Doomsday for the Greenback
By Mike Whitney
“Of all the contrivances for cheating the laboring classes of
mankind, none has been more effective than that which deludes
them with paper money.” Daniel Webster
04/10/07 "ICH"
-- -- -The American people are in La-la land. If they had
any idea of what the Federal Reserve was up to they’d be out on
the streets waving fists and pitchforks. Instead, we go our
business like nothing is wrong.
Are we really that stupid?
What is it that people don’t understand about the trade deficit?
It’s not rocket science. The Current Account Deficit is over
$800 billion a year. That means that we are spending more than
we are making and savaging the dollar in the process. Presently,
we need more than $2 billion of foreign investment per day just
to keep the wheels from coming off the cart.
Everyone agrees that the current trade imbalances are
unsustainable and will probably trigger major economic
disruptions that will thrust us towards a global recession.
Still, Washington and the Fed stubbornly resist any change in
policy that might reduce over-consumption or reverse present
trends.
It’s madness.
The investor class loves big deficits because they provide cheap
credit for Bush’s lavish tax cuts and war. The recycling of
dollars into US Treasuries and dollar-based securities is a neat
way of covering government expenses and propping up the stock
market with foreign cash. It’s a “win-win” situation for
political elites and Wall Street. For the rest of us it’s a
dead-loss.
The trade deficit puts downward pressure on the dollar and acts
as a hidden tax. In fact, that’s what it is--a tax! Every day
the deficit grows, more money is stolen from the retirements and
life savings of working class Americans. It’s an inflation
bombshell obscured by the bland rhetoric of “free markets” and
deregulation.
Consider this: In 2002 the euro was $.87 on the dollar. Last
Friday (4-6-07) it closed at $1.34-- a better than 50% gain for
the euro in just 4 years. The same is true of gold. In April
2000, gold was selling for $279 per ounce. Last Friday, at the
close of the market it skyrocketed to $679.50---more than double
the price.
Gold isn’t going up; it’s simply a meter on the waning value of
the dollar. The reality is that the dollar is tanking big-time,
and the main culprit is the widening trade deficit.
The demolition of the dollar isn’t accidental. It’s part of a
plan to shift wealth from one class to another and concentrate
political power in the hands of a permanent ruling elite.
There’s nothing particularly new about this and Bush and
Greenspan have done nothing to conceal what they are doing. The
massive expansion of the Federal government, the unfunded tax
cuts, the low interest rates and the steep increases in the
money supply have all been carried out in full-view of the
American people. Nothing has been hidden. Neither the
administration nor the Fed seem to care whether or not we know
that we’re getting screwed --it’s just our tough luck. What they
care about is the $3 trillion in wealth that has been
transferred from wage slaves and pensioners to brandy-drooling
plutocrats like Greenspan and his n’er-do-well friend, Bush.
These policies have had a devastating effect on the dollar which
has been slumping since Bush took office in 2000. Now that
foreign purchases of US debt are dropping off, the greenback
could plunge to even greater depths. There’s really no way of
knowing how far the dollar will fall.
That puts us at a crossroads. We are so utterly dependent on the
“charity of strangers” (foreign investment) that a 9% blip in
the Chinese stock market (or even a .25 basis point up-tick in
the yen) sends Wall Street into a downward spiral. As the
housing market continues to unwind, the stock market (which is
loaded with collateralized mortgage debt) will naturally edge
lower and foreign investment in US Treasuries and securities
will dry up. That’ll be doomsday for the greenback as central
banks across the planet will try to unload their stockpiles of
dollars for gold or foreign currencies.
That day appears to be quickly approaching as the 3 powerhouse
economies are overheating and need to raise interest rates to
stifle inflation. This will make their bonds and currencies all
the more attractive for foreign investment; diverting much
needed credit from American markets.
Just imagine the effect on the already-hobbled housing market if
interest rates were suddenly to climb higher to maintain the
flow of foreign capital?
The ECB (European Central Bank), Japan and China are all
cooperating in an effort to “gradually” deflate the dollar while
minimizing its effects on the world economy. In fact, China even
waited until the markets had closed on Good Friday to announce
another interest rate increase. Clearly, the Chinese are trying
to avoid a repeat of the 400 point one-day bloodbath on Wall
Street in late February ‘07.
Japan has also tried to keep a lid on interest rates (and
allowed the carry trade to persist) even though commercial
property in Tokyo is “red hot” and liable to spark a ruinous
cycle of speculation.
But how long can these booming economies avoid the interest rate
hikes that are needed for curbing inflation in their own
countries? The problem is, of course, that by fighting inflation
at home they will ignite inflation in the US. In other words, by
strengthening their own currencies they weaken the dollar--it’s
unavoidable.
This is bound to hurt consumer spending in the US which will
ripple through the entire global economy.
The problems presented by the falling dollar can’t be resolved
by micromanaging or jawboning. In truth, there’s no more chance
of a “soft landing” for the dollar than there is for the
over-bloated real estate market. Greenspan’s bubble economy is
headed for disaster and there’s not much that anyone can do to
lessen the damage. As housing prices fall and homeowners are no
longer able to tap into their equity, consumer spending will
slow, the economy will shrink and the Fed will be forced to
lower interest rates.
Unfortunately, at that point, lowering rates won’t be enough.
Interest rates need at least 6 months to take hold and, by then,
the steady drumbeat of foreclosures and falling real estate
prices will have soured the public on an entire “asset class”
for years to come. Many will see their life savings dribble away
month by month as prices continue to nose-dive and equity
vanishes into the ether. These are the real victims of
Greenspan’s low interest rate swindle.
The Federal Reserve is fully aware of the harm they have
inflicted with their low interest rate boondoggle. In a 2006
statement the Fed even acknowledged that they knew that
trillions of dollars in speculation was being funneled into the
real estate market:
"Like other asset prices, house prices are influenced by
interest rates, and in some countries, the housing market is a
key channel of monetary policy transmission."
“Monetary transmission” indeed?!? Trillions of dollars in
mortgages were issued to people who have no chance of paying
them back. It was a shameless scam. Still, the policy persisted
in a desperate attempt to keep the US economy from collapsing
into recession. The upshot of this misguided policy was “the
largest equity bubble in history” which now threatens America’s
economic solvency.
Author Benjamin Wallace commented on the Fed’s activities in an
article in the Atlantic Monthly, “There Goes the Neighborhood:
Why home prices are about to plummet—and take the recovery with
them”:
"Let's assume for a moment that enough people get fooled, and
the refinancing boom gets extended for another year. Then what?
The real problem hits. Because if you think Greenspan's being
cagey on refinancing, the truth he's really avoiding talking
about is that we're in the midst of a huge housing bubble, on a
scale only seen once before since the Depression. Worse, the
inflated housing market is now in an historically unique
position, as the motor of the rest of the economy. Within the
next year or two, that bubble is likely to burst, and when it
does, it very well may take the American economy down with it."
Or this from Robert Shiller in his “Irrational Exuberance”:
"People in much of the world are still overconfident that the
stock market, and in many places the housing market, will do
extremely well, and this overconfidence can lead to instability.
Significant further rises in these markets could lead,
eventually, to even more significant declines. The bad outcome
could be that eventual declines would result in a substantial
increase in the rate of personal bankruptcies, which could lead
to a secondary string of bankruptcies of financial institutions
as well. Another long-run consequence could be a decline in
consumer and business confidence, and another, possibly
worldwide, recession”.
If it is not handled properly, the housing collapse could result
in another Great Depression. America no longer has the
(manufacturing) capacity to work its way out of a deep
recession. While the Fed was sluicing $11 trillion into the real
estate market via low interest loans; America’s manufacturing
sector was being carted off to China and India in the name of
globalization. Without capital investment and increased factory
production, economic recovery will be difficult if not
impossible. The so-called “rebound” from the 2001 recession was
due to artificially low interest rates and easy credit which
inflated the housing market. It had nothing to do with increases
in productivity, exports, or paying off old debts. In other
words, the “recovery” was not real wealth creation but simply
credit expansion. There’s a vast chasm between “productivity”
and “consumption” although Greenspan never seemed to grasp the
difference.
A penny borrowed is not the same as a penny earned—although both
may cause a slight bump in GDP. Greenspan’s attitude was aptly
summarized by The Daily Reckoning’s Addison Wiggin who said,
“GDP measures debt-fueled consumption--it really only measures
the rate at which America is going broke”.
Bingo.
America’s biggest export is its fiat-currency which foreigners
are increasingly hesitant to accept.
Can you blame them?
They have begun to figure out that we have no way of repaying
them and that the “full faith and credit” of the United States
is about as reliable as a Ken Lay-managed 401-K retirement plan.
The fragility of the US economy will become more apparent as
Greenspan’s housing bubble continues to lose air and consumer
spending remains flat. As we noted earlier, home equity
withdrawals are drying up which will slow growth and discourage
foreign investment. The meltdown in subprime loans has drawn
more attention to the maneuverings of the banks and mortgage
lenders and many people are getting a clearer understanding of
the Federal Reserve’s role in creating this economy-busting
monster-bubble.
The 10% to 20% yearly increases in property values are
unprecedented. They are “pure bubble” and have nothing to do
with increases in wages, demand, productivity, capital
investment or GDP. It was all “froth” generated by the world’s
greatest Frothmeister, Alan Greenspan.
As Addison Wiggin notes, “There is only one real source of
wealth: a healthy and competitive environment involving the
exchange of goods coupled with control over deficit spending.”
Elites at the Federal Reserve and in the Bush administration
have steered us away from this “tried and true” course and put
us on the path to debt and catastrophe. It won’t be easy to
restore our manufacturing base and compete again in the open
market, but it must be done. Strong economies require that their
people produce things that other people want. This is a
fundamental truism that has been lost in the smoke and mirrors
of Greenspan’s shenanigans at the Fed.
Regrettably, we are probably facing a decades-long economic
downturn in which the dollar will weaken, stocks will fall, GDP
will shrivel, and traditional standards of living will decline.
The trend-lines in the real estate market will most likely be
the inverse of what they have been for the last 10 years. This
will dramatically affect consumer spending (70% of GDP) and put
additional pressure on the dollar.
The dollar is already in big trouble--the only thing keeping it
afloat is foreign purchases of US debt by creditors who don’t
want to be left holding trillions in worthless paper.(US debt is
Japan’s single greatest asset!) These “net inflows” have created
a false demand for the dollar which will inevitably dissipate as
central banks continue to diversify.
Last week the IMF issued a warning that there would have to be a
“substantial” decline in the dollar to bring the trade deficit
to sustainable levels. That, of course, is the intention of the
Fed and Team Bush—to reduce the debt-load by deflating the
currency. It’s a crazy idea. No one destroys the buying power of
their currency to pay off their debts. It just illustrates the
recklessness of the people in charge.
Also, on March 20, 2007 the Governor of China’s Central Bank
Zhou Xiaochuan announced “that China will not accumulate more
foreign reserves and will cut a small amount of current reserves
for the formulation of a new currency agency”. Zhou’s statement
is a hammer-blow to the dollar. The US needs roughly $70 billion
in foreign investment per month to cover its current trade
deficit. China is one of the largest purchasers of US debt. If
China diversifies, then the dollar will fall and the aftershocks
will ripple through markets across the world.
The Chinese are very careful about how they word their economic
statements. That’s why we should take Zhou’s comments seriously.
Three weeks ago he issued an equally ominous statement saying,
“China will diversify its $1 trillion foreign exchange reserves,
the largest in the world, across different currencies and
investment instruments, including in emerging markets.”
(Reuters)
This should have been a red flag for currency traders, but the
media buried the story and the markets dutifully shrugged it
off. The truth is that our relationship with the Chinese is
changing very quickly and the days of cheap credit and a
“high-flying” dollar are coming to an end.
70% of China’s currency reserves are in US dollars. The effect
of “diversification” will be devastating for the US economy. It
increases the likelihood of hyperinflation at the same time the
housing market is in its steepest decline in 80 years. When
currency crises arise at the same time as economic crises; the
problems are much more difficult to resolve.
Doomsday for the Greenback
It is impossible to fully anticipate the effects of the falling
dollar. The dollar is a currency unlike any other and it is the
cornerstone of American power—political, economic and military.
As the internationally-accepted reserve currency, it allows the
Federal Reserve to control the global economic system by
creating credit out of “thin air” and using fiat-scrip in the
purchase of valuable manufactured goods and resources. This puts
an unelected body of private bankers in charge of setting
interest rates which directly affect the entire world.
Iraq has proven that the US military can no longer enforce
dollar-hegemony through force of arms. New alliances are forming
that are reshaping the geopolitical landscape and signal the
emergence of a multi-polar world. The decline of the
superpower-model can be directly attributed to the denominating
of vital resources and commodities in foreign currencies.
America is simply losing its grip on the sources of energy upon
which all industrial economies depend. Iraq is the tipping point
for America’s global dominance.
When foreign central banks abandon the greenback the present
system will unwind and the “unitary” model of world order will
abruptly end.
This may be a painful experience for Americans who will
undoubtedly see a sharp fall in current living standards. But it
also presents an opportunity to disband the Federal Reserve and
restore control of the nation’s currency to the people’s
legitimate representatives in the US Congress.
This is the first step towards removing the cabal of
powerbrokers in both political parties who solely represent the
narrow ambitions of private interests.
The War on Terror is a public relations ploy that is intended to
disguise the use of military and covert operations to secure
dwindling resources to maintain dollar supremacy. It is a futile
attempt to control the rise of China, India, Russia and the
developing world while preserving the authority of western white
elites.
The strength of the euro portends increasing competition for the
dollar and a steady decline in America’s influence around the
world. This should be seen as a positive development. Greater
parity between the currencies suggests greater balance between
the states--hence, more democracy. Again, the superpower model
has only increased terrorism, militarism, human rights
violations and war. By any objective standard, Washington has
been a poor steward of global security.
The falling dollar also suggests growing political upheaval at
home brought on by economic distress. We should welcome this.
America needs to remake itself—to recommit to its original
principles of personal freedom, civil liberties and social
justice--to reject the demagoguery and warmongering of the Bush
regime—to reestablish our belief in habeas corpus, the
presumption of innocence and the rule of law. Most important, we
need to reclaim our honor.
Big changes are coming for the dollar; it’s just a matter of
whether we allow those changes to bog us down in recriminations
and pessimism or use them to create a new vision of America and
restore the principles of republican government. It’s up to us.Click here
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