|
Even Larry Summers
Predicts Doom
A Dollar the Size of a Postage
Stamp
By Mike Whitney
11/28/07 "ICH"----
Lately it seems as though everyone wants to take a poke at
the dollar. Last week, it was the Brazilian supermodel who
demanded euros for her jaunts on the catwalk instead of USD. The
week before that, hip-hop impresario, Jay-Z, released a video
dissin' the dollar and praising the euro as the 'baddest Dude in
the 'hood'.
Lambasting the greenback has
become trendy. It's a favorite pastime of politicians, too. At
the November OPEC meeting in Riyadh, Iran's president Mahmoud
Ahmadinejad asked the assembled finance ministers to "study the
feasibility of selling oil in another currency." Ahmadinejad
disparaged the dollar as "a worthless piece of paper".
The fiery Venezuelan President,
Hugo Chavez, followed Ahmadinejad's lead predicting that the
demise of the dollar would mean the "end of the Empire."
Hugo may be on to something. The
dollar is America's Achilles heel; if the dollar tanks, so does
the empire. That means the taxpayer will have to foot the bill
for Bush's bloody-interventions in Iraq and Afghanistan, rather
than the Chinese. That also means that the US will have to
export something of greater value than Daisy Cutters and gulags.
That could be a tall-order, now that Bush has boarded up the
factories, hollowed out the industrial base, and outsourced 3
million manufacturing jobs. We'll have to scrape the rust off
the machinery and get back into the widget-making business like
we were before the Free Trade fiasco.
Central banks across the globe
are trying to figure out how to ditch their dollar reserves
without triggering a stampede for the exits. No one wants to see
that. But, then, nobody wants to be stuck with vaults full of
Uncle Sam's green confetti either. So, the question arises; What
is the best way to divest oneself of $5.6 trillion (total USD
held overseas) before the Lusitania capsizes?
Kuwait, Venezuela, Iran, Russia,
and Norway have already opted to ignore the destabilizing
effects of "conversion" from dollars and are in some stage of
divestiture. Others will follow. The UAE, Bahrain, Qatar, Oman
and Saudi Arabia are considering switching from the dollar-peg
to a basket of currencies so they can hedge against the
inflation that's battering their economies. It's only a matter
of time before the Petrodollar System---which links the dollar
to petroleum sales and creates a de facto "international
currency"---unravels completely, precipitating the final
collapse of Breton Woods.
Talk of America's impending
currency disaster is no longer relegated to the Internet
blathershere. Mainstream journalists have joined the chorus and
are sending up their own red flags. The UK Telegraph's
economics's editor, Liam Halligan, made this grim observation in
his recent article, "Bet Your Bottom Dollar Tensions Will
Follow":
"The importance of "dollar
divestment" cannot be overstated. At the very least it means
the greenback has much further to fall - plunging the US
into recession. But it begs a bigger, more alarming,
question. How will Washington react to the end of the US
hegemony?"
The dollar was savaged by the
monetary policies of the Federal Reserve. The Fed's policies
were designed to coincide with Bush's Middle East Crusade. They
were supposed to work like two wheels on the same axle. The
administration believed that, by 2007, the military would need
only 30,000 or so troops to maintain security in Iraq. That
would give Bush's legions the chance to turn east and push on to
the next target-state, Iran. If things went according to plan --
and no one thought the high-tech US war machine could be stopped
-- the US would control two-thirds of the world's oil. This
would allow America to keep writing bad checks on green paper
for the next century.
But then, of course, the plan
hit a snag. The Iraqi resistance mushroomed, the US got bogged
down in an "unwinnable" war, and the once-mighty dollar
shriveled into nothingness. Now we're at a turning point and our
leaders are in a state of denial. Bush is still playing Teddy
Roosevelt, while Paulson and Bernanke are just plain
shell-shocked. They probably know the game is over. As the
dollar continues to wither; the frustration is beginning to
mount in Europe. Liam Halligan sums it up like this:
"Europe has finally had
enough of America's "benign neglect" dollar policy. As a
large economic area, with a floating exchange rate, the
eurozone suffers most. Over the past seven years, the single
currency has risen by a shocking 82 per cent against the
greenback. That's hammered eurozone exports - provoking
serious trade disputes between the EU and US, the world's
two biggest trading blocks. No wonder French President
Nicolas Sarkozy describes America's drooping dollar as "a
precursor to economic war". (UK Telegraph, "Bet Your Bottom
Dollar tensions Will Follow")
Sarkozy is leading the charge
for "intervention"; the buzzword for shoring the greenback
through exchange controls and buying up billions of dollars. But
it's a risky business; especially when net capital inflows --
which are the monthly purchases of US-backed securities and
Treasuries --have gone negative for the last two months. That
means the US isn't attracting enough foreign investment to
finance its trade deficit. So the dollar will have to fall to
compensate.
So, how much loot is Sarkozy
willing to put up to keep the dollar from slumping further --
$100 billion, $500 billion, $1,000 billion? And where's the
bottom?
The fact is, the greenback took
a "header" down the stairwell and by the time it picks itself
up, it could be eye to eye with the peso. Who knows? Maybe its
time we all learned Spanish?
More than two-thirds of all
sovereign foreign exchange holdings are denominated in dollars.
When those dollars are converted into back into foreign
currencies and start recycling into the US; we're in deep
trouble. Inflation will soar. Surely, the Fed must have known
this day would come when they were pumping trillions of dollars
into subprime mortgages and complex debt-instruments which
served no earthly purpose except to fatten the bottom line for
rapacious bankers and hedge-fund managers. The Fed also knew
that the nation's wealth was not being "efficiently deployed"
for capital improvements on factories, technology or industry.
Oh, no. That would have ensured that America would remain
competitive in the global marketplace into the new century.
Instead, the money was shoveled into the bottomless sinkhole of
stucco homes with composition roofing and toxic credit default
swaps.
The stock market lost another
237 points yesterday; the third 200-plus slide in a week. Now
all three indexes are down more than 10% since their record high
on Oct 9. Treasury yields are plunging as investors flee the
stock market looking for safety. That means the Fed will have to
slash rates again at its December 11 meeting to provide more low
interest crack for the investor class. Traders see an 82% chance
that Bernanke will cut the Fed Fund's rate by another quarter
point to 4.25%. All that is likely to do is put the dollar into
free fall and send food, oil and gold prices to the moon. It
won't pay off the overdue mortgage payments and it won't remove
the billions of dollars of debt from the banks' balance sheets.
It's pointless. The US is headed for a "hard landing" and its
dragging the rest of the world along with it.
Harvard Economics professor,
Lawrence Summers offered this sobering warning yesterday in an
article in the Financial Times, "Wake up to the dangers of a
deepening crisis":
"Three months ago it was
reasonable to expect that the subprime credit crisis would
be a financially significant event but not one that would
threaten the overall pattern of economic growth. This is
still a possible outcome but no longer the preponderant
probability. Even if necessary changes in policy are
implemented, the odds now favor a US recession that slows
growth significantly on a global basis. Without stronger
policy responses than have been observed to date, moreover,
there is the risk that the adverse impacts will be felt for
the rest of this decade and beyond. Several streams of data
indicate how much more serious the situation is than was
clear a few months ago."
Summers is not the smartest guy
on the block. If he was he wouldn't have said men are smarter
than women and he'd still be president of Harvard. But he's a
capable economist and he can sniff disaster as it comes
stampeding round the corner.
Click on "comments" below to read or post comments
Comment Guidelines
Be succinct, constructive and
relevant to the story.
We encourage engaging, diverse
and meaningful commentary. Do not include
personal information such as names, addresses,
phone numbers and emails. Comments falling
outside our guidelines – those including
personal attacks and profanity – are not
permitted.
See our complete
Comment Policy
and
use this link to notify us if you have concerns
about a comment.
We’ll promptly review and remove any
inappropriate postings.
Send Page To a Friend
In accordance
with Title 17 U.S.C. Section 107, this material
is distributed without profit to those who have
expressed a prior interest in receiving the
included information for research and educational
purposes. Information Clearing House has no
affiliation whatsoever with the originator of
this article nor is Information ClearingHouse
endorsed or sponsored by the originator.)
|
