The Inevitable Collapse of the Greenback

By Mike Whitney

05/03/06 "ICH" -- -- Why is George Bush destroying the dollar?

Or is it Bush? Maybe, it is the Federal Reserve, the privately owned group of 12 central banks that prints our money and sets the policy?

A UK Telegraph article on Tuesday “Dollar Drops as great Sell-Off Looms” explains the current dilemma. The dollar is falling against the euro and the Asian currencies while gold and energy prices continue to skyrocket. “Greenback liquidation comes amid growing concerns that global central banks and Middle East oil funds are quietly paring back their holdings of US bonds.

” David Bloom, a currency expert at HSBC, said the dollar was vulnerable to a steep sell-off as investors begin to refocus on America’s yawning current account deficit, now 7% of GDP”. (UK Telegraph)

Just to add some perspective to this topic; Argentina’s economy collapsed when its trade deficit reached 4% of GDP. The US deficit is at an unprecedented level.

Normally, we could say that these are the predictable effects of market forces, but that’s not the case here. After all, we know that Bush insisted that the lavish tax cuts be made permanent even though it was understood that such action would undercut the dollar. So, what is going on here; why does Bush want to kill the goose that laid the golden egg?

There are two ways to weaken the currency; either print more money which dilutes the supply, or create new debt which lowers the value.

Bush has done both simultaneously and with such gusto that it’s a wonder the dollar hasn’t crashed already. He’s expanded government spending by 35% and produced humongous $450 billion per year tax cuts. Add this to the projected costs of a $2 trillion war and the dollar was bound to get hammered.

At the same time Bush has been spending us into oblivion, the Federal Reserve has kept the printing presses humming along at full-throttle doubling the money supply in the last decade. Almost half of all greenbacks are now located outside the country, which means that if the dollar becomes less attractive to investors those greenbacks will come flooding back to America and plunge the country into recession.

Regardless of one’s political leanings, there is an obvious and demonstrable attempt to savage the currency by the political and banking establishment.

Why?

The real force behind Bush’s actions is the Federal Reserve. No one has any illusion that our paper-mache president, who even boasts about not reading the newspapers, is making complex policy decisions about geopolitics and finance. As a privately owned institution, the Fed has its own agenda which runs contrary to the interests of the American people. Many people fail to realize that it was Greenspan who cooked up the massive increases in Social Security in 1983 to help Reagan reduce the soaring interest rates that were caused by his tax cuts for the wealthy. Ever since then, Social Security payments have gone directly into the general fund; paying for roads, social programs and war. This was the Fed’s clever way of creating a flat tax directed exclusively at the poor and middle class.

The Federal Reserve has engineered many similar coups, the most impressive being the huge stock market bubble of the late 1990s. Greenspan kept the cheap money flowing into the Wall Street Casino (and refused to even increase marginal rates on stock purchases) while PE’s skyrocketed and the bubble expanded to Hindenburg-proportions.

Following the explosion, which left tens of thousands of Americans stripped of their retirement and savings, Greenspan breezily noted that it is not the task of the Fed to stop bubbles.

Really? The European Central Bank (ECB) takes an entirely different tack intervening whenever it is clearly in the public interest. Greenspan’s recalcitrance has nothing to do with principle; he was simply acting on behalf of constituents in the investment community.

Currently, the Fed has created the largest equity bubble of all time; the $9 trillion housing bubble, slapped together over the last 3 years by lowering rates to an unbelievable 1.5% (at one point) and facilitated through shabby lending practices. As rates continue to rise to satisfy America’s need for $2 billion cash inflows from foreign lenders every day, the carnage from the housing-bomb is bound to be extensive and agonizing.

The Federal Reserve has always served the singular interests of the ruling class, the only difference now is that the present clash is designed to drive the wooden-stake into the heart of the middle class and create a permanent American oligarchy.

Bush has purposely generated another $3 trillion in debt ensuring that the dollar will fall mightily and working class people be left with a trifling of their life savings.

6 months ago, the Federal Reserve, anticipating the day when the foreign inflows would dry up, eliminated the M-3, their public record of foreign purchases of dollars and securities. It all sounds very abstract, but what it means is that we no longer have any way of knowing how quickly foreign banks are dumping their greenbacks. This means that the American people will be left holding the bag once again; stuck with an inflationary dollar while foreign investors bail out.

The Federal Reserve gave Bush the go-ahead on his “war of choice” just as they cheerily endorsed the budget-busting tax cuts. They’ve doubled the money supply and done everything in their power to shift middle class wealth to corporate kingpins and American plutocrats.

Still, this doesn’t explain why they appear to be intentionally savaging the dollar?

Here’s the key: We are not a “capitalistic” system or a “free market” system, that’s all just philosophical mumbo-jumbo. In practical terms, we are a “Dollar system” and the greenback must continue to dominate the world oil trade or the Federal Reserve, the IMF, the World Bank and all the privately owned global institutions will crash and burn. That’s not their plan; their plan is to perpetuate this debt-pyramid into infinity; integrating dissident states into an expanding and predatory neoliberal network.

The face value of the dollar doesn’t matter to the men who print the money. The actual value is constantly manipulated to shift wealth from one class to another. (via bubbles and inflation) What really matters is who controls the system and the means whereby others are coerced to participate. In the last decade the amount of dollars stockpiled in foreign banks has gone from 53% to nearly 70%; this is a monopoly that the US intends to defend by every means possible. To maintain this monopoly, the Federal Reserve has linked arms with the oil industry (and the US military) in its effort to control the world oil market. This has become an “existential” issue for the corporate elites who run American foreign policy. If the dollar is not supported by access to the world’s dwindling oil supplies, then there is no incentive for foreign banks to accumulate the anemic dollar. (Oil is sold exclusively in US greenbacks)

By this standard, we can see that Bush’s fictitious war on terror is really just a smokescreen for a global resource war that will decide which economic system prevails.

Will it be the dollar system, with its wars and gulags spread across the planet? Or will some other system emerge, some non-ideological incarnation of socialism that redistributes wealth according to people’s needs like we see in Venezuela?

The future of the dollar may be decided sooner than any of us had imagined. Iran’s Mehr News Agency announced that the long-awaited Iran Oil Bourse (OIB) will open sometime next week on Kish Island challenging head-on America’s monopoly on the sale of oil in dollars. Iran’s plan is a direct attack on the greenback as the world’s “reserve currency”. The US must preserve that advantage because it allows it to maintain massive deficits as well as a national debt of $8.4 trillion without fear of economic collapse or hyper-inflation. The opening of the bourse guarantees that central banks around the world will convert some of their reserves into euros precipitating a sharp decline in the dollar’s value.

This may be the most serious threat the dollar has ever faced. The fundamental economic law of “supply and demand” ensures that the bourse means hard times for the greenback. This explains why the Bush administration is cobbling together a feeble coalition of European allies (England, France and Germany) to push a resolution through the Security Council expressing their “serious concern” about Iran’s alleged nuclear programs.

Washington is looking for international cover to conceal its battle-plans. The hawkish members of the administration want to preempt the opening of the bourse with a unilateral attack (nuclear?) on Iranian facilities.

Even if Washington succeeds in stopping Iran’s plans to compete in the oil market, it’s still a bumpy road ahead for the greenback. The dollar is under growing pressure from overspending and mismanagement. The prospect of diminishing foreign inflows and a fragile housing market are telltale signs of an inflationary cycle.

America is now facing a slow-motion meltdown that could escalate into a widespread run on the dollar. Attacking Iran will only aggravate the situation and push tenuous states towards new alliances. (China, India, Venezuela and Russia have already expressed support for the new bourse) Military action will do nothing to relieve America’s enormous account imbalances or lesson the vulnerability of the ailing greenback.

The problems facing the dollar are purely systemic. The privately owned central banks in the Federal Reserve cannot be trusted to decide monetary policy any more than the oil giants can be trusted to decide foreign policy. When the public interest is excluded from policy-making, catastrophe is inevitable.

Expect the greenback to follow a long-downward spiral.

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