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“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.