Economic Warfare via Currency
Our Cuba policy is once again reaching idiotic heights.
The dollar was legalized in Cuba in 1993 after the fall of the Soviet Union plunged the island into deep economic crisis and forced it to open up to tourism and foreign investment.
Dollars became the dominant currency and are used to buy most consumer goods in stores that will now only accept the local currency.
The decision will effect cash remittances from the United States, a major support for the cash-strapped Cuban economy that amount to an estimated $1 billion a year, unless they are sent in other currencies.
The government encouraged Cubans living abroad to send remittances to their relatives in Cuba in euros, British pounds, Swiss francs or Canadian dollars, to avoid exchange costs.
Castro, wearing his trademark military uniform, said his communist government was not banning possession of dollars, just their use in the economy.
"We are not restoring the penalization of holding dollars; it will not be a crime," he said.
The move to eliminate use of the greenback was prompted by U.S. moves to squeeze Cuba financially, the decree said.
A four-decades-old U.S. trade embargo against his government prohibits the use of dollars in transactions with Cuba unless they are licensed by the U.S. Treasury.
Foreign banks were put on guard in May when the Federal Reserve fined UBS, Switzerland's largest bank, $100 million for illegally transferring freshly printed dollar notes to Cuba and three other countries subject to U.S. sanctions, Libya, Iran and Yugoslavia.
Foreign bankers in Havana said this had created serious problems for Cuba to deposit its dollars abroad and renew bills in circulation.
Existing dollar accounts will be "totally guaranteed" and their funds can be withdrawn in the U.S. or local currency at any date with no charge, the decree said. Dollar bank transfers will also be accepted, but not cash deposits.
Foreign companies operating in Cuba, as well as Cuban state enterprises, will no longer be able to make dollar bank deposits in cash.
Cuba's tourism is based on the dollar, though euros are accepted as currency in some resorts. Tourists will have to exchange their currency into convertible pesos, though the 10 percent charge will only apply to dollars, the decree said.
The commission will not affect credit card payments. Cards issued by U.S.-based banks are not valid in Cuba.
Cuba took the first step to curb dollar circulation last year when it banned state corporations from using the U.S. currency in their domestic operations.
President Bush launched a strategy in May to undermine Castro's government by tightening restrictions on travel from the United States and the amount of dollars that licensed visitors could spend on the island.
If we wanted to economically destroy Cuba what we would do is drop all trade restrictions and flood Cuba using our "free market" and "international capital investment" system. In no time the economy of Cuba would be in shambles, its agricultural products undercut by subsidized goods, and unemployment would skyrocket while its workers were converted to starvation wages to make goods for Walmart. Hey, it's worked in every other country it's been tried in right? With the exception of those that catch on and insist on massive subsidies, dollar pegging, and convert their economy to a parasitic export based petroconsumption economy of course.
In the meanwhile Bush's brilliant policy is actually driving Cuba into the arms of the euro. I swear that man is dumb as a post. Back in the days when the US was the only international trading currency around, restricting dollar flows into or out of Cuba would cause a liquidity crunch hobbling Cuba's economy.
Now all Cuba has to do is switch to the euro, further accellerating the dollar's fall:
Spreads on junk bonds have actually fallen lately. They now yield about four percentage points or so over Treasuries. In October 2002 the spread was over ten points, not that the numbers meant much, given the panic in the markets at that time. Perhaps all the issuers of such bonds are indeed much healthier now than they were then. Perhaps, on the other hand, they are simply the beneficiaries of ultra-loose monetary policy and a huge appetite for risk among investors. After a panic in May, emerging-market debt recouped most of its losses. In recent days this market, too, has wobbled but it still looks horribly expensive by historical standards.
The dollar has also been falling out of favour in recent days. This week, it reached its lowest level in eight months on a trade-weighted basis, according to the Fed, and is within a whisker of an all-time low against the euro. Foreign-exchange traders seem to have discovered what everyone else already knew: that America’s huge and growing current-account deficit is unsustainable, and that two things are required to correct it. First, Americans must save more (which will slow growth, perhaps sharply); and second, the dollar needs to fall more than it has done already—perhaps a lot more.
Alan Greenspan, the Fed’s chairman, and a man with a somewhat Panglossian view of the world, thinks that all these fears are overdone. His message is: don’t fret about America’s current-account deficit, consumers’ huge debts or the surging oil price; none of them matters, or at least not much. But your columnist does worry about such things, not least because the financial markets seem to be frighteningly sanguine about them: fears in the markets look about as overdone as a steak haché.
The dollar looks in danger of plunging, the price of oil continues to surge, gold is going up and world growth is slowing. Oh, and America is about to hold an election that could create as much uncertainty as it removes. Small wonder that there are a few growls from financial markets. Buttonwood has a nasty feeling that something worse is in store.
Unless we change fiscal and monetary policy, quickly, the dollar is danger of breaking through a technical support level in trading with the euro. If it does that it may free fall to the next sustainable level. Oil would rise even higher in price and we would take one more irreversible step toward oil being dedollarized and then denominated in euros. We never had much time to begin with but steps like this eat up what little time we have left.
Now is not the historical moment to try squeezing economies off the dollar standard. Cuba's economy by itself isn't a big deal but if it dedollarizes and then eurosizes its economy and others realize that they can too then it may start a movement toward the exit far sooner than it would have otherwise occurred.