Tuesday, April 25, 2006

Obliterating the Dollar and the Middle Class--Preparing for the Economic Typhoon

Found this absolutely superb article (written by Mike Whitney) over at Counterpunch. Couldn't have said any of it better myself! I believe when you read it, you will agree that it was time well spent...

Gold traders love George Bush. They know that his blundering mismanagement of the economy will keep gold soaring well into the future. In the last year alone gold increased nearly $200 an ounce capping off a 5 year run that has taken it from $274 per ounce to $635 at Friday's close.

These are serious numbers and they reflect the uneasiness with the global political situation (Iran, Nigeria) as well as concern about the oceans of debt generated by our Oval Office numbskull.

Is it really possible for one man to single-handedly obliterate the world's most robust economy?

Guess so.

After 6 years of looting the public till, the cupboard is just about bare. Bush has chalked up another $3 trillion of public debt which sounds the death-knell for Social Security, public education, and the social safety net.

Think I'm kidding? Consider what new Fed-master Ben Bernacke said just yesterday, "If the dollar declined sharply, it would not necessarily disrupt markets".

That's right; the Fed is conspiring to reduce its debt payments by driving a wooden stake into the heart of the greenback. In three to six months the dollar will probably be valued at 1.40 to 1.50 per euro. That is, if the bottom doesn't fall out completely. After all, allies and enemies alike are pretty sick of the good old USA, so it wouldn't be out of the question for someone (perhaps, China) to start a sell-off that would end in disaster.

The dollar is now recognized as the empire's Achilles heel and the primary target for any asymmetrical warfare directed at America. If that means regime change at home, count me in. I'll worry about the wheelbarrow-loads of greenbacks for a loaf of bread some other time.

The Group of Seven industrialized nations (G-7) took a few swipes at Washington's profligate spending this weekend; warning that they wanted "more flexibility" in the Asian currencies. This is a clear sign that the path is being paved for a freefalling dollar while the other currencies gain ground.

How do you like the idea that half of your savings will be erased through executive fiat?

Since Bush took office the dollar has plummeted 30% against the euro. The only thing that has kept it from joining the peso is the skyrocketing oil prices which have allowed the Fed to keep the printing presses going at full tilt. That's because oil is denominated exclusively in dollars, so while the price per barrel continued upward, the Fed was able to circulate another $2.5 trillion of funny money. The high cost of oil has kept the dollar reasonably stable even though the twin-deficits have eroded its true value. Maintaining the monopoly on the sale of oil (which forces foreign central banks to hold billions of greenbacks in reserve) is critical to US prosperity. A switch to euros would weaken demand for the dollar and send the American economy into a tailspin.

Unfortunately, other countries are frustrated with the recklessness of the Bush team and are threatening to destabilize the system. First there was the danger of Iran opening an oil bourse that would compete head-on with the dollar; increasing the number of euros stockpiled in the central banks. Now, the Russian Finance Minister, Alexei Kudrin has fired a broadside at his American counterparts saying, "The US dollar is NOT the world's absolute reserve currency". He noted that the unsustainable' US trade deficit is "causing concern" and that "the international community can hardly be satisfied with this instability."

Kudrin's remarks were greeted with the shock one would expect from a dirty bomb on a crowded subway. America's global dominance requires that it maintain the dollar as the world's reserve currency; if that changes then the US will be unable to trade its painted-script for valuable resources. It would also mean that America would have to start paying back its $9 trillion national debt.

Kudrin's comments were interpreted to mean that Russia might ease away from the dollar in its oil transactions; a change that might spread to other countries that are equally skeptical of Uncle Sam's recklessness.

The eroding value of the dollar is just one of the economic crises facing the American people. A 6 month downturn in housing starts signals that the housing bubble, the largest equity bubble in history, is quickly losing steam. With long term interest rates steadily rising (along with energy prices) the shaky loans that were blessed by former Fed-chief, Greenspan, are beginning to unravel. "No down payment", ARMs (Adjustable Rate Mortgages) and easy financing have the over-extended American public teetering towards insolvency. Foreclosures are up, mortgages balances are at unprecedented levels, and inventories are larger than they've been since the early 90s. Last month produced the biggest slowdown in sales in a decade and the real pain hasn't even begun. At least $3 trillion of the $9 trillion equity bubble is built entirely on the cheap money pumped into the system by the Federal Reserve to keep the economy percolating while Bush and Co. stole every last farthing in the US Treasury. Greenspan's low interest rates were nothing more than a carnival-hucksters' scam to shift the vast wealth of America's middle class into the pockets of well-heeled constituents.

Thanks, Alan.

Last year Americans used their homes as a personal ATM; withdrawing over $600 billion to pay off credit card debt and for personal spending. That "presto-equity" is quickly evaporating as home prices flatten out and wages continue to stagnate. Personal debt is currently in the stratosphere and there are some gloomy signs that the American consumer, that great engine of global economic power, is finally tapped out. Consumer spending represents 70% of US GDP (Gross Domestic Product) so, as housing prices retreat and energy prices increase; Americans will face the greatest economic challenge since the Great Depression.

One thing is absolutely certain; Bush will stick by his constituents to the bitter end. It is physically impossible for him to act in the interests of the American people. He won't be deterred by the falling dollar, the deflating housing market, or the skyrocketing energy prices. He'll make his budget-busting tax cuts permanent and plunge the country into a sea of red ink.

Betting that George Bush will do the wrong thing for the nation is not a matter of conjecture; it is a mathematical certainty. He is deliberately destroying the middle class, the prospects for upward mobility, and the currency. The economic underpinnings of American democracy have been demolished in just 6 short years. Smart people will prepare themselves for the typhoon ahead.

Mike Whitney lives in Washington state. He can be reached at: fergiewhitney@msn.com


Out at the peak said...

One sad thing is that Bush believes, in his own mind, that he is serving America better than anyone else can. He will never admit that his policies are terrible mostly because he'll never even understand what he is doing.

Although Hillary Clinton would also make terrible policies as well. We need someone smart like McCain ... or anyone that isn't an egomaniac which is hard in politics since they usually seek this power.

Anonymous said...

Wow. Thanks for making this the first post on your website. As a political middle-of-the-roader, I found it very informative.


contrarian2day said...

Excuse me--Who is the idiot? I believe this is post # 87 on my Blog (not the 1st) and I actually voted for Bush twice (as the lesser of two evils). I've been a registered Republican for years, but I feel these guys have completely destroyed our Economy (so it's partially my fault).

Anyway, I don't give two rat's asses who is Republican or who is Democrat. I think the vast majority of politicians on both sides are in it all for themselves.

This crap must come to an end! We need LEADERSHIP looking out for both this and FUTURE generations. As it stands now, we are quickly headed for third world status.

"Political middle of the roader"?Sounds to me like you are quite biased towards someone in office and maybe I I hurt your sensitive little feelings.


Go back to drinking your Kool-Aid and continue to have an oblivious day.

A. B. Dada said...

I'm not sure if we need leadership to do anything, anymore. What we need is for leadership to step back and let people be personally responsible for their own actions. Not just responsible for what situations their actions create today, but tomorrow and 40 years from today.

If people don't have the right to fail, then there is no purpose in succeeding.

John Doe said...

Hey, quick question. Can you please post a link about Bernanke's quote of the falling dollar. I had not yet picked that one up, but would be very interested if he said that publicly.

John Doe said...
This comment has been removed by a blog administrator.
CoolMintListerine said...

It's funny that now blog is free from anons calling names, what is it inferiority complex? I still dont really grasp why W needs to destroy middle class, any ideas?

contrarian2day said...

John Doe,

Here's the link and Bernanke comments you are looking for:


Fed chief Ben Bernanke has declared that he does not foresee a massive drop in the dollar as a result of the unprecedented U.S. trade deficit. But he also said that should one occur, he is confident the economy would simply absorb the impact and continue in stride.

"Although U.S. trade deficits cannot continue to widen forever, these deficits need not engender a precipitous decline in the dollar," Bernanke wrote in a letter to a member of the House of Representatives, according to Reuters News

"Nor should such a decline, were it to occur, necessarily disrupt financial markets, production or employment."

The letter was Bernanke's response to questions from a February House Financial Services Committee hearing on monetary policy.

Bernanke's opinion is in stark contrast to that of many analysts who have insisted that the ever-widening trade gap will likely lead to a harmful drop in the U.S. currency.

Though Bernanke is less concerned about damage to the dollar, his letter did acknowledge that "the possibility of a future disruptive correction of the U.S. trade deficit cannot be ruled out" and that continued implementation of "policies designed to maintain the stability of the financial system and the flexibility and resilience of the economy" would be the best safeguard against any potential threats.

The Fed chairman also reiterated that current U.S. policy dictates that government must allow markets themselves to establish the value of the dollar, with intervention coming only if absolutely necessary to "counter disorderly market conditions."

According to one report, Bernanke said that short-term interest rates might need to be higher than usual if long-dated rates reflect small premiums.

He also reportedly claimed that a flattened yield curve did not necessarily indicate an imminent recession in the United States but could just as easily be blamed on other factors, such as a lack of global savings.

Anonymous said...

i really appreciate your site and wish you continued success. please continue to post as you have opened my eyes beyond mtv =D

best regards,
15 y/o girl from good ol' usa

Anonymous said...

Goverment to use tax dollars to give all Americans a rebate check of $100 to offset rising gasoline prices. This is the Republicans way to try and push a bill through congress to open ANWR to drilling.

Also, while Oil companies rake in record profits, and get massive tax breaks, the gov't does nothing. Shows you the GOP is in bed with big oil.


twib said...

Nice article, but it's not just Bush. It's Congress that does all the appropriations. They haven't met a spending bill they haven't liked. Time for a change of leadership?

demarko said...

With all the informtion at hand, what should an american invest in or buy to conteract these situations i.e ( buy gold, trade our savings for euro) ????? please tell us!!! We believe you, now what does the middle class have to do to protect its savings account?? Thanks in advance.

Demarco- Washington

Gary Anderson said...

I would consider buying foreign stocks, American companies that sell to foreign nations, and gold and silver. That would seem to be a reasonable hedge. If deflation did occur you would have to cash these out, but a falling dollar would seem to result in inflation first. If US businesses really perform well, it is possible that we could have less inflation and little chance at deflation, but that remains to be seen.