guards in Chiasso see plenty of smugglers and plenty of false-bottomed
suitcases, but no one in the town, which straddles the Italian-Swiss
frontier, had ever seen anything like this. Trussed up in front
of the police in the train station were two Japanese men, and beside
them a suitcase with a booty unlike any other. Concealed at the
bottom of the bag were some rather incredible sheets of paper. The
documents were apparently dollar-denominated US government bonds
with a face value of a staggering $134bn (£81bn).
How on earth
did these two men, who at first refused to identify themselves,
come to be there, trying to ride the train into Switzerland carrying
bonds worth more than the gross domestic product of Singapore? If
the bonds were genuine, the pair would have been America’s fourth-biggest
creditor, ahead of the UK and just behind Russia. No sooner had
the story leaked out from the Italian lakes region last week than
it sparked a panoply of conspiracy tales. But one resounded more
than any other: that the men were agents of the Japanese finance
ministry, in the country for the G8 meeting, making a surreptitious
journey into Switzerland to sell off one small chunk of the massive
mountain of US bonds stacked up in the Japanese Treasury vaults.
In the event,
late last week American officials confirmed that the notes were
forgeries. The men, it appeared, were nothing more than ambitious
scamsters. But many remain unconvinced. And whether fake or otherwise,
the story underlines one important point about the world economy
at the moment: that the tension and paranoia surrounding the fate
of the US dollar has hit a new high. It went to the heart of the
big question: will the central bankers in Japan, China and elsewhere
continue to support the greenback even in the wake of the worst
financial crisis in modern history, or will they abandon it as America’s
economic hegemony dissipates?
are nothing new. The currency has been presumed dead more times
than Shane Macgowan. But like the lead singer of The Pogues, the
greenback has somehow withstood repeated knocks and scrapes over
the years and lived on, battered, bruised and a couple of teeth
the lighter, to fight another day. In the 1970s and 1980s there
were plenty predicting its demise, although at that point the main
challenger was the Japanese yen. And in the years preceding this
crisis, economists and investors including Peter Schiff and George
Soros were lining up to declare the dollar’s demise as the world’s
reserve currency. In the late 1990s, the creation of the euro gave
dollar sceptics another stick to beat the currency with, and no
doubt the European currency has claimed some of the prominence in
its first decade.
the collapse of the global financial system, those warnings have
become louder still, and ever more difficult to dismiss – because
this time around there are threatening noises coming from those
who actually have the power to do something about it. First came
a paper from Zhou Xiaochuan, the governor of the People’s Bank of
China (PBoC), a couple of months ago, positing the idea of introducing
the special drawing right (SDR) – a kind of internal currency
at the International Monetary Fund (IMF) – as an international
reserve currency. These calls were then repeated, with more force,
by the Russian president, Dmitry Medvedev, who last week declared
that the world needed new reserve currencies in addition to the
And this time
around, the dollar is most certainly suffering. Since 2002 its trade-weighted
strength – calculated against a basket of other currencies
– has fallen by more than a quarter, from 112 to 81 points.
In the same period, the proportion of dollars held by reserve managers
in leading central banks has also taken a dive. According to figures
from the IMF, confirmed holdings of dollars in government vaults,
from Beijing and Tokyo to London and Paris, fell from 71pc of reserves
to 64.5pc between 2002 and 2008.
what is really happening in the world of foreign exchange reserves
is notoriously closer to an art than a science. For instance, figures
from April seemed to suggest a fall in China’s holdings of US Treasuries
– something ‘dollapocalypticists’ pounced on at the time. But
according to Brad Setser of the Council on Foreign Relations, the
country was merely rejigging its Treasury portfolio rather than
liquidating parts of it. In such an opaque world it is little wonder
the conspiracy theories over those two Japanese smugglers show little
sign of dissipating.
for US Treasury Secretary Tim Geithner, who has inherited his predecessors’
role as dollar wallah-in-chief, the currency’s travails have made
it all the more difficult for him to repeat the mantra that he "believes
in a strong dollar" while keeping a straight face. Indeed,
when he tried to insist at a university lecture in Beijing earlier
this month that "Chinese financial assets are very safe,"
it drew floods of laughter from the audience.
playing for laughs, but the irony of the situation is plain to see.
If there were a textbook list of actions one could take to weaken
a currency, the US (alongside most other developed nations) would
be following it to the letter. It has cut interest rates to a whisker
above zero; it has engaged in quantitative easing, pumping cash
directly into the economy; it has committed to spending trillions
of dollars on a fiscal stimulus package designed to pull the country
out of recession; it has pledged tacitly to support its stricken
banks so that no major institution is allowed to collapse. In any
normal circumstances, actions like these would hammer a currency.
Stephen Jen of BlueGold Capital Management: "People are having
second thoughts not simply because they don’t like the dollar, but
they are having second thoughts about whether US assets are obviously
the strongest assets to own."