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Nov 30, 2008

Speculator: buck up

The strength of the US dollar seems surprising amid financial crisis, but how long will it last?

Suddenly things fell apart. Our only hope is that, unlike Humpty Dumpty, they can be put back together again.

It’s no great consolation that Speculator has repeatedly suggested in recent years that the US economy has, in effect, been running on hot air. That said, even Speculator failed to anticipate the way subprime loans metastasized through the global economy.

One could understand the motives of the banks packaging and selling the bonds; they made a fortune in fees at each stage of the process. In a Ponzi scheme, the idea is to broaden the process and find more marks among the general public. This one was almost unique in that other financial institutions bought the snake oil, so the erstwhile Masters of the Universe were falling for their own confidence tricks.

Even at the end, as some of the banks realized how toxic their wares were, their reaction was not to issue a financial health warning, but to attempt to unload the bonds on their peers. There is, truly, no honor among thieves.

None of the famous new paradigms seemed to explain how dire the consequences would be. There are huge pools of money coagulating around the globe, including, one suspects, the ill-gotten gains of the bond-mongers, but no wants to risk it, which is why the government has had to flood the system with liquidity.

The caution surrounding most forms of credit – and even equities – is understandable. But why are people buying dollars? Cash may be the first port of call, but surely any sensible financial navigator would get the hell out of it again as soon as possible. And yet, with a massive deficit on trade, and a huge fiscal hole just enlarged by a $700 bn bailout, the dollar almost inexplicably rises.

In Peter Pan, Tinkerbell is brought back to life because all the children believe in fairies. And something similar seems to be happening to the dollar, although it’s more a question of everybody being more skeptical about all other forms of liquidity.

With the US Treasury, in effect, printing money to pay for sundry wars, pork barrels and bailouts, how long can this last? Well, as long as the Chinese continue buying T-bonds. But even Beijing will want some collateral soon.

The situation is reminiscent of the UK’s 1940 war cabinet, which decided to continue World War II even if it meant liquidating every British asset and selling it to the Americans. That precedent offers some inspiration now.

Sadly, the UK is not in a position to make any offers for the original 13 colonies. Perhaps a bidding war between Canada, Russia and China for Alaska is in order. It would sell for far more than the $7 mn originally paid for it and a good realtor could talk up its glowing prospects when global warming really sets in.

Vermont, home of the US’ only socialist senator, would probably volunteer to go to Canada for a small consideration, and the French could make an offer from their gold reserves to take back Louisiana, which would save FEMA a fortune in future hurricane damage repairs.

These are desperate measures, admittedly, but with Americans’ future depending on the credibility of their currency, what else could get the people of the world to believe in that most modern equivalent of fairies, a strong dollar?