SPEAKING OUT:

A Dangerous Game of Global Poker

by Fred Cederholm

This high-stakes poker game can’t go on forever. Who will hold, who will fold, who will call, or who will up the ante? We can only hope and pray that not even one of them thinks, "Frankly my dear, I don't give a damn!" and cashes in their chips--because that could end the game for all of us.
I’ve been thinking about Davos, foreign holdings, currency valuations, Rhett Butler, and the dilemma of the US dollar. I wasn’t thinking about Texas Hold’em and the high roller whales of Las Vegas--because they pale in comparison to the high-stakes drama of the game now unfolding on a global scale.

You see, the World Economic Forum being held in Davos, Switzerland only scratched the surface in addressing what needs fixing regarding the twin deficits of the United States and their impact on the value of the US dollar. Regardless of the topic/presentation on the agenda, there was always the underlying issue of the future of the US buck.

While working for the FDIC/RTC on investigations, I learned that when you owe a million, you have a lender; but when you owe a billion, you have a partner. If you are Uncle $ugar and owe trillions, you have a Board of Directors who head the World’s Central Banks. Roughly two-thirds of all global currency holdings are denominated in the US dollar--for now!

A reserve currency is one that is held by other governments and institutions as part of their foreign exchange reserves. Add to those the US dollar denominated assets--stocks, bonds, corporate debentures, US Treasury securities, and US real estate--and it’s not that hard to be sitting on a TRILLION in dollar exposure. If your US dollar-denominated holdings are at that level, every 10% drop in the dollar’s value against the basket of world currencies means you have just lost another $100 BILLION of value. Four "players" fall into that category--the Chinese, the Japanese, the Arab/OPEC’s, and the Euro Zone Group--not necessarily in that order. There are others who have huge dollar exposure, but these are the really big boys!

When you owe a million, you have a lender; but when you owe a billion, you have a partner.

While our past policies have painted US/us into a corner financially/fiscally (and made us most vulnerable), the massive dollar holdings of the world have painted them into the same corner with US/us. Remember that scene from "Gone With The Wind" when Scarlett visits Rhett in jail to try to borrow the money to save Tara from tax foreclosure (and wearing recycled green window drapes to boot)? Well, we find Rhett in a poker game trying to save his own hide. His solution to avoid death is to lose and "owe" money big time to his captors.

The only way the Union Officers (think global financiers) can ultimately claim their balances due is not to hang Rhett (think Uncle $ugar)--because that will "screw" them in the process. In effect, the obligations have become the temporary salvation. The four noted "players" at the table with Uncle have massive dollar holdings. The solution to the debt/deficits dilemma would seem to be to devalue/dump the dollar. But...do they want to let further drops in the dollar give US/us any competitive advantage in world trade? Remember, this would be compounded by their holding losses, or--from our perspective--would make further purchases of US-based acquisitions even cheaper.

The problem is also that each of them depends on the US consumer to keep their own economic plates spinning on the poles. Because we are an essential market, every week they have been willing to pony up another ten to fifteen BILLION to underwrite our current (and evergreen) trade deficit--thus keeping the game going! The question is... for how much longer?

Roughly two-thirds of all global currency holdings are denominated in the US dollar--for now!

The Asians have the trump cards of an endless cheap labor force and a populace who actually saves. The Arab/OPECs have a seemingly bottomless source of chips--courtesy of their oil and gas reserves. The Euro Zone Group is the most vulnerable of the four players because they (all) don’t have a "readily-flowing must-have energy product line." Besides, their labor costs relative to China, India, and Indo-China are as bad as (if not worse than) those of US/us.

This is poker for the highest of stakes. The game, as we’ve watched it unfold for the past two and a half decades, can’t go on forever. Who will hold, who will fold, who will call, or who will up the ante? We can only hope and pray that not even one of them thinks, Frankly my dear, I don't give a damn!" and cashes in their chips--because that could end the game for all of us.

’m Fred Cederholm and I’ve been thinking. You should be thinking, too.


REFERENCES: Davos Conference: Copyright 2005 Fred Cederholm. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer who contributes the column "TH*NK*NG" to The Weekly Observer in Creston, (Ogle County) Illinois. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at asklet@rochelle.net.


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This story was published on February 1, 2005.