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."
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 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 over-consumption
or reverse present trends.
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
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 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
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 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
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
Unfortunately, at that point, lowering rates won't be enough.
Interest rates need at least six 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 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
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".
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
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 sub-prime 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,
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 that 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
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
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, and can be reached at: