�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
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
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
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
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
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,
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.�
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.�
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
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.
Mike Whitney lives in Washington state. He can be reached at: firstname.lastname@example.org.