There were two stories this month that will have world-shaping implications. The first was in a Paris hospital and a compound in Ramallah. The other, unfolding in the world's foreign exchange dealing rooms, hardly made it beyond the business pages, but deserves to be taken just as seriously. We witnessed the storm warnings of what promises to be a financial crisis of epic proportions, threatening both the US and the EU.
Europe and Asia have both been on the receiving end of massive foreign currency speculation for the past 20 years and the countries concerned have been left badly scarred. Italy, France and the UK have suffered currency crises that have overshadowed their politics for years. In Asia, the experiences of Indonesia and South Korea tell a similar story.
The one country to have blithely sailed on through all this turbulence has been the US, but that is what is about to change. The political consequences for US President George W. Bush promise to be every bit as difficult as they have been for other governments. The dollar has been insulated because it is the linchpin of the international financial system. The US possesses the currency that is the everyday unit of account in international trade and finance; even al-Qaeda uses it to finance its terror network.
The US has used this happy fact to go on an international rake's progress, spending regularly more abroad every year than it earns by a massive US$500 billion. Its cumulative international debts stand at some US$3 trillion. The rest of the world accepts the dollars because it needs and wants to; until the euro, there was no other choice.
So the endless supply of dollars has gone on, springing as if like a mile-high geyser from a burst financial water-main and building up a growing lake of currency, mopped by the world's central banks, principally those in Asia, with Japan and China leading the pack.
The big question in international finance is whether this process can carry on indefinitely, because there are different rules for the US and the dollar, or whether the dollar will fall like every other currency whose economy takes on debts that ultimately it cannot service.
Earlier this month, the markets suggested the answer -- the dollar is no different. It touched record lows against the euro in what the president of the European Central Bank called a brutal fall.
For more than a decade, the world economy has rested on a Faustian pact: the rest of the world will soak up any amount of dollars the US wants to provide as it imports more than it exports, builds up its network of military bases and fights its wars and invests in factories and offices worldwide to supply the US market with cheaply made goods and services. More than half of the US' imports come from overseas affiliates of US companies.
The US lives beyond its means, but the rest of the world has the opportunity to ship goods into the globe's greatest market. China's growth has been predicated on this capacity; it, in turn, has sucked in imports from Japan and Europe and so the world economy has motored on.
Bush's re-election, though, has changed the fine calculus. He declares he has a mandate to be radical and the markets are pricing the consequences. He will cut more taxes and be assertive abroad, spending billions in Iraq and elsewhere; the geyser of dollars will gush ever more powerfully.
There is one inexorable economic truth; if there is too much supply and too little demand, the price falls, and so it is with currencies. Bush doesn't really care if the dollar falls and other currencies rise; like other US presidents, he sees it as the rest of the world's problem, just as in the past, when the dollar has fallen.
Indeed, he needs the dollar to drop to stimulate the growth of US exports and stem the inflow of imports. If the US can rig the price of the dollar sufficiently low, it becomes as effective a deterrent as protectionist tariffs to importing into the US. What is different now is that because there are so many dollars and the US is so indebted, the devaluation process will become uncontrollable and overshoot wildly, as it has for other currencies.
In that case, before it feels any benefits, the US will be dragged through the financial mill of rising interest rates, falling stock markets and mugged borrowers, with all the associated recessionary effects on its economy.
The world in general, and Europe in particular, doesn't want this. A falling dollar means a rising euro, giving a further knock to the European economy. The distress noises from Europe have already begun to mount.
Italian Prime Minister Silvio Berlusconi has called for currency intervention to try to drive the euro down and the dollar up, even though intervention unsupported by big changes in economic policy is a proven failure.
Economists of every persuasion predict up to a 40 percent fall in the dollar, which means a 40 percent rise in the euro.
Nobody can say when the fall will come or whether it will turn into a crash, but when even US Federal Reserve Chairman Alan Greenspan says there is a 75 percent chance of a dollar crisis in the next five years, be sure trouble lies ahead. What will be required is an international response.
The Europeans, through the IMF, will need to offer Bush stand-by credits running into hundreds of billions of euros to support the dollar and Bush himself will have to reverse his tax cuts and cut back spending at home and abroad. He will be faced with an impossible choice: eat humble pie and underpin the dollar or let the dollar go and accept the economic consequences.
But Europe, too, faces an impossible choice; further rises in the euro mean stagnation and even recession. Pressures for member states to break the euro's fragile rules and, at the limit, even give up their membership, will become intense.
This is the drama set to unfold. The markets may yet steady; this round of storm warnings could pass. But if the underlying economic realities go unaddressed, then the risk of crisis will deepen. We need politicians in mainland Europe and the US who understand what is happening and central bankers prepared to act. We neither have them nor any shared philosophy and analysis that could underpin their action.
The UK's Chancellor of the Exchequer Gordon Brown, an exception to the general rule, has only limited influence outside the euro zone. US Senator John Kerry's election might have reduced the risk, but he would have faced similar choices.
The Democrats may come to agree, as do Labour about 1992, that it was an election to lose. But picking up the pieces may take a very long time.
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