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 Bogota, 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.