Americans will come out poorer from this crisis

The US will have to compete with other countries to attract investments

Atim Kabra

Every crisis has to end and eventually all markets bottom out rather than go to zero. So shall it be this time, too.

Whether there will be heady days of growth soon on the horizon, as early as late second half of 2009, according to some, is a matter of debate. Markets discount the future and a clear prognosis is not forthcoming at this juncture on the expected timeframe for revival of growth.

However, a few things are much clearer than the rest. In the end, determined governments almost always get their way. Assuming that the US government is able to print its way out of the crisis, eventually the excess supply of dollars will lead to severe inflationary pressures. Interest rates will have to rise to counter inflation and that will add to the debt-servicing burden of the government tremendously. This burden, short of a miracle, can only be met through printing more money, devaluing the currency further.

Once the inevitability of this starts becoming apparent, the holders of US government debt will not sit idle and watch the value of their investments decrease significantly. It should be a matter of concern, when the head of the government of China, the biggest holders of US debt, asks for a guarantee to protect his investment value. It should be a matter of further concern, when China proposes an alternate reserve currency and finds many backers for the idea. I think, to dismiss all this, as mere posturing ahead of the G 20 meet, is a fallacious argument.

For America though, there is no option but to dismiss the idea publicly. To endorse the idea of a new reserve currency implies an untimely and immediate demise of the dollar. I am quite sure that back channels have been activated to assuage the Chinese concerns. The Chinese are focusing on invigorating domestic demand and stimulus money is being spent in the interiors of the country rather than in the coastal areas. Once there is a visible revival in domestic consumption, the Chinese may rush to check out of US dollars.

One need not be a genius to bet that incrementally very little is being invested in US treasury securities. Domestic demand revival would clearly break the cycle necessitating the Chinese to stay invested in the US dollar lest a falling dollar completely demolish whatever is left of the Chinese exports to the USA.

Everyone I knows is searching for an alternate currency to park their money in if they have to move out of the US dollar. However, in a world, where we have probably seen only the first part of the crisis play out, where there is still money sitting on the sidelines waiting to call a bottom and rush back in, where most of the countries are busy hiding their troubles and their troubled banks behind opaqueness (read suspension of mark to market rules), it is the US dollar which benefits in the short term due to the openness of its system and the character of the nation where all major issues are discussed and debated openly. Further, the flexibility in the system to massively cut jobs in one swoop (650,000 + jobs lost in March alone) and reduce other fixed costs, give American companies a fighting chance to survive the crisis intact.