid the same as someone working in a factory in Taiwan?

Second, he doesn't spend nearly enough time on the coming oil crisis. Today oil is $65 a barrel. The biggest 'economic event of the twenty-first century' is going to be the change in our entire culture as oil goes to $165 then $265 a barrel. The whole economic situation of the world changes as transportation has to change. It costs about $3,000 to bring over one of those 40 foot containers from Asia. What if that goes to $30,000? What happens to the economics of Asian manufacturing?

The dollar crisis is just one of the fun and exciting things we have to look forward to in the next few years.

A fascinating book! When he is talking about his assessment of global economic conditions, he is very convincing, and the book is extremely well-written. He backs up his statements with lots of charts and tables. The book is divided into four sections - one on the origins of economic bubbles, one on the flaws of the dollar standard, one on the death of monetarism, and the final one on a global solution to the problems he outlines.

It is this last part - on a global solution to the problems outlined - that is the reason I deducted one star from my review. It is not because it is not well-written. Like the rest of the book, it is. I just happen to disagree vehemently about the solution proposed. The solution he proposes requires working within the framework of the World Trade Organization, and/or the International Monetary Fund. In the words of Micheal Badnarik, the Libertarian candidate for president, "[The WTO and the IMF] rely on thousands of pages of confusing regulations and corrupt agreements between multinational corporations and oppressive governments". My belief is that anytime you trust a governmental, or in this case quasi-governmental, organization to fix a problem, the cure tends to be worse than the problem itself. To me, the best fix is to entrust the individual nations, and the individuals within those nations, to make decisions about their future, rather than relying on centralized planning. After all, it was big-government policies that caused the problem in the first place, when it was decided to rescind the gold standard.

Having said that, I highly recommend the book for anyone who wants to know some of the origins of the current global economic situation. I found it fascinating.

Author Richard Duncan may not have been the first to highlight the dollar problem, nor is he the only one presently voicing concern.

The ?problem? is that global economic growth is primarily driven by the US trade deficit, principally as a result of the strong dollar. The rest of the exporting world reinvests the US$ receipts back into the US to avoid selling dollars and appreciating their own currency (this would make their exports less competitive) and ?well, Duncan?s contention is that it can?t continue.

According to the author, how will the wheels fall off the trolley?
1/ The ability of the US to generate sufficient dollar denominated debt instruments is tied to the large budget deficit.
2/ The budget deficit will eventually contract and balance of payments will be restored.
3/ The effect of (2) will be to force repatriation of the trade surplus ie. widespread selling of the dollar.

There is already a well argued case for depreciation of the dollar, and the US Fed appears to have acquiesced to this weakness since the beginning of ?03, but Duncan would (correctly) argue the order of depreciation required to solve the problem is much greater. Should the consumer credit binge supporting the US economy falter, perhaps as a result of a housing collapse, a chain reaction of reduced investment and downgraded commercial creditworthiness could be the trigger for a major decline. A decline in the dollar would likely become self feeding through speculative action and a ?rush for the exits?.

The book?s weakness is in its closing chapters. Duncan proposes a global minimum wage as the solution to persistent trade imbalances. This is a fine academic proposal, but why argue for something that so patently will never occur?

?Crisis argues that a status quo in which the United States trades off its own financial assets in return for imported goods cannot be maintained. The conclusion: a significant fall in the dollar, is made very convincingly.

The content of the book was amazing.
The person who gave it one star complains about flawed economics. He easily forgot that economics is a flawed science by itself. Most of the famous theories that we as economists (including myself) learnt haven't worked. All I know for sure is that the modern era economics and the economists are totally out of reality. They are consistently wrong with their predictions and their theories and their implementation have failed dramatically.

This book is an eye opener and as real as it gets. Some People will not like its content because they do not want to believe that modern economic policies have failed.

(the person who complained talks about a model showing that the U.S. could sustain its level of current account deficit level for another 20 years)
this statement is laughable.....
The deficits if they keep growing like that they will destroy the dollar.PERIOD.

MODELS are for people who sit in ivory Towers totally out of reality.
The author of the book has proven right up to now and the dollar collapse has already started.
AGAIN AMAZING WORK....One of the best books I have read on the dollar and deficits and the real dangers that lie ahead of us.
It seems to me that some people can make the black white making the Debt problem of the US looking like nothing. The US phenomenon is the biggest CREDIT, DEBT, ASSET BUBBLE ever on this planet.
We technically exchange paper money for goods and the thing is that the other countries accept that.

My advice is:
Buy this book and read it. It will open your eyes and pay off for its price multiple times. I got the idea about this book from Richard Russell's newsletter. He himself that has seen everything in his extremely succesfull career has been completely amazed by the book and keeps mentioning it.

Do yourself a favor and don't listen to the economists that are consistently wrong. Listen to some people with experience in the field.

The main premise of the book has merit. Which is, huge US current account deficit is leading to excess reserve for trading partners which itself is leading to credit expansion and asset price bubble for trading partners. Reinvestment of excess reserve back to US is inflating asset prices in US. Current monetary system does not have strong governing mechanism as the gold standard had.
However, these points are repeated multiple times in every chapter and there is no new information after first couple of chapters.
Some of the points were not well grounded and included many assumptions. For example, author keep saying that price deflation is not good. In fact, import price reduction is generally good for importing country. Even for exporting country it is not bad as long as there is sufficient productivity gain. Author never talked about productivity at all. In fact, he implicity assumes that cost of producing goods in two contries are only determined by wage rate (what about productivity).
The argument about raising global minimum wage to increase demand was not sound at all, it has so many hidden assumptions. No evidence of higher minimum wage increasing demand. Besides, no mention of increasing productivity which is often linked to increased wage rate.