The Dollar as Collateral Victim

Truthout has posted an essay from the French Contre Info that describes how the Federal Reserves' move to save Wall Street is producing inflation around the world. It warns that the dollar is losing its' place as a global reserve currency. Here's an excerpt:

The massive and repeated rate reductions Bernanke has chosen -- we expect another one tomorrow -- directly challenge the status of the American currency.

As his predecessor did at every slowdown of activity, the new Fed chairman tries to relaunch the credit machine, hence monetary creation, to prop up the economy and prices and to break the deflationary spiral.

Without much success. The gears in the transmission have jammed and the confidence of already-overextended households and companies is faltering.

But as he acts this way, he reinforces the already well-anchored sentiment that the dollar - weighted down by the United States' $9,000 billion debt that cannot be reimbursed - is overvalued, which amplifies the American currency's slide.

The inflows of foreign capital that have allowed deficits to grow and the currency to maintain its value for twenty years (the Clinton episode aside) are in the process of drying up. During the last three months of 2007, the influx of foreign investments went from $113 billion to $56 billion.

Just recently, US Treasury bonds have been evaluated as less reliable than Germany's.

This drop in the dollar Bernanke has accepted and precipitated to save Wall Street looks like a runaway train that will export the American crisis to the rest of the world, and do so at an exorbitant cost.

Since most raw materials markets, including most obviously oil, are denominated in dollars, the slide in the US currency mechanically entails a revaluation of raw materials' prices and provokes significant global inflation.

This phenomenon is further reinforced by the flight of capital abandoning dollar-denominated securities, the value of which is melting like snow in the sun, and seeking refuge in raw materials markets.