Doomsday for the Greenback

[Leigh Meyers <the.buffalo.in.the.midst@xxxxxxxxx>]

Posting to Headlines Wire of Scoop
Opinion: Mike Whitney
Date: Friday, 13 April 2007
Time: 11:18 am NZT

Mike Whitney: Doomsday for the Greenback

Global Research Feature Article
Doomsday for the Greenback
by  Mike Whitney
Global Research, April 11, 2007
Information Clearing House

Posted to Scoop's Eco-Economy News List

"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, 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 plummetâand 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 earnedâalthough
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 Bushâto 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 powerâpolitical, 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 itselfâto recommit to its original
principles of personal freedom, civil liberties and social justice--to
reject the demagoguery and warmongering of the Bush regimeâto
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.

*************

Global Research Articles by Mike Whitney


*************

Disclaimer: The views expressed in this article are the sole
responsibility of the author and do not necessarily reflect those
of the Centre for Research on Globalization.

To become a Member of Global Research

The CRG grants permission to cross-post original Global Research
articles on community internet sites as long as the text & title
are not modified. The source and the author's copyright must
be displayed. For publication of Global Research articles in
print or other forms including commercial internet sites, contact:
crgeditor@xxxxxxxxx

www.globalresearch.ca contains copyrighted material the use of
which has not always been specifically authorized by the copyright
owner. We are making such material available to our readers under
the provisions of "fair use" in an effort to advance a better
understanding of political, economic and social issues. The material
on this site is distributed without profit to those who have
expressed a prior interest in receiving it for research and educational
purposes. If you wish to use copyrighted material for purposes
other than "fair use" you must request permission from the copyright
owner.

For media inquiries: crgeditor@xxxxxxxxx

(c) Copyright Mike Whitney, Information Clearing House, 2007