The dollar “crisis” and the New World Order

The concept of a New World Order is one of those compelling political ideas designed to scare some people and inspire others, even if it has little or no basis in reality. There’s no New World Order, of course — but lately, plenty of people wish we did have one.

It looks like the U.S. has run off the rails and is deliberately provoking a dollar crisis. Usually we pooh pooh anything that involves the word “crisis” — the word pops up dozens of times for every time there’s a real one. But this time, we are worried. Very worried.

The long-suspected idea the U.S. actively seeks a weaker dollar was confirmed in a Wall Street Journal story on May 13 (see also “Playing with fire”), which asserted the U.S. is “acquiescing” in the willful misinterpretation of the G7 communiqué, which read, “In emerging Asia, particularly China, greater flexibility in exchange rates is critical to allow necessary appreciations, as is strengthening domestic demand, easing reliance on export-led growth strategies, and actions to strengthen financial sectors.”

This was interpreted as a call for the dollar to depreciate across the board, even though the G7 clearly did not say that. Fed Chairman Ben Bernanke, Treasury Secretary John Snow, European Central Bank (ECB) President Jean-Claude Trichet, and Japanese Finance Minister Sadakazu Tanigaki each complained the market was misinterpreting the G7 statement, to no effect at all. This means their protests and denials came across as weak and unconvincing to the market.

The market thinks that somehow there is something wrong with a finance ministry that acquiesces to the downfall of its currency — and former Fed Chairman Paul Volcker would agree. It’s also arrogant. Both the Fed and the Treasury have recently said that any diversification out of dollars is not a danger to incoming capital flows (which are mostly private and not official) or the interest-rate structure. It looks like we are about to find out if this is true.