THE nightmare scenario that haunts global strategist Clyde Prestowitz is an economic September 11 – a worldwide financial panic triggered by a sudden massive sell-off of US dollars that would lead inexorably to the collapse of economies around the world.
If that happens, Prestowitz predicts: “It would make the Great Depression of the 1930s look like a walk in the park.”
“Right now,” he says, "we have a situation in which the US is running huge trade deficits – about $US650 billion ($766 billion) in 2004 – which are financed by borrowings from the central banks of Asia – mainly the Chinese and the Japanese. All the world’s central banks are chock-full of US dollars – they’re holding many more dollars than they really want. They’re holding those dollars because at the moment there’s no great alternative and also because the global economy depends on US consumption. If they dump the dollar and the dollar collapses, then the whole global economy is in trouble.
"However, some countries have a bigger stake than others in maintaining the status quo. China and Japan have a big stake in maintaining the flow of their exports to the US and keeping the US economy humming. Russia, on the other hand, does not export much to the US. India doesn’t export much to the US. Yet Russia and India are also big dollar-holders. They hold many more dollars than they really want or need.
"It doesn’t take any great stretch of the imagination to see what could happen if one of these central bank managers decides to dump dollars. We had a situation recently when a mid-level official at the Central Bank of Korea used the word ‘diversification’. It was a throwaway remark at some obscure lunch, but there was instantaneous overreaction. The US stock market fell by 100 points in 15 minutes because the implication was that South Korea might be shifting out of US dollars.
**
"So picture this: you have a quiet day in the market and maybe some smart MBA at the Central Bank of Chile or someplace looks at his portfolio and says, ‘I got too many dollars here. I’m gonna dump $10 billion’. So he dumps his dollars and suddenly the market thinks, ‘My god, this is it!’ Of course, the first guy out is OK, but you sure as hell can’t afford to be the last guy out.**
“You would then see an immediate cascade effect – a world financial panic on a scale that would dwarf the Great Depression of the 1930s.”
http://www.theaustralian.news.com.au/common/story_page/0,5744,16416680%255E28737,00.html
Well when you look at it like that just goes to show the capitalist model is a very fragile economic system. One mistake or one decision and its like a domino effect and they all go kaboom, i think the key word in the article that makes the difference is that there is no alternative once there is an alternative than situation will be very interesting indeed.