- Economic news remains focused on banks and housing, while
the threat mounts to the US dollar from massive federal budget deficits
in fiscal years 2009 and 2010.
-
- Earlier this year the dollar's exchange value rose against
currencies, such as the euro. UK pound, and Swiss franc, against which
the dollar had been steadily falling. The dollar's rise made US policymakers
complacent, even though the rise was due to flight from over-leveraged
financial instruments and falling stock markets into "safe" Treasuries.
Since April, however, the dollar has steadily declined as investors and
foreign central banks realize that the massive federal budget deficits
are likely to be monetized.
-
- What happens to the dollar will be the key driver of
what lies ahead. The likely scenario could be nasty.
-
- America's trading partners do not have large enough trade
surpluses to finance a federal budget deficit swollen to $2 trillion by
gratuitous wars, recession, bailouts, and stimulus programs. Moreover,
concern over the dollar's future is causing America's foreign creditors
to seek alternatives to US debt in which to hold their foreign reserves.
-
- According to a recent report in the online edition of
Pravda, Russia's central bank now holds a larger proportion of its reserves
in euros than in US dollars. On May 18 the Financial Times reported that
China and Brazil are considering bypassing the dollar and conducting their
mutual trade in their own currencies. Other reports say that China has
increased its gold reserves by 75 per cent in recent years.
-
- China's premier, Wen Jiabao, has publicly expressed his
concern about the future of the dollar. Arrogant, hubris-filled American
officials and their yes-men economists discount Chinese warnings, arguing
that the Chinese have no choice but to support the dollar by purchasing
Washington's red ink. Otherwise, they say, China stands to lose the value
of its large dollar portfolio.
-
- China sees it differently. It is obvious to Chinese
officials that neither China nor the entire world has enough spare money
to purchase $4 trillion of US Treasuries over the next two years. According
to the London Telegraph on May 27, Dallas Federal Reserve Bank president
Richard Fisher was repeatedly grilled by senior officials of the Chinese
government during his recent visit about whether the Federal Reserve was
going to finance the US budget deficit by printing money. According to
Fisher, "I must have been asked about that a hundred times in China.
I was asked at every single meeting about our purchases of Treasuries.
That seemed to be the principal preoccupation of those that were invested
with their surpluses mostly in the United States."
-
- US Treasury Secretary Timothy Geithner has gone to China
to calm the fears. However, even before he arrived, a Chinese central bank
spokesman gave Geithner the message that the US should not assume China
will continue to finance Washington's extravagant budgets. The governor
of China's central bank is calling for the abandonment of the dollar as
reserve currency, using the International Monetary Fund's Special Drawing
Rights in its place.
-
- President Lyndon Johnson's "guns and butter"
policy during the 1960s forced president Richard Nixon to eliminate the
gold backing that the dollar had as world reserve currency, putting foreign
central banks on the same fiat money standard as the US economy. In its
first four months, the Obama administration has outdone president Johnson.
Instead of ending war, Obama has expanded America's war of aggression
in Afghanistan and spread it into Pakistan. War, bailouts, and stimulus
plans have pushed the government's annual operating budget 50 per cent
into the red.
-
- Washington's financial irresponsibility has brought pressure
on the dollar and the US bond market. Federal Reserve Chairman Bernanke
thought he could push down interest rates on Treasuries by purchasing $300
billion of them. However, the result was to cause a sharp drop in Treasury
prices and a rise in interest rates.
-
- As monetization of federal debt goes forward, US interest
rates will continue to rise, worsening the problems in the real estate
sector. The dollar will continue to lose value, making it harder for the
US to finance its budget and trade deficits. Domestic inflation will raise
its ugly head despite high unemployment.
-
- The incompetents who manage US economic policy have created
a perfect storm.
-
- The Obama-Federal Reserve-Wall Street plan for the US
to spend its way out of its problems is coming unglued. The reckless spending
is pushing the dollar down and interest rates up.
-
- Every sector of the US economy is in trouble. Former
US manufacturing firms have been turned into marketing companies trying
to sell their foreign-made goods to domestic consumers who have seen their
jobs be moved offshore. Much of what is left of US manufacturing--the auto
industry--is in bankruptcy. More decline awaits housing and commercial
real estate. The dollar is sliding, and interest rates are rising, despite
the Federal Reserve's attempts to hold interest rates down.
-
- When the Reagan administration cured stagflation, the
result was a secular bull-market in US Treasuries that lasted 28 years.
That bull market is over. Americans' living standards are headed down.
The American standard of living has been destroyed by wars, by offshoring
of jobs, by financial deregulation, by trillion dollar handouts to financial
gangsters who have, so far, destroyed half of Americans' retirement savings,
and by the monetization of debt.
-
- The next shoe to drop will be the dollar's loss of the
reserve currency role. Then the US, an import-dependent country, will
no longer be able to pay for its imports. Shortages will worsen price
inflation and disrupt deliveries.
-
- Life for most Americans will become truly stressful.
-
-
- Paul Craig Roberts was Assistant Secretary of the Treasury
in the Reagan administration. He is coauthor of The Tyranny of Good Intentions.
He can be reached at: PaulCraigRoberts@yahoo.com
|