Gabor Steingart

Dollar Illusion – the German View

In the recent past, some of our readers have criticized our tendency to present economic “gloom-and-doom” stories–most likely, they argue, to make our own services look more attractive. While we don’t deny that we’re interested in selling our services (after all, we’re businesspeople), we also believe that, if there is something to know, we want to know. And we think you should, too. Ignorance is not bliss. It’s just that: ignorance, and a potential ticket to the poorhouse for unassuming investors.

Having said that, we’ve been wondering lately–sometimes aloud–how foreign investors could possibly be so blind to the dollar’s decline that they keep buying more and more of the greenback. Last week, a German economic journalist answered our question.

On October 25, Der Spiegel, one of Germany’s most renowned economic magazines, ran an article titled “America and the Dollar Illusion.” The article is an excerpt of Spiegel editor Gabor Steingart’s book World War for Wealth: The Global Grab for Power and Prosperity.

“The two things investors crave most are high yields and high security,” writes Steingart. “Since you can never have both at the same time, the moods of investors are like an emotional roller coaster. They shift constantly from fear to greed and back–although major investors, like corporations and states, clearly prefer security over fancy returns. Their fear is stronger than their greed.”

Fear, says Steingart, who was named “Economic Writer of the Year” in 2004, is the main reason why foreign investors haven’t dumped the flailing dollar yet.

“Investors can see what is happening,” he asserts. “But they keep buying dollars as though possessed. The greater their doubts, the more greedily they order dollars. Indeed, that’s exactly what is so crazy about these investors and their behavior: The client isn’t just a client. He creates the security he’s purchasing by the very act of purchasing it. If he were to stop buying dollars tomorrow, suspicion about the currency would spread and insecurity would grow. Then the dream would end. The dollar would start to falter and all the wealth held in dollars would lose its value.”

And of course, no one wants to see that happen because the stakes are just too high. The (temporary) remedy, says Steingart, is to play along and pretend everything is just fine.

“Many people no longer care whether the U.S. currency still justifies the faith people seem to have in it. The new game, which amounts to playing with fire, works exactly the other way around: The dollar deserves the faith it gets because otherwise it loses that faith. Dollars are bought so they don’t have to be sold. The dollar is strong because that’s the only thing that can prevent it from growing weak. [...] Or, to put it still more clearly: Behaving irrationally has become rational behavior.”

“Of course,” he continues, “those playing this game know that, in the long term, currencies can’t be stronger than the national economies from which they derive. Consumption without production, imports without exports, growth on credit–these are all things that can’t last in this world.”

But if things have become this obvious, why aren’t foreign investors starting to jump the sinking ship?

“Financial investors aren’t tax collectors or accountants: Their job isn’t that of a meticulous overseer,” writes Steingart. “They love excess, and they regularly cause markets to overheat. [...] Their professional attitude resembles that of race car drivers whose goal is victory and not avoiding accidents at all costs.”

Investors can see, he claims, “that a great statistical effort is being made to prolong the American dream.”

What he refers to are government statistics that “have announced sensational productivity leaps for the U.S. economy–productivity leaps that, strange as it may seem, haven’t led to any rise in wages for years.” He concludes that these “productivity leaps exist only on paper.”

The low unemployment figures are also no reliable indicator. “Working just one hour a week is enough for one to be classified as ‘employed.’ Given that it’s considered antisocial to declare yourself unemployed, the U.S. statistics may well say more about American society’s dominant norms than about its actual condition.”

What about the U.S. economy’s high growth rates?

A result of public and private debt, says Steingart, stating that new loans taken by the U.S. government accounted for one-third of the U.S. economic growth in 2001, and for one-quarter in 2003. “The United States is an economic giant on steroids–doped so its decline in performance doesn’t become too apparent.”

But how long can this charade continue, we wonder?

Not too much longer, Steingart thinks. “Today’s snowdrift will become tomorrow’s avalanche. The masses of snow are already accumulating at breathtaking speed. The avalanche could happen tomorrow, in a few months or years from now. Much of what people think is immortal will be buried by the global currency crisis–perhaps even the leadership role of the United States.”

Posted 10-31-2006 5:45 PM by Shannara Johnson

http://www.investorsinsight.com/blogs/what_we_now_know/archive/2006/10/31/dollar-illusion-the-german-view.aspx