A Parallel Universe?

“[A U.N.] commission, led by U.S. economist Joseph Stiglitz, a frequent critic of globalization and unbridled free markets, is primarily aimed at finding solutions for developing countries.

On the monetary front, Stiglitz, the 2001 Nobel Memorial prize economics laureate, told a press conference here there was “a growing consensus that there are problems with the dollar reserve system. He noted that such a system was “relatively volatile, deflationary, unstable and had inequity associated with it.”

– Google News

March 26, 2009

The parallel-universe theory says other, physical universes exist, although no one, to date, has found one. The exploring scientists say their mathematical formulae demonstrate the possible existence of such ethereal planes, and, with such devices as the Hadron Collider, they’re searching for proof.

It may be the home of lost emails.

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Opportunistic philosophers and science-fiction writers often exploit the parallel-universe theory. They allege that you, we, could exist, or, at least, could concurrently enter into other dimensions, as do Ray Bradbury’s characters in his Martian Chronicles.

In Bradbury’s story, Thomas Gomez, a terrestrial settler, encountered a Martian traveling along a deserted road. The two have a friendly talk, but soon learn they have dissimilar views. Distant cities and flowered fields glow in the Martian’s vision, while Gomez sees only a new road amidst ancient ruins. Each believes their world is the real one.

Upon parting, they attempt to shake hands, but their fingers pass through one another’s, like Hollywood ghosts. It’s because, Bradbury reveals, they reside in parallel universes, which have momentarily converged.

To some extent, we’ve all experienced parallel universes, but in the form of differing beliefs and lifestyles. Because of human nature, such ethereal barriers often become real.

A critical question

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Today, most notably, parallel universes exist between average Americans and their government, the one that has, for the past year, distributed billions of dollars to save our economy.

Most of us can’t visualize billions. Or trillions. And, even though we want a cure, we’re uncomfortable when the deciding chiefs say even more dollars may be required. For example, on March 18, the U.S. Federal Open Market Committee, a Federal Reserve division, announced additional monetary measures that should promote economic recovery and preserve price stability.

Bloombergs.com, reporting on this action, said the agency had decided to increase the Federal Reserve’s balance sheet by purchasing an additional $750 billion of agency, mortgage-backed securities. This action will bring the Fed’s total securities purchases to $1.25 trillion this year.

That’s a lot of money. According to one source, a trillion dollar bills, stacked flat, like playing cards, would reach one-third the distance to the moon.

The committee will also increase its purchases of agency debt by approximately $100 billion (to a total of roughly $200 billion) and “will improve conditions in private credit markets” by purchasing up to $300 billion of longer-term Treasury securities (over the next six months).

CNNMoney.com writer Ben Rooney said the Fed, by purchasing long-term Treasury securities, hopes to drive down interest rates on consumer and business loans as well as credit flow. Other analysts say the Feds have taken such action because there’s no other source for money, aside from printing more, which has proven to trigger inflation.

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Relate these purchases to a corporation buying back its own stock, and, as always, the critical question is the desired goal: Is the firm trying to shorten the supply of its securities and drive up the price? Or, is it attempting to curtail a value dive – or improve its financial ratios? The Fed’s patent answer, of course, is to improve financial ratios, but don’t discount the dive factor.

SDRs vs. dollars?

To many investors, money is a commodity; the rest of us see it as legal tender. Thus, it’s uncommon for us, working people, to visualize international investors buying and selling money and foreign treasury bonds just as they do commodities. Also, we seldom imagine other nations’ banks quarrelling over whose money gets used in assorted, worldwide transactions. Nonetheless, such decisions are important. They eventually determine how much you pay for materials and supplies.

A March 17 Moscow Times story said the Kremlin’s (read Prime Minister Vladimir Putin) list for the upcoming G20 meeting includes crafting of an international reserve currency issued by the International Money Fund (IMF). This, in part, opposes the present, traditional, dollar-dominated system.

The Kremlin suggests using the IMF’s existing Special Drawing Rights (SDRs) as a currency for international business, instead of the dollar. The SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves (currency) of member countries.

Numerous financial chiefs, including billionaire investor George Soros, Columbia University professor Joseph Stiglitz and U.S. Treasury adviser Ted Truman, have recommended global acceptance of SDRs.

China, with more than $700 billion invested in U.S. Treasury bonds, supports SDRs as well. However, because it’s a primary creditor to the U.S., China’s conversion of its T-bonds to SDRs – should it do so – could create financial havoc in the U.S.

On March 23, the vice-governor of the Chinese central bank, Hu Xiaolian, calmed U.S. investors. He said investing in U.S. bonds is an important part of China’s strategy and that China will continue to do so. But, he cautioned, China “… will pay close attention to fluctuations in the value of our assets.”

A basket of currencies

SDRs represent a “basket” of major currencies commonly used in international trade. Presently, the currencies are the dollar, the euro, the yen and the pound sterling. Critics say SDRs have no specific government backing; thus, they don’t inspire confidence. Faith. (To succeed, currency, like religion, requires faith. A member must believe in the designated authority.) Further, a participating country’s monetary misfortunes could affect the value.

See it like adding a weak battery in line with strong ones. The weak one pulls amps from the others and, in doing so, reduces the overall power.

Adopting SDRs as a world-trade currency could seriously devalue the dollar and, in turn, skyrocket the price of foreign goods. Analysts also warn that an excessive distribution of SDRs could cause worldwide inflation.

The connected world

On March 25, The Wall Street Journal headlined Treasury Secretary Tim Geithner saying the dollar will remain the world’s dominant reserve currency, and U.S. government actions would ensure this. Geithner’s remarks followed an earlier statement in which he said the U.S. was quite open to the SDR suggestion, which was a misstatement, his PR people said.

The U.K.-based Telegraph newspaper, on March 27, quoted David Bloom, director of strategy, HSBC Global Markets, as saying any switch to SDRs will directly affect currency markets. He said 65% of the world’s $6.8 trillion foreign reserves are held in dollars, but they comprise only 42% of the SDR basket. Thus, the euro, yen and pound sterling would equalize any large-scale SDR purchase, which. Bloom said, would cause an immediate and massive sell-off of the dollar.

Almost immediately after Geithner misspoke, the dollar’s value position against other currencies declined. This clearly demonstrates the volatility – and connectedness – of the world’s economic affairs.