By: Prof. Shlomo Maital

Rockabye, dollar, in the treetop
When the bough breaks, the cradle will rock
When the bough breaks, the dollar will fall...
And down will fall dollar, global economy and all...

Once upon a time, there was a country called Argentina. It had been one of the world's wealthiest countries in the 19th century, because of its plentiful exports of beef and grain that the world wanted and needed.

In the 20th century it fell on hard times. Its government overspent, over borrowed-some say, American banks lent excessively-and ruined the currency. A white knight named Domingo Cavallho rode to the rescue, fixed Argentina's peso one-to-one to the dollar-and the inflation stopped overnight. He was hailed as a hero. 

The people of Argentina loved the fixed exchange rate, because imports were cheap. When the politicians and experts knew it was time to devalue the exchange rate the people would not allow it and there was no strong political leader to administer the bitter medicine. So once again, dollar borrowing soared. And again, Argentina could not pay its debts. In 2001/2, the currency collapsed, again.

The IMF rode to the rescue. But Argentina refused its terms for a bailout loan. The Argentine banks closed their doors, the Argentinean economy collapsed, and the middle class was wiped out. Cavallho was brought back for another rescue. He failed. And they threw him in jail.

There was enormous suffering. End of Chapter One.

Once upon the SAME time, there was a big country whose people ALSO loved cheap imports, and bought $700 b. more of them than they exported, every year. They saved nothing. They borrowed heavily, year after year, for over 30 years. (See graphs). The world lent them money by holding this country's currency, because its money was a powerful global, liquid currency. "The dollar. It's our money. It's your problem!" said their Treasury Secretary. 

One day, the world stopped lending them money. The currency crashed, just like in Argentina and so did the global economy and stock markets. Why? Because you cannot run a global economy without a stable global currency.    

The country, of course, is the United States. It was former US Treasury Secretary, John Connolly, who called the dollar "your problem." That is how America acts today. But the dollar is America's problem. Because as America learned in 1997/8, if Asia collapses, the US economy suffers, too. 

The collapse of the dollar has not yet happened. But it is a highly plausible-in fact, perhaps the only plausible, ending to this story.

It is the world's problem, because if America's trade deficit shrinks-as it must-then the world will lose up to several hundred million jobs that the $700 b. in annual excess demand from the U.S. creates. There will be no way to replace that demand, except with domestic demand - except that with high unemployment, domestic demand will shrink, not grow.

America borrows abroad not just to finance its domestic investment, but also to pay for some of its consumption spending. Then, it presses the Chinese to fix an American problem by revaluing the yuan to make Chinese exports more expensive, in dollar terms. Our currency. Your problem.   

China's foreign minister was recently asked why China bought (together with Hong Kong) nearly a trillion US dollars. He said: "for the time being China still needs U.S. customers to keep consuming." Translation: A weak dollar and strong yuan would cut U.S. imports from China. 

The key phrase is "for the time being." If China, Japan and Hong Kong stop buying dollars, the dollar will drop faster than anyone can imagine. And one day, China will stop buying dollars. Because the currency risk on a trillion-dollar exposure is equal to one whole year of Chinese economic growth, or $300 b., if the dollar drops 30% - which is entirely plausible. 

Argentina, Brazil, Thailand, Indonesia, Malaysia-all are subject to economic laws. A country is a business. Overspend, over-borrow and you will soon pay the price. 

Only America, it seems, has repealed economic laws.

But it hasn't. It only seems like it has. All the economic chickens one day come home to roost. The wary investor will prepare for a near-term sharp fall in the U.S. dollar. Because once the dollar starts falling, it will be like Humpty Dumpty-there aren't enough King's Men to break its fall.

Act Two has yet to end. Will it be a "soft landing" and a happy end? I believe the chances are growing slimmer, as America defers the bitter medicine of deficit cutting and passes the buck to other nations.