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Doomsday for the greenback
Mike Whitney
Online
journal
Wednesday April 11, 2007
“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
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, they go about 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 overconsumption 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 percent gain for
the euro in just four 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
April 2000 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 George W. Bush and Alan
Greenspan, while Federal Reserve chairman, 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
percent 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 three 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, causing a 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 nosedive 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 were 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 gross domestic product (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 percent to 20 percent 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 percent 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.
Seventy percent 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.
INFOWARS:
BECAUSE THERE'S A WAR ON FOR YOUR MIND
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