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What Comes Around Goes Around

by Jeannette Di Louie, Assistant Editor, Mt. Vernon Research

I don’t find myself agreeing with Russia very often, but hey! A broken (non-digital) clock is still right twice a day, right?

Just today, the leaders of the world’s four largest emerging economies all got together for a closed meeting of the minds to discuss matters of economic importance in relation to themselves, the recession, and what they view as the increasingly problematic US$.

Russia hasn’t been thrilled with the U.S. in general for a while now, so normally, it isn’t any big surprise when the country’s leaders fire off a few verbal shots at how problematic or useless we are. But I think we might want to take their latest tirade more seriously, since this time, it was more of a threat to move some of its currency reserves out of the dollar and into bonds issued by itself or its fellow BRIC nations.

And while that may or may not be an idle threat on their point, they still make a good point; a point that incidentally, FOREX investors agreed with strongly enough to send the dollar plummeting against other world currencies today. Even if they didn’t agree with the sentiments Russia and its compatriots expressed, everybody recognizes what could happen if the BRIC group makes goods on its continuing warnings to the U.S.

In the past, Washington has been able to largely spend as it pleases.  With the dollar standing as the world’s reserve currency, American presidents such as Bush I, Clinton, Bush II and now Obama, have all run budget deficits without fear of paying the consequences.

The dollar might not be in any danger of losing its reserve currency status at the moment, since the economic implications could be dangerous if not deadly, and the G8 earlier this year considered it such a non-issue that they didn’t even bother discussing the matter. Not to mention that the whole process of switching reserve currencies would take up a significant amount of time. This is not something that can be decided and implemented in the space of a single meeting by four emerging nations.

But we’re obviously drawing closer to some alternative, when China starts openly lecturing us on our spending habits, or when Roberto Mangabeira, Brazil’s minister for strategic affairs, feels the need to say something like: “The world economy should not remain entangled so directly and unnecessarily in the vicissitudes of a single great world power. The developing countries should not have to see painfully accumulated hard currency reserves fall under the shadow of major devaluations.”

Again, the U.S. isn’t in any danger of losing everything anytime soon. But it’s important to remember that what comes around goes around. And as they say, Karma can be… well… less than friendly.

Jeannette Di Louie

Disclosure: No positions