Reply #2: First the US decline is relative

[happyslug]

Remember the US nearest Competitors (Europe) made a serious effort to kill each other off between 1914 and 1945. Except for the US NONE of the combatants of WWI recovered from WWI before the Great Depression started. Come WWII the US actually GAINS in economic power while Europe again goes down in flames. By 1945 HALF of the GNP of the World is made in the US. THE US IS THAT DOMINATE. The Marshall plan is not only an effort to defeat the Soviet Union, but an effort to relieve the huge US trade SURPLUS of the late 1940s that offered to send Europe back even further (and into the Soviet Camp so the two were related).

Come the 1960s Europe had finally caught up with the US vis a vis what both had been in 1914 (Through in 1914 Europe was bigger than the US and in the 1960s the US was Bigger but dependence Europe had on the US 1945-1960 was over). Into this new reality the US went into Vietnam. That war used up more and more US Resources. Finally to avoid an economic collapse Nixon in 1971 floated the Dollar rather than cut back spending on Vietnam and the Cold War. In 1970 the US started to import more oil than it exported, this change along with the growth of Europe and Japan caused the US to go from a net exported to a net importer. This was another factor in floating the Dollar.

Finally in 1973 the Arab embargo oil, and unlike the Arab Oil Embargo of 1956 and 1967 (which had no effect for the US was a net Exported of oil prior to 1970) the 1973 embargo had a heavy effect on the US Economy already weaken by excessive inflation do to the cost of the Vietnam War. The Democratic Congress stepped in and tried to straighten out the Mess, told the Pentagon to plan for only 1 1/2 war instead of he pre-1970 planning for 2 1/2 wars, pulled out of Vietnam cutting out losses there, and tried to avoid domestic problem by trying to solve the high unemployment of the time period while controlling inflation. Congress did a good job of balancing these two and was assisted by Carter when he became President in 1976. The problem was the costs to balance the Inflation caused by the increase in oil prices, the cost of rep-financing the Vietnam debt (and to continue to fight the Cold war And reduce unemployment) was 21 % inflation. With inflation as a threat Reagan defeated Carter and also won a working "Majority: in Congress (The House was still Democratic but enough Democrats would vote for Reagan's policies to get them passed). Do to the Baby-Boomers finally all having jobs and you had the lowest number of new workers coming into the work force since the 1950s, Reagan was able to reduce inflation by causing acceptable unemployment (again the unemployment was acceptable for you had the smallest number of new employees entering the market since the 1950s).

Reagan claimed he defeated inflation, but it was a steady 5-6% during both his and Bush's Sr's Presidency. Inflation was only controlled with the Collapses of the Soviet Union in 1991 which permitted the US to cut Defense Spending AND go back to a 2 1/2 war posture. Finally with Clinton you had a boom in the economy with low inflation and low unemployment (Through to be honest the Inflation was kept in check by keeping wages low and that was done be permitting in more and more immigrants that kept demands for wages increases low, even in the 1990s economist where asking where was the wage inflation? The answer was in off-shoring, and immigration both undercut demands for wage increases.).

While Clinton almost balanced the Budget (It was balanced if you include Social Security, it was not if you exclude Social Security), Clinton also permitted the bubble of the net boom (and in this he was assisted by the GOP Congress and the Federal Reserve, both deserve more blame than Bill). While the Budget had been balanced, no excess income came to the Government so that the Government could start to pay off the debt built up since Kennedy's administration (Since 1961 only LBJ in 1969 and Bill Clinton in 1999 balanced the Budget). That debt is still sitting there.

When Bush jr became President the Internet bubble bust, and he demanded his tax cuts. Bush jr thus returned us to the days of his father with a year. The debt ballooned. The US under Clinton had had terrible trade balances, but at least you had the stock market for those foreign countries to invest in. With Bush in and his policies clear, more and more foreign investors (and American Investors) abandoned the American economy. Foreign Central banks to keep their own people employed, started to invest their money into the US to keep their currency stable compared to the US Dollar. This is possible for the US is NO longer 50% of the world economy, thus it is possible for other countries to subsidize the US Dollar. Why are such countries doing this subsidies? If the US dollar goes down Japan and China (and the other Asia Tigers) could export less to the US. If these countries export less, they will have massive layoffs, which will lead to social Unrest. Given their fear of Social Unrest these Countries prefer to risk bankrupting themselves rather than face revolution.

Thus the great economic miracle you have today. The Asia Tigers (including Chain, Japan and Korea) are buying US Treasury Bonds so to keep their own currency constant with the US Dollar. These same countries are exporting items to the US and receiving those Dollars Back. This money is than taken by the Central Bank (Through internal borrowing or taxes) and is used to buy more US t-bonds. This can only go on so long. Sooner or later people will fear the lost of their "savings" (now in US T-bonds) more than the lost of trade. This may come with the refusal of local banks from taking US T-bonds from their Central Bank, demanding their own currency instead, it may come with an inability to raise enough tax money to buy the US t-bonds, but sooner or later it will happen. Once it happens you will see one country just lift all controls on its own currency while dumping US T-bonds on the World Market. I expect this to be one of the smaller countries first, Malaysia is my bet. This will be followed by Indonesia, Thailand, and the rest of the second tier of the Eastern Pacific. The Big four (Japan, China, Taiwan and Korea) will be at the end, with Korea and Taiwan going before China and Japan (This is provided the move is forced on these countries by the Market instead of one of the Countries being pro-active and dumping their T-bonds first).

I lean to the market forcing the issue for the internal problems of these nations are to frightening for their leadership to risk internal unrest just to minimize a lost in US t-bonds investment.

Thus the problem is NOT how it will happen but when and what will cause it? A riot in the US may panic investors in Malaysia, a oil shortage may cause the needed panic. I can not foresee what will cause the panic but once it set in the Market forces released by that Panic will force ALL of the Asian Tigers to give up their T-Bills. The Dollar will drop like a rock.

Now what about Europe? Europe is still trying to get the Euro to work. Germany and France are subsidizing the rest of the Euro zone to make the currency work. Europe's present weak growth is tied in with this commitment to the Euro. Germany and France could make their economy boom if their give up their commitment to keep the Euro Stable throughout Europe. That being the case why are Germany and France still committed to the Euro? The reason is if the Euro replace the Dollar as the world's reserve Currency, Germany and France as the nations who control the Euro will wake all the benefits of their currency being the one used in international Trade. Presently the US has this advantage, but is losing that function by scaring investors with the US huge trade and spending Deficits. The key is what will care investors from the Dollar to the Euro? It will be the same thing that will cause one of the Asian Tigers to give up holding their own currency constant to the US Dollar. Thus do not look for Europe for what will happen to the Dollar look to Asia. Europe will benefit the most but the Panic that caused the fall of the US Dollar will first affect the Asian Tigers.

Please note this prediction is based on the Belief that Bush will NOT ask Congress to pull out of Iraq, cut Military spending by 90% and thus balancing the US Budget. If Bush did that he would save the Dollar as the world Reserve Currency, but he is to reckless and his whole administration do not understand cause and effect, only the good old boys network they having been a member of since before Collage.