by Steve Watson
January 06, 2009
Warns that within five years global
dumping of dollar assets could be complete
A former member of the Bank of England’s Monetary Policy Committee has
predicted a massive collapse of the dollar within the next two to five
years, warning that a government increase in spending under President elect
Obama could be disastrous.
Willem Buiter, who served the BOE from June 1997 to May 2000, has
stated that he expects to see the plug pulled from under the dollar as
foreign investors turn away from the dollar and other US backed assets
including government bonds.
Writing for the Financial Times, Buiter, now a Professor with the
London School of Economics European Institute, comments:
“There will, before long (my best guess is
between two and five years from now) be a global dumping of US dollar
assets, including US government assets. Old habits die hard. The US
dollar and US Treasury bills and bonds are still viewed as a safe haven
by many. But learning takes place.”
Buiter, who has previously advised the
World Bank, the
IMF and the European Commission, points out
that the dollar has managed to stay afloat due to the misguided notion that
the US can make more capital on overseas investments and interests than
foreign investors can make on US assets - a hypothesis that economists have
referred to as “American alpha”.
However, he believes the global financial crisis has exposed the fatal flaws
in that assumption.
“The past eight years of imperial
overstretch, hubris and
domestic and international abuse of power on the
part of the Bush administration has left the US
materially weakened financially, economically, politically and morally,”
Prof Buiter writes.
“Even the most hard-nosed, Guantanamo
Bay-indifferent potential foreign investor in the US must recognize that
its financial system has collapsed.”
Buiter warns that a Keynesian-style increase in
public spending, the economic stimulus plan mooted by President elect Obama,
will not work in the long term because underlying the fundamentals of
the US economy is what he describes as a “deep structural rot”.
“If the authorities go ahead with the
short-run Keynesian stimulus without having convinced the global capital
markets and domestic producers and consumers that there will be a timely
reversal, the policies will not work” Buiter states.
“If the government is believed to be fiscally continent (future taxes
will be raised and/or future public spending will be cut by enough to
safeguard the solvency of the state) but turns out not be so after all,
the Keynesian fiscal policy will be effective in the short run (as long
as the public believes in the fiscal virtue of the government) but will
become highly contractionary once the truth dawns” he continues.
Buiter also states that he expects Federal
authorities to allow the dollar to depreciate under an inflationary
monetary policy, rather than default on Federal debt.
“The US Federal government has taken on
massive additional contingent liabilities through its bail
out/underwriting of the US financial system (and possibly other bits of
the US economic system that are too politically connected to fail)” Prof
“Together will the foreseeable increase in
actual Federal government liabilities because of vastly increased future
Federal deficits, this implies the need for a future private to public
sector resource transfer that is most unlikely to be politically
feasible without recourse to inflation. The only alternative is
default on the Federal debt. There is little doubt, in my view, that
the Federal authorities will choose the inflation and currency
depreciation route over the default route.”
Buiter warns that this course of action
on behalf of the Federal government is unsustainable and will ultimately
lead to a
massive dollar collapse.
“If I can figure this out, so can anyone in
the US or abroad who follows recent economic developments. The dawning
of the realization will lead to the dumping of the assets” he concludes.