The Demise of the Dollar?

September 21, 2007
Aaman Lamba

The United States Dollar has fallen to its lowest levels in fifteen years against a basket of six currencies. Things are so bleak that the Indian rupee is beginning to look like a viable reserve currency, a 'hard' currency. As a matter of fact, that's not a bad idea, but more on that topic later.

With the world's central bankers, including former Federal Reserve chairmen, trash-talking the US Dollar, it seems as if its days are numbered. With special friends of the United States like the Saudis indicating they might unpeg their currency from the dollar, it seems almost a done deal.

Wait, there's more. Kuwait became the first emirate to actually unlink it's currency from the USD in June, and Venezuela, the largest oil exporter in the Western Hemisphere said it would do the same yesterday for its investment accounts. Iran has abandoned the petrodollar entirely.The US Dollar flirted with Canadian loonie parity, and the euro, that strange animal, is at $1.40. The Indian rupee is close to the Rs 40/$ level, having broken through the psychological mark yesterday.

Were the US Dollar to lose its status as the 'world's reserve currency', it would be the largest financial shift since the end of World War II, and the subsequent agreements that established this position. The strength of the dollar was backed both by the relative size of the United States economy and by a collective willingness of export-oriented nations to fund American prosperity. It was also in effect, an 'oil-backed' currency, with oil revenues mostly counted in dollars the world over, even by putative enemies such as Iran. The US Government issued the greenback on the basis of fiat and extended its debt. US National debt today stands at over $9 trillion, approximately 6.5% of US GDP. It's near its federally mandated limit. 44% of the public debt is held by foreign entities, including central banks, with Japan and China at the top of the list.

Were the US government to pay down the national debt, it would contract the money supply, leading to US deflation. On the international front, however,which is the topic of this article, the decline of the US Dollar leads to a drop in value of foreign exchange reserves in USD terms, and impacts exports. While the strong dollar paid for US prosperity, and concomitantly, the prosperity of exporting nations, a falling dollar could lead to higher inflation both in the US and globally.

Alternatives to the US Dollar might seem obvious, such as the euro, but the strength of the euro relative to the dollar masks weakness in a number of European economies, ranging from Italy to Germany. Further, there have been significant property bubbles in most economies, from the United Kingdom to China and India.  Iran mandated that its oil exports to Japan be paid in yen earlier this year, and the yen might appear a promising option, but the multi-year slump in the Japanese economy has left it fragile and prone to export-related shocks. The Nikkei is a volatile index, by any measure. China's size and growth seem to be able to accommodate global capital flows, but the Dragon is itself trying to push away foreign capital inflows so at not stoke already high inflation.

Inflation concerns are global. Beijing imposed a price freeze on all government-controlled prices recently in an attempt to stem anger over inflation, Saudi advisers said  ``It's not necessary that there will be a de-pegging of the riyal from the U.S. dollar, not in the near future,...``The issue is that we have an abundance of liquidity in the economy.'' The latest wave has come from the $25 billion+ purchases of stakes in the NASDAQ and LSE by various emirates, including Dubai and Abu Dhabi.

USD-INR historical chart

India has not held back in its quest for financial domination, strange as that term might feel to those of us weaned on economics of scarcity and limitations. Apart from the much-publicized buyouts of a few foreign firms by Indian corporations, India has indicated a willingness to flex its naval muscle in pursuit of oil diplomacy. Venezuela has been a key business target, and India has also courted Cuba. China has not stood still, signing deals such as the $10 billion agreement with Caracas and numerous Africa-centric deals - many of which overlap with ONGC interests. India is in talks with Israel to induct defence systems such as the Barak missile, and the eponymously-named Israeli defence minister, Ehud Barak has planned a visit to India in October to discuss the same.


All of the following is speculative and open to dispute, yet one can look at various ways the current global economic crisis might play out.

To begin with, various salves and quickfixes might be applied by central bankers to defer the slide, and induce optimism in the global financial markets, perhaps by boosting the largely irrelevant stock markets through sweet-talking the banks. Liquidity concerns might ease, given the massive infusions of cash by the central banks, but this could lead to a renewed threat of hyper-inflation. If the Federal Reserve raises interest rates to attract foreign buyers, the US economy will almost certainly enter into a deep recession. Gold is already at historically high levels, and any additional economic shock might make it the default standard. The United States and other countries might choose to announce a return to the gold standard in this case.

The dollar's slide seems irreversible, and beyond a not-too-far point, numerous other currencies emerge as better-yielding zones to park oil and other global revenues. While this is not the place to debunk the already weak myth of a global clash of civilizations, the long term emergence of alternative economic zones is likely. One could be the Euro/Amero area, initially separated, but merging into a larger Western macro-economic zone. Another might evolve out of the Shanghai Cooperative Organization, with the rouble and yuan embracing each other, after a similar phase of antagonism. A third, as-yet unknown currency bloc could emerge out of the Islamic oil crescent, with the facade of religion and blending with the SCO to be at least as strong as the Euro/Amero zone.

That leaves the Indian sub-continent. A global economic shock might make the emergence of a subcontinental Confederacy almost necessary, and the Indian rupee itself becomes a tempting intermediate hard currency at levels of Rs 25/30 to the dollar, IMHO. Already, a global triangulated USD/INR/Yen carry trade has evolved in recent times. India might choose to continue its pretense of a non-aligned zone, but it must choose soon enough, and the options are to identify itself either regionally or with the Anglophone world, or perhaps, follow an imperialistic path.

Oil diplomacy can easily enough be replaced by gunboat diplomacy, and were the looming war clouds to materialize, it could accelerate events, with each economic zone being forced to take sides in a fight few really want, and leading to factional divisions even between friends.

Aaman Lamba is the Publisher of, a Blogcritics network site. He also blogs, more infrequently nowadays, at Audit Trails Of Self
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Ruvy in Jerusalem
September 21, 2007
04:52 AM


Great article.

While many of the writers at Blogcritics would dismiss this kind of thinking, one out of every six people on the planet live in the Union of India. Add Pakistan, Bangladesh, Sri Lanka and Burma, the former constituents of the Empire of India, and you have quite a large, if underdeveloped economy, one that with sufficient micro-financing and reverse engineering, and alliances with other parts of the world (like Israel, with its advanced research facilities) could heft a significant weight in a world where American economic domination is a thing of the past.

All of us need to look beyond the United States. In Israel, in spite of artificial stimuli, the shekel has dropped down to NIS 4.10/$1.00. A lot of put orders that will possibly drive the market down come due today, the eve of Yom Kippur, the Day of Judgment in the Religion of Israel. The New York market does not open until about 15:00 our time in Israel, and about 17:30 your time....

I'll be off the computer from about 14:00 today until sundown, Saturday night, when Yom Kippur and the Sabbath come to a close.

Motza'éi Shabbat should bring us interesting news.

It appears that Judgment might indeed be coming due.

September 21, 2007
07:25 AM


The United States and other countries might choose to announce a return to the gold standard in this case.

Brettonwoods Part II: The Giants wake UP?

not likely. the dynamics have changed...former tigers have become paper tigers...and .....

wished i had listened to a friend SR who has been predicting this for about six years now through his columns and writings

remember one of the sins of saddam was to have the audacity to demand payment in euros for his oil for food?

Christopher Rose
September 21, 2007
07:53 AM

Very interesting food for thought here, Aaman.

As a "glass half full" kind of person, I tend towards believing that we won't see a clash of civilizations but rather the emergence of a larger cast of actors on the world stage, as opposed to the monologues or occasional dialogues we have had up to now.

That's not to say that there won't be the occasional ruckus as the players, both established stars and emerging talents, are forced to adjust to and accept the, er, new world order.

In this context, the changing dollar valuation relative to other currencies is an expected part of the process as our global human family adapts and grows.

It goes without saying that, whilst not ignoring the possible pitfalls and potential perils, I reject absolutely the more apocalyptic or pessimistic views of some commentators.

We do indeed live in interesting times!

September 21, 2007
08:09 AM

Awesome article, Aaman. BTW, for any other well-educated Desis out there, I would *strongly* advise learning another European language besides English. German especially, also French and Dutch may be highest-yield, though I've also been meeting some Desis enjoying success in Mediterranean Eurozone countries and speaking Spanish, Portuguese or Italian.

The USA and Britain are both in deep trouble financially. I was in the UK recently, and they're making runs on their banks now just like in the Great Depression-- in fact, Britain now has the worst consumer debt problem of any country in the world, almost $3 trillion in consumer debt which is 5 times as bad as the already debt-overwhelmed USA. Australia, NZ and Canada are only slightly better and, since they're all heavily leveraged in the US real estate market (and many also knee-deep in Iraq, Afghanistan or both), they're in deep trouble too.

My work puts me very close to scores of intelligent people in financial services and tech, and to an extent I've never seen before, Americans and Brits are both learning Eurozone languages like German and French, and they're leaving to emigrate to countries like Germany, France and Belgium permanently. Besides drawing a very nice salary in Euros for more moderate hours, they also get nice schools and cities with better infrastructure. That's probably where the future of Western economies lies.

September 21, 2007
08:13 AM

BTW, I wouldn't even be astonished if South America surprises us soon, despite their own structural problems they're not stuck in a bankrupting global military stance with thousands of costly nuclear arms like the USA.

For that matter, I know at least two dozen Desis who've emigrated to S American countries like Chile, Argentina, Uruguay, Paraguay, Costa Rica, Venezuela and Brazil. It's similar to the way so many Desis work and live in the Middle East, though in many ways South America is more appealing. Almost all of the Desis there are very successful , even if I have to brush up on my Portuguese or Spanish to talk to them. ;)

corporate serf
September 21, 2007
09:41 AM

Aaman, I think as a practical matter this is a complete non-issue. Most of the talk in this space has been political, rather than financial. The fact is, if you do your trades in USD and are afraid of either USD depreciating or, more generally, of volatility in USD rates, you can easily hedge that risk using an appropriate portfolio of futures and options of FX rates. This is what most companies (including Indian) do currently and I don't see why this can't work at a bigger scale if USD suffers a secular decline.

Even if it came to crunch, it might not be too difficult to move to a hedged trade system; in which event any financial dislocation would be fairly temporary. US treasury bonds will lose value, but that was a risk that the bond buyers took. (After all what is riskless for an us investor is not so for non-us investors)

Given the importance of the US as a market as well as manufacturer in many industries, we will probably see changes in trade pattern. Already, in many manufactured goods, US exports are picking up as the USD depreciates. But the question of in which currency these trades settle should be a non-sequitor.

Lets take a hypothetical. If I am buying a million dollars worth of goods, say payable in 60 days (which is about the right time frame); and I believe the USD will depreciate further, I will, of course, be willing to pay in USD. However, I suspect, for most companies the extra foreign exchange risk is something they will willingly forgo. Also, to a certani extent, as long as the global foreign exchange market works and is liquid enough, companies will be able to hedge their exposures well enough that the depreciation of USD will not cause a huge dislocation. (Now, if only the Indian govt will really free the Resident Indians to trade in these markets). The fact is, if your financial markets are liquid enough and free enough, you can work around most dislocations.

September 21, 2007
09:50 AM


how does this 'hedging' work if there is a melt down? a domino effect created by rush to exit dollar hedging? would it not have ripple effect on other currencies too?

(caveat: i want to learn and am not knowledgeable.)

also is there a 'independent' or 'commercial' unit of currency to trade in like the IMF 'units'? and if yes, can they act as a buffer?

corporate serf
September 21, 2007
10:08 AM

the real caveat is the one you bring up. So the fx market needs to stay liquid. Much like the credit/debt market liquidity is affecting the financial system today. But the fact is, currently, the fx market is even more liquid than the swap market and the treasury bond market. This is not to say problems can't develop. If, for example, people perceive that the market makers themselves have currency exposures which expose them to default risk; this will certainly be a major problem. I am guessing that these issues will be temporary as there are other strong central banks (other than the US FED) that will probably move to ease the situation.

In the contrary case, yes, this will have a fairly large ripple effect on the whole system. My guess is that the chances of that happening is smaller than chances of large dislocations in a single currency (or single commodity, think gold standard) systems.

I am unfamiliar with the IMF units; but I suspect one can create "commercial units" of currency. Say, create an index : USD vs currencies sterling pound, EUR, JPY; anything else you can think of and, say weigh the respective rates with the corresponding national GDP's. This will be a measure of how far USD is up or down with respect to the rest of the world. Do this for other currencies as well. Shouldn't this work?

September 21, 2007
12:02 PM

Great insight. With Economies of BRIC nations going strong, euro setting new records every day and currencies of the nations with great natural resources like Canada in the upward trajectory against US dollar, this is the beginning of a New world order. Unless USA controls its fiscal deficit, I think the future action is these countries rather than in USA.

A. S. Mathew
September 21, 2007
07:46 PM

After the 2nd world war, U.S. Dollar was the
Almighty currency of the world. History will repeat itself like the pendulum of a clock.
Most of the nations preferred Dollar reserve rather than gold reserve.

I do rember $ 1.00= Indian Rs. 4.50, then 7.50,
then 12.50, then 21, then 31, then 45. Indian
Rupee and currencies of the third world countries were getting weaker day by day.

Now, it is a great news that the Indian Re is
getting stronger against the U.S. Dollar.

Indian exporters, especially textiles will suffer
greatly. Indian importers can have a great boom
in their business. Ordinary tourists from the
U.S. will visit other countries where Dollar can
stretch more, so Indian tourism will suffer greatly.

If the Government of India won't take some drastic mesaures, since the U.S. is a big trading
partner, export to the U.S. will suffer greatly.
American buyers will find identical goods in some other parts of the world at a cheaper price.

September 22, 2007
08:51 AM

Interesting points.
Although, I differ on the Indian rupee raising to 25/30 rupee level in the short to mid term. As long as our exports are lower-end goods and services which do not have a high margin, it would be rather difficult to let the rupee rise.
Even with its inherent weaknesses, the euro seems a stronger currency to switch to - surely, if the global economy can take the us economy's weaknesses, it can take up the same on the EU front?
On learning other languages, I'd say its time to start learning our own languages better - the Indian vernacular - India's domestic market is going to grow rather big - and there is going to be a bigger demand for both Vernacular software, support - and crucially services. English or even Hindi just wont do.

And, on the article -

Great point - focusing on the Dollar-domination of the global economy changing.
Also, good analysis on the alternative currency front.

Brickbat -
Rather confused article, in spaces. Hops, skips and jumps topics - which seemingly are unrelated. I, didnt get what naval diplomacy had to do with dollar-economy. Sure oil-economy and dollar economy go hand in hand, but naval diplomacy?!

September 22, 2007
10:58 AM

Things are going to move again, After US, next financial crisis will happen in Indian Econome, FII, fund flow will countinue like, RBI also fall in a big crisis. RBI must take sudden steps to prevent Dollor flow.

September 22, 2007
11:03 AM

I cant follow what is happening here, if thing will go like this 4th Std, student like me also fall in crises

September 22, 2007
12:00 PM

BangaloreGuy, there were many issues I left deliberately unexplored in my article - some are for the initiated, others need more space than this article allows. Perhaps in future pieces.

September 22, 2007
02:38 PM

Nonsense, a gold standard would provide unfair advantage to those countries which have more abundant natural supplies of gold in the ground.

A nation's worth shouldn't automatically be judged based on what they have in the ground. A basketcase economy like Saudi Arabia's is an example of this, because they're making their living based pumping the oil out, regardless of any claims by them of having a broader economic base.

So the gold standard wouldn't be all it's cracked up to be. The US dollar has been a de facto standard because of the security and stability of the US economy. Unless their is a suitable replacement for this indispensable nation and its indispensable economy, the world is in for a period of serious economic instability and flux, and no gold standard or any other such gimmick will be able to fill that void.

September 22, 2007
02:48 PM
Ruvy in Jerusalem
September 23, 2007
04:01 AM


We spent a long time after the Yom Kippur fast talking with friends down the road. It was a great meal of salmon, bagel, cream cheese (I was a naughty boy - 30% fat!) and coffee. It wasn't until midnight that we got back and I got the chance to check how the NYSE did on Friday. Apparently the put orders shorting it did not have any effect, but the dollar is still low. The shekel, that joke of a currency in Israel, is at 4.06/$1.00 - or 2439 cents a shekel.

Aditi Nadkarni
September 23, 2007
09:54 AM

Aaman, I have to confess: if I see anything remotely resembling a piece from the Economic Times I am immediately reminded of how little I know about the world's financial bearings and don't read the article. Thats why I wanted to leave you a comment coz I actually followed your article, it engaged me...and whats more, I liked it a lot!! :) I especially liked the clever incorporation of a few colloquial gems into such a formal, analytical piece:) My personal favorites were:

"The US Dollar flirted with Canadian loonie parity, and the euro, that strange animal, is at $1.40. The Indian rupee is close to the Rs 40/$ level, having broken through the psychological mark yesterday"

The last paragraph summed things up so well. Although I had never really thought of world economics and war diplomany in the same frame of mind, that last paragraph brought attention to a very interesting by-product of shifting economies across the globe.

September 23, 2007
10:25 AM

Thanks, Aditi, the Canadian dollar IS called the loonie, and oil diplomacy, as Greenspan reminded us most recently, has a sharp edge.

Aditi Nadkarni
September 23, 2007
02:42 PM

Aaman, on one hand I had NO idea that the Canadian dollar was called loonie :) but I actually liked "that strange animal" tag for the euro and the reference to a "psychological mark" when dealing with high-street terminology, way better :D Creative I thought.

I think what makes your article interesting is that it is a hybrid between a post about world economy and and a by-stander like inspection of the bigger picture. Thank heavens, for if it were solely the former I would've had numbers and jargon flying over my head :)

September 23, 2007
06:42 PM

Loonie is just the nickname for the coin, which has the symbol of a loon on it.

Anyway, the comparable rise of Canada's dollar is a reflection of the worth of its natural resources. Oil-exporting provinces like Alberta are doing exceptionally well, but the export-driven manufacturing engine of Ontario will take a hit, due to the adverse exchange rate.

Ruvy in Jerusalem
September 24, 2007
11:55 AM

The loonie is a the Canadian dollar token; the twonie (pronounced "toonie") is the Canadian two dollar token. A quick look at the above terms will show how cartoonish the world has become, and how entertainment (in this case my [very] distant relatives, the Warners), influences North American culture.

That, th-th-th-that's that's all folks!!

September 24, 2007
01:29 PM

I recently re-read Paul Erdman's 1970s book The Billion Dollar Killing on a plan to deliberately devalue the US Dollar, and global repercussions - eerily prescient. Perhaps will do a review.

Ruvy in Jerusalem
September 24, 2007
03:39 PM


Also check out Erdman's The Crash of 2009 1979....

October 1, 2007
08:49 AM

For more relevant analysis, check out The End of Dollar Hegemony

Temple Stark (CCE)
October 1, 2007
12:53 PM

I hadn't seen this piece, so want to acknowledge it's worth as well. It's am interesting phenomenon, on par with trying to push understanding to the !@#% world about running hybrid or electric cars. Except doing so much more diplomatically than that.


Ruvy in Jerusalem
October 2, 2007
12:19 PM

For what it is worth, the dollar continues to slide against the "New" Israeli Shekel. It is now where it was almost eight years ago at NIS 3.98/$1.00. Americans living on their American Social Security pensions are getting royally screwed...

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