by V R Rutledge

Created on: September 27, 2008   Last Updated: October 08, 2008

Just what is the state of the US economy today? Can we believe Alan Greenspan and George Shultz when they predict a "serious economic contraction"? Senator Harry Reid obviously believes them, but why? Citigroup Inc. (C) has warned that it's profits will take a 60% hit for the third quarter, due to "dislocations in the mortgage-backed securities and credit markets," and "deterioration in the consumer credit environment." Perhaps that helps to explain the worst bear market in years. I suppose Wachovia (WB) is feeling the pinch as well, with rumored talks of a merger. Christopher Cox, (SEC chief) is quoted as saying, "The Commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets," This seems to indicate that there is a threat to investors and capital markets. It is a fact that Global Currency Reserves of the US Dollar have declined by at least seven per cent in the last ten years, something that cannot be good news for an economy in crisis. I suppose it is only coincidental that the Asian Financial Crisis occurred about ten years ago. Currency Manipulation has been cited as the root cause for that crisis, but without any certainty. One may recall that South America had a similar crisis, ten years before Asia, related to extensive borrowing and international recession.

The United States reserve currency status helps offset the effects of trade deficits, but this is not a permanent situation. Eventually the bill comes due, and if private investors begin a shift toward holdings that are not in US dollars, there could be a panic which might then institute a virtual 'run' on the $US. Should dollar-denominated assets lose value on the international market, the US economy would be seriously impacted. Alan Greenspan has said that the Euro can replace the USD as the primary reserve currency. While the Group of Eight can hold off collapse of the US economy, there is only so much that can be done in the face of continuing trade deficits, lack of manufacturing base, dependence on foreign oil, and the various other drains on the value of the dollar. Remember that, in a list of countries holding US debt, Japan and China hold a trillion dollars collectively, more than the next ten combined. Since these two economies represent the heart of ASEAN wealth, and since there is so much dependency on the $US in Europe and Africa, even a small variation in the strength of that currency could lead to global

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