I began writing about the fall of the dollar last September. It was top-secret in the mainstream media back then. None of them wanted to interfere in an election in which all the questions for debate had already been settled.

That stance ended as soon as Bush was declared the last-minute winner. On November 17 Robert Samuelson wrote in the Washington Post (page A27)—

George Bush hasn't much discussed what could be his biggest economic problem. It's not budget deficits or jobs. It's the possible crash of the dollar on foreign exchange markets. Even if Bush understood it, he would be hard-pressed to explain it to the public. Worse, there are no obvious ways to prevent it. Nor is it certain how big the threat is. Little wonder Bush hasn't said much. If John Kerry had won, the situation would have been the same. But a dollar crash, if it occurred, could trigger a terrifying global slump.

The "biggest economic problem" wasn't even mentioned in the presidential debates or on the campaign trail? Ain't democracy grand!

No one knows what will happen. The massive U.S. payments deficits could continue for years, with foreigners investing surplus dollars in American stocks and bonds. Gradual shifts in currency values might reduce the world's addiction to exporting to the United States.

Yes. Foreign investors might continue to do that if they didn't mind seeing the value of their investment decline for a very long time. Or...

Or something might cause a dollar crash tomorrow. In that case, massive intervention by government central banks (buying unwanted dollars) might avert a calamity. Or it might not. We're in uncharted waters. If we hit a shoal, it will be bad for everyone.

By December William Pesek, Jr. was writing for Bloomberg—

"Et tu, Indonesia?" It was with this question that Oxford University economist Brad Setser began a recent report on the U.S. dollar's mounting problems. It is appropriate for its global implications.
....

No, Indonesia isn't stabbing the U.S. in the back, regardless of what some in Washington may think as it considers trimming its holdings of U.S. Treasuries. Aslim Tadjuddin, deputy governor for monetary policy at Indonesia's central bank dropped that bombshell in a recent Bloomberg interview.

Indonesia's was merely the latest central bank to suggest that it may sell some U.S. Treasuries if the dollar continues to decline. Just days earlier, Russia's central bank rocked currency markets by suggesting it may swap from dollar-denominated assets to euro assets.

China also raised eyebrows late last month after China Business News reported Beijing had cut its U.S. debt holdings. The news shook markets because China's $174 billion of Treasuries makes it the second-biggest holder after Japan. While a Chinese central bank official said the report was "distorted," markets fear the worst.

Taiwan, the world's third-largest holder of foreign-exchange reserves, had to deny reports it planned to reduce U.S. debt holdings as the dollar slides. Such a move by the island, which has $57 billion of Treasuries, would surely boost U.S. debt yields.

And by the end of December Daniel Gross was writing in Slate—

The dollar's decline against the euro shows no sign of ending. Clearly, currency traders have made a long-term judgment about the relative value of the currencies of the Old and New Worlds. That sounds bad enough. But now there are signs that we're losing some of the most devoted fans of the greenback: drug dealers, Russian oligarchs, and black-market traffickers of all kinds.
....

Finally, in the past two years, euros have also become easier to carry, store, and hide than dollars. Generally, the largest denomination of U.S. currency readily available is the $100 bill. But in the past two years, the European Central Bank has started to print 200-euro and 500-euro bills. These larger bills thus allow for the concentration of wealth in smaller packages. At today's rates, a 500-euro note is worth $682.

So if you wanted to, say, hide cash by swallowing it temporarily, euros would the obvious (and more comfortable) way to go. And indeed, as Grant notes, in October a drug mule traveling from Spain to Colombia was found to have an unexpected form of contraband in his stomach: $197,000 in euro notes. The same month, Fidel Castro declared that the dollar, which is tolerated as a means for Cuban-Americans to support their relatives in Cuba, was officially currency non grata and that the euro was most welcome.

For most products, losing international drug cartels and corrupt Third World dictators as customers would seem to be a desirable outcome. But these guys represent part of our long-standing and faithful base. If you think pundits are fretting about the slumping dollar now, just imagine what might happen if we start to lose the arms dealers.

Damn! Even the drug cartels don't want dollars any more.

Not mentioned by any of these writers was the decision by China to boost euro-denominated bonds. ChinaBiz reported in October—

European pension funds and banks subscribed more than €4bn (US$ 5.05) for the 10-year tranche, China's largest euro-denominated issue, according to bankers close to the deal. European investors' interest for China's international bond issue could mean a shift away from US$ debt, towards Euro currency for Asian governments and companies, said the Financial Times on Friday.

.... Various European investors ranging from Finnish pension funds to Italian and Spanish asset managers showed interest for Beijing's decision to break with traditional reliance on dollar currency and raise most of the funds in euros. The US dollar tranche of the bond was limited to US$500m of five-year notes, compared with previous fundraisings of up to US$1bn.
....

.... Asian debt issuance have been for many years in dollar. But now according to bankers more than 40 per cent of demand for the euro portion of the Chinese issue, which will pay a low level of interest relative to similar bonds, came from investors that had never previously bought Asian debt.

Investors were waking up and smelling the euro.

Since I had already warned my readers in September, I decided to drop the topic in preference for the fresh calamities that the Bush administration provides so unstintingly. But a crawler on CNN yesterday piqued my interest—something to the effect that "Mercedes to delay introduction of 2005 cars because of weak dollar."

Wow! Here's what the AP's Melissa Eddy had to say—

DaimlerChrysler AG is delaying the U.S. launch of its Mercedes-Benz B-Class sport wagon over concerns that the weak dollar would eat too deeply into profits, the automaker said Monday.

The compact four-door hatchback was to have been brought out in North America this year, DaimlerChrysler spokesman Toni Melfi said. But the company has decided to bring the vehicle out in Canada and Mexico as planned but wait to introduce it to the United States.
....

Melfi declined to say when the launch would take place, but stressed that the exchange rate has to be "substantially better."

Picture that! Canadians and Mexicans will be sporting their new Mercedes while Americans skulk about in last year's models. As for any substantial improvement in the exchange rate, you'd best plan a little trip out of the country if you were thinking of buying this year's sport wagon.

DaimlerChrysler has also scrapped plans to launch their Smart ForMore in the U.S., which was to compete for some SUV marketshare. The NY Times-sponsored Jalopnik asks "End of year budget jitters or second thoughts about market viability?" Exchange rates could be a very big factor in market viability.

All of this brings us back to where we started, with Robert Samuelson—

Higher currencies make Europe's and Japan's exports less competitive. Their industries stagnate. The United States, Europe and Japan constitute about half the global economy. Their recessions would hurt the Asian, Latin American and African countries that export to them. Markets interconnect; weakness spreads. It's grim.

The Mercedes wagon, built in Germany, is the first high-profile item to catch my attention, but there may already have been others.

For so long Cuba has been derided for the vintage cars that survive on its streets. No currency for new ones, you see. And what will the U.S. look like in four years? Will attendees at Inauguration Day 2009 be arriving in used Mercedes, Porsches and Beamers?

Previous posts
Something you should know about your dollars (9/24/04)
More comment on the dollar (10/11/04)
Yet more news about the dollar (and the global economy) (10/21/04)
Dollar update (10/22/04)