Pubdate: Thu, 30 Dec 2004
Source: Slate (US Web)
Copyright: 2004 Microsoft Corporation
Contact: http://fray.slate.msn.com/
Website: http://slate.msn.com/
Details: http://www.mapinc.org/media/982
Author: Daniel Gross

Euro Trash

EVEN DRUG DEALERS ARE GIVING UP ON THE DOLLAR

Currency Of Choice

The dollar's decline against the euro shows no sign of ending. Clearly, 
currency traders have made a long-term judgment about the relative value of 
the currencies of the Old and New Worlds. That sounds bad enough. But now 
there are signs that we're losing some of the most devoted fans of the 
greenback: drug dealers, Russian oligarchs, and black-market traffickers of 
all kinds.

James Grant, of Grant's Interest Rate Observer, whose animadversions about 
the dollar and other subjects are as droll as they are pricey, highlighted 
the latest indignities to befall the once-mighty dollar in his Dec. 17 
issue. (Alas, it's not available on the Web.)

People the world over--central banks, companies, and individuals--like to 
hold the dollar. It's stable, liquid, easily convertible, and never goes 
out of style. The dollar is popular in the official global economy--the 
money that changes hands through computer terminals, checks, and wire 
transfers. But it has also been extremely popular in the world's vast cash 
economy. For American tourists, Chinese smugglers, Ukrainian arms dealers, 
and African dictators, the dollar has long been the currency of choice. The 
fearful and shady, those who subsist on tourism, and residents of countries 
with unstable domestic currencies love the greenback. Citing Federal 
Reserve estimates, Grant writes that "between 55% and 70% of the $703 
billion of U.S. currency outstanding circulates outside the 50 states."

The United States benefits greatly from the fact that the dollar is the 
world's reserve currency. Many of the $100 bills circulating throughout the 
globe are essentially loans that we never have to pay back. Americans use 
them to buy goods, services, or other currencies. But many of those bills 
never return to our shores to be redeemed for anything we make or produce. 
Instead, they stay under mattresses in BogotC!, circulate in Iraq, and are 
stashed in bank accounts around the world.

But among a subset of global cash connoisseurs, the dollar is losing ground 
to the euro--and it has nothing to do with concerns over U.S. 
multilateralism. First, the euro zone has been expanding with the addition 
of new countries and the continued integration between Eastern and Western 
Europe. So there are simply more people who accept and use euros now. Since 
2002, the growth rate of euros in circulation has far outpaced that of 
dollars. Add in the euro's recent strength against the dollar, and the case 
for Eastern Europeans and euro-neighbors to use euros becomes more 
compelling. In the 1990s, the dollar was remarkably popular in Russia, 
where residents had long been deprived of coveted Western imports. But 
between January 2002 and August 2004, Grant notes, the percentage of 
private Russian currency transactions employing the dollar fell from 94.1 
percent to 84 percent while the euro's share rose from nothing to about 15 
percent.

Finally, in the past two years, euros have also become easier to carry, 
store, and hide than dollars. Generally, the largest denomination of U.S. 
currency readily available is the $100 bill. But in the past two years, the 
European Central Bank has started to print 200-euro and 500-euro bills. 
These larger bills thus allow for the concentration of wealth in smaller 
packages. At today's rates, a 500-euro note is worth $682.

So if you wanted to, say, hide cash by swallowing it temporarily, euros 
would the obvious (and more comfortable) way to go. And indeed, as Grant 
notes, in October a drug mule traveling from Spain to Colombia was found to 
have an unexpected form of contraband in his stomach: $197,000 in euro 
notes. The same month, Fidel Castro declared that the dollar, which is 
tolerated as a means for Cuban-Americans to support their relatives in 
Cuba, was officially currency non grata and that the euro was most welcome.

For most products, losing international drug cartels and corrupt Third 
World dictators as customers would seem to be a desirable outcome. But 
these guys represent part of our long-standing and faithful base. If you 
think pundits are fretting about the slumping dollar now, just imagine what 
might happen if we start to lose the arms dealers.
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MAP posted-by: Beth