Tuesday, December 4, 2007

Third World Currency

It looks like the Bush administration's policy of a "strong" dollar has finally begun to pay off. After losing 25% of its value against the Euro in two years, the dollar now buys barely more than 50 euro-cents. The damage to Euro-zone exporters is obvious. But in a move that exemplifies the gravity of the situation, EADS chairman Louis Gallois today declared that its Airbus subsidiary will soon be forced to outsource its production to the dollar-zone:

"Unfortunately, I believe we must not use the conditional anymore. We must not say 'We ought to', we must say 'We will have to', because we no longer have the choice... The only way to prepare the company for a dollar that no one controls anymore is unfortunately to set ourselves up in the dollar zone," he added, judging that "the industrial substance is in the process of leaving" Europe... (Translated from the French.)

Had someone suggested two years ago that the Chinese, OPEC, the ECB and all of the other enormous market-making capital funds would simply sit by and watch the dollar lose 25% of its value, I'm not sure anyone would have believed it. Now there doesn't seem to be a whole lot anyone can do about it. Over the cliff we go...

Update: According to Der Spiegel, Airbus is exploring the possibility of an assembly plant in Mobile, Alabama, and VW is looking to establish a North American factory also.

Also, in response to a Comment thread, I should also make my broader point more explicit. Namely, that the dollar devaluation has been part of an economic "assault" on the Euro-zone and China. So far it's managed to boost American exports, and might end up resuscitating America's industrial productive base through "insourcing" from the Euro-zone, even if it hasn't gotten China to unpeg its currency. But it's hard, if not impossible, to imagine that the US can somehow maintain its global influence while at the same time becoming a Third World economic zone to a "rich" EU and a cash-bloated China.

Where it also gets sketchy is when it combines with underlying fundamentals to make investors reluctant to subsidize the American lifestyle. Already Asian central banks are increasingly moving towards Euro-zone debt, and should the dollar continue to slide, that will only become more pronounced. Since America is now primarily a non-productive debtor nation, this will have very painful consequences.

Posted by Judah in:  Markets & Finance   

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