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ECONOMY
Will the
US Dollar Collapse?
Dr. Hassan Ali
Arguments over the global financial
meltdown have now reverted to the mother
of all debates — should the international
market abandon the US dollar in view of the
ailing American economy? Interestingly,
many have even suggested that the debate
should not be focused on the collapse
but rather on the timing of the collapse —
will it occur gradually or suddenly?
ACCOUNTANTS TODAY s&EBRUARY
ACCOUNTANTS TODAY s&EBRUARY
Will the US Dollar Collapse?
T
turn in their net savings, would prefer to
few years and its capacity to draw capital
o understand how badly the
cut their losses and seek other profitable
from reserves that were kept by emergUS economy is ailing, one has
international markets.
ing economies and oil-rich countries are
to imagine the massive size of
The common paradigm that excess supactually exacerbating the decline of the US
its deficit, which is estimated
ply will result in a fall of value truly explains
dollar.
at US$1 trillion, accumulated over years
the precarious condition of the US dollar.
For far too long the US economy has
of failed economic policies, continuous
The inherent weakness of the US finanbeen accumulating massive debts withcurrent account imbalances and budget
cial system coupled with the emergence
out the least regard to the sensitivity of
deficits. The bailout packages of another
of the Euro and the declining confidence
its economy. As a result, the average debt
US$825 billion needed by the Obama-led
of international investors will ultimately
for every US citizen in 2007 is estimated at
administration to lift the economy from
lead to lower demand for the US dollar and
$29,100 or roughly 8.2 per cent of its GDP.
its financial doldrums will undoubtedly
thereby trigger a dollar collapse. Indeed,
No ordinary country could sustain such
strike another hefty blow on the dollar.
international investors are monitoring the
debts accumulated
The reason for this
huge deficit is easy
The bailout packages of another over decades with- value of the US dollar and any attempt by
the international market to use any other
out any symptoms
to comprehend —
US$825 billion needed by the of an eventual col- major currency could trigger an exodus of
the country is spendinvestors abandoning the US dollar.
lapse. The US,
ing more than it can
Obama-led
administration
to
lift
Despite the global financial meltdown,
however, has sucafford with consummassive
unemployment across Europe
cessfully
raised
its
ers living way bethe economy from its financial
and the doomsday scenario on the fuinterest rate deyond their means
ture of the global financial system, some
and borrowing far doldrums will undoubtedly strike signed to sustain its
beyond their capacianother hefty blow on the dollar. massive borrowing central banks of countries in Europe are
defending the US dollar. Naturally they
programme — that
ty. But how could the
are caught in a dilemma whether to coris, until recently
US economy have
rect the imbalance of the global financial
when it was reduced from 0 to 0.25 per
borne such a huge anomaly unscathed
system hoping perhaps the situation will
cent. The impact of lowering the interest
over these years?
revert to its “normal” course or risk an
rates could induce investors to park their
The US market has always been eveimminent collapse that will render huge
savings elsewhere, causing a blow to the
ryone’s favourite destination to invest
losses to their
economy
already
and trade. These trade dealings, particusuffering from a
larly those involving the major developing
“Today, in the wake of a global foreign exchange
reserves that are
huge deficit.
economies of China, India, Middle-East oil
Another
likely financial meltdown, international denominated in US
producing countries and other successful
cause is the dollar’s
Asian economies, have worked well over
investors are nervously looking dollars.
Today, in the
dependence on oil.
the last decade. On the surface, this arover each other’s shoulder and wake of a global fiIt may seem bizarre
rangement appears to benefit both forces
nancial meltdown,
to some that oil is
— the Asian economies desperately needobserving if anyone would break international investraded in US doling an open free market to export their
lars at exchanges ranks and abandon the US dollar, tors are nervously
products thereby reducing their huge
looking over each
located in New York
unemployment problems and the US benthereby triggering its collapse.” other’s shoulder
and London when
efiting from the accumulated net savings
and observing if
almost half of the
earned by these economies that were ofanyone would break ranks and abandon
world’s oil output is produced in the Midten channelled back into the US market for
the US dollar, thereby triggering its coldle-East. Until now, by tacit approval of
investments.
lapse. There could only be two possibilithe OPEC countries, the US had ensured
The concept of sustained economic profties from here — either there would be a
that its currency is implicitly backed by
itability that is based on the notion that
total global meltdown of the US dollar that
crude oil. In turn, these countries would
exports must exceed imports does not apcould trigger huge losses for institutional
enjoy high returns in their net savings
pear to be the goal of US economic policy.
investors that are trading in US dollars or
both under the guise of government-led
In reality, the current account deficit of the
the status quo remains with the US dollar
investment firms or direct investments in
United States is the current account surbuoyed by staunch foreign investors bent
the US capital market. But this arrangeplus of exporting countries. To cover this
on ensuring its survival. AT
ment may be failing because of the US
deficit, the US treasury has been borrowfinancial crunch that is affecting their ining from these exporting countries and
Dr. Hassan Ali is an Associate Professor with
vestments. Most sovereign wealth funds,
re-financing its imports. Hence, the strong
the Graduate School of Business, Universiti
already pressured to sustain a high reSains Malaysia.
productivity growth in the US over the last
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