Farewell to the US Dollar

At the beginning of 2003, one euro bought one US dollar. Eighteen months ago, it bought $1.20. Now it is pushing $1.50, and there is no reason to think that it will stop there.

Three of the world's biggest oil exporters, Iran, Venezuela and Russia, are demanding payment in euros rather than U.S. dollars. Only straws in the wind, but all in the past couple of weeks.

For the majority of Americans who do not travel abroad, the only visible effect so far of the dollar's steep fall has been higher fuel prices at the pump. The Chinese imports that fill the big-box stores still cost the same, only because the Chinese yuan is still pegged to the American dollar. But that may be about to change, along with many other things.

The main reason for the collapse of the U.S. dollar is President George W. Bush's attempt to fight expensive foreign wars while cutting taxes at home. "Ronald Reagan proved that deficits don't matter," as Vice President Dick Cheney told then-Treasury Secretary Paul O'Neill.

But they do matter to foreigners. As the U.S. dollar fell in value, the price of oil (which is usually calculated in dollars) rose to compensate for it, but there was no comparable adjustment for foreign central banks that had huge amounts of U.S. dollars in their reserves. China, which was sitting on about a trillion U.S. dollars, simply lost several hundred billion as the currency's value fell. So various central banks started wondering if they should diversify their reserves, and some acted on it.

Many countries are replacing part of their dollar reserves with a basket of other currencies, and those who have pegged their currency to the dollar are starting to cut loose from it: Kuwait has already done so, and the United Arab Emirates is actively considering it. If China unpegs, things will move a lot faster, but in any case the long farewell of the U.S. dollar has begun.

[Excerpt of article by Gwynne Dyer, Salt Lake Tribune]

Credit crisis worsens, Alan Greenspan says the Fed is powerless

Fallout from the sub-prime mortgage crisis wreaked further havoc as Bank of America, Wachovia and PNC all said that investment write-downs would be worse than forecast as the credit crunch worsened.

Kenneth Lewis, Bank of America’s chief executive, said the credit markets “have turned down again and will probably remain challenging into next year.”

Kennedy Thompson, Wachovia’s chief executive, described the credit markets as the toughest in his 32-year career and said that no one knew when the situation would improve.

Alan Greenspan, the former Federal Reserve chairman, described the sub-prime mortgage crisis as an “accident waiting to happen” as a period of unprecedented global growth lulled investors into a false sense of security.

Mr Greenspan noted: “After more than half a century observing price bubbles evolve and deflate, I have reluctantly concluded that bubbles cannot be safely defused by monetary policy or other policy initiatives.”

[Excerpt of an article by Tom Bawden, The Times]

The chairman of investment bank Morgan Stanley's Asian arm, Stephen Roach, says the United States economy is headed towards recession and the rest of the world should be concerned.

[The Sydney Morning Herald]

National Debt growing at 1 million dollars a minute

Like a ticking time bomb, the mind-numbing $9.13 trillion (that's over $9,000,000,000,000.00!) national debt is an explosion waiting to happen. It's expanding by about $1.4 billion a day -- or nearly $1 million a minute.

What's that mean to you? It means almost $30,000 in debt for each man, woman, child and infant in the United States.

So long as somebody is willing to keep loaning the U.S. government money, the debt is largely out of sight, out of mind. But the interest payments keep compounding, and could in time squeeze out most other government spending. A major economic slowdown, as some economists suggest may be looming, could hasten the day of reckoning.

The first day the Chinese or the Japanese or the Saudis say, `we've bought enough of your paper,' then the debt -- whatever level it is at that point -- becomes unmanageable.

Texas billionaire Ross Perot made paying down the national debt a central element of his quixotic third-party presidential bid in 1992. The national debt then stood at $4 trillion and Perot displayed charts showing it would soar to $8 trillion by 2007 if left unchecked. He was about a trillion low.

[The New York Times]

A Global Crash on the Horizon

International Business editor for the UK Telegraph, Ambrose Evans Pritchard, summed up yesterday's action in the Asian markets: "The global credit crisis has hit Asia with a vengeance for the first time, triggering a massive flight to safety as investors across the region pull out of risky assets. …

'This is a severe warning sign,' said Hans Redeker, currency chief at BNP Paribas. 'Asia ignored the credit crunch in August but now we're seeing the poison beginning to paralyze the whole global economy.'"

The credit storm that began in the United States with subprime mortgages has spread to markets across the globe. In fact, the train has already crashed. What we're seeing now is the boxcars piling up on top of each other.

According to the Wall Street Journal: "Chinese authorities are slamming the brakes on bank lending, in their latest attempt to curb the runaway investment threatening to overheat what is soon to be the world's third-largest economy. In recent weeks, regulators have quietly ordered China's commercial banks to freeze lending through the end of the year, according to bankers in several cities. The bankers say that to comply, they are canceling loans and credit lines with businesses and individuals."

China is awash in US Dollars and that surplus is causing a steady rise in food and energy costs. This could be mitigated by allowing their currency to "float" freely. But a sudden, steep increase in the Chinese yuan's value could also send the world headlong into a global recession. For now, the lending freeze and price fixing appear to be the way out.

In California Governor Arnold Schwarzenegger has joined with four mortgage lenders to freeze adjustable interest rates (ARMs) for some of the state's highest-risk borrowers; another unprecedented move. The Governor hopes to avoid a collapse of the California real estate market which has gone into a tailspin.

Jon Basile, economist at Credit Suisse, summed it up like this: "There's a heck of a lot of bad news out there." Indeed.

The Sinking Currency

The euro, worth 83 cents in the early George W. Bush years, is at $1.47.

The British pound is back up over $2, the highest level since the Carter era. The Canadian dollar, which used to be worth 65 cents, is worth more than the U.S. dollar for the first time in half a century.

Oil is approaching $100 a barrel. Gold, down to $260 an ounce not so long ago, has surpassed $800.

Have gold, silver, oil, the euro, the pound and the Canadian dollar all suddenly soared in value in just a few years?

Nope. The dollar has plummeted in value, more so in Bush's term than during any comparable period of U.S. history. Indeed, Bush is presiding over a worldwide abandonment of the American dollar.

Nor is there any end in sight to the sinking of the dollar.

[Excerpt of an article by Patrick J. Buchanan]

Sinking Currency, Sinking Country

The dollar is plunging because America has been living beyond her means, borrowing $2 billion a day from foreign nations to maintain her standard of living and to sustain the American Imperium.

The prime suspect in the death of the dollar is the massive trade deficits America has run up, some $5 trillion in total since the passage of NAFTA and the creation of the World Trade Organization in 1994.

A sinking dollar means a poorer nation, and a sinking currency has historically been the mark of a sinking country. And a superpower with a sinking currency is a contradiction in terms.

What does this mean for America and Americans? As nations realize that the dollars they are being paid for their products cannot buy in the world markets what they once did, they will demand more dollars for those goods. This will mean rising prices for the imports on which America has become more dependent than we have been since before the Civil War.

Americans traveling to the countries whence their ancestors came will find that the money they saved up does not go as far as they thought. U.S. diplomats stationed overseas, students and businessmen are already facing tougher times.

[Excerpt of an article by Patrick J. Buchanan]

Dollar Devaluation

You want to know why so many Americans are struggling financially? Because the U.S. Dollar has been devalued by a third (1/3) over the past 5 years!

Today the FED cut interest rates by a quarter of a point in another effort to salvage the economy.

The Dollar has hit a new low, and devaluation means the cost of everything is going up.

The Middle Class is getting annihilated from this silent event. Incomes are not keeping up. This was done because this administration equates stock market success with economic success and has directed their efforts to drive up equities at literally any cost.

Meanwhile the Wall Street Banking Firms continue to make huge profits.

[Excerpt of an article by Robert McHugh, Ph.D.]

The ailing U.S. economy

With today being the 20th anniversary of “Black Monday,'' when the Dow fell 23 percent in one day, it seems a good time to post an overview on the latest on the economy.

- U.S. stocks tumbled the most in two months after earnings reports from banks, manufacturers and industrial companies heightened concern about the health of the financial markets and the economy.

- Oil prices have soared to another record high above $90 per barrel on Friday amid global supply jitters and tensions between Turkey and crude producer Iraq.

- It is on record that Japan and China led a record withdrawal of foreign funds from the United States in August, heightening fears of a fresh slide in the dollar and a spike in US bond yields.

- China now exerts enormous influence over the economies of virtually every country in the world, so that a slight change in its domestic economic policy has the potential to send shockwaves rippling throughout the world. Nowhere is this more apparent than with the United States, which is very much at the mercy of China when it comes to prices, wages, interest rates, most importantly, the value of the Dollar.

- Meanwhile, currency traders were given a green light to continue selling the US dollar, as the International Monetary Fund said the greenback "remains overvalued" and rejected claims the euro, which continues to increase in value, had risen too far.

The Crash that comes

America is frequently referred to as the “richest nation on earth”, but the reality is that most American people are just living on borrowed money, and for many the transformation from “seeming rich” to “poor” could happen overnight.

In fact, there is not one sector in the U.S. that has shown any measure of refrain. Government, corporate, and consumer debt are all at record levels.

Private debt is now much higher than during the Great Depression, and has been allowed to grow as if there were no consequences to borrowing, and no limit to what can be paid back in the future. The U.S. is more leveraged by private debt than ever before, and families have the lowest rate of saving since 1929, the beginning of the Great Depression.

The Federal Reserve has bailed out the U.S. economy a couple times in recent months, to the tune of billions of dollars. This has involved the Fed pumping liquidity into the system to thwart greater economic chaos, and also cutting the interest rate on the money it lends directly to banks.

What most American citizens don't realize is that the Federal Reserve, which controls the U.S. currency, inflation, and deflation at the cost of the American people, is a private corporation.

While the name “Federal Reserve” might suggest otherwise, it is simply a private company set up by big bankers in 1913, a company that makes decisions based on profits, as required by stockholders. The Federal Reserve System controls the U.S. currency, inflation, and deflation at the price of the American people.

The fact that Americans hold a great deal of private debt isn't troublesome to them, merely profitable.

Banks show shakey third quarter losses

Investment bank Merrill Lynch said credit and mortgage woes will lead to it post a third-quarter loss, as it takes almost $5 billion in writedowns in the wake of a credit crunch that paralyzed Wall Street this summer.

And Merrill Lynch was not by any means the only institution to announce its earnings would take a significant hit due to the declining mortgage market. Washington Mutual Inc. said its third-quarter earnings would tumble 75 percent on loan write downs and substantially higher provisions for loan losses.

Citigroup said its quarterly earnings would fall 60 percent, as it planned to write down more than $3 billion in securities backed by underperforming mortgages and loans tied to corporate bonds.

JPMorgan Chase and Bank of America are expected to disclose losses of about $3 billion in mortgage securities and leveraged loans when they report earnings this month, the Financial Times reported, citing an analyst.

Meanwhile, data from the U.S. Department of Housing and Urban Development suggests there about 750,000 homeless across the U.S. on any given night, with about 40 percent of those members of homeless families.

The cause: A convergence of low wages, high housing costs, an increase in housing foreclosures and cuts in federal and state housing assistance programs. One official explains: "I think what we are seeing here is a perfect storm.”

The Dollar's double Asian blow

Vietnam is planning to cut its purchases of US Treasuries and other dollar bonds, raising fears that other Asian central banks with control over two thirds of the world's foreign reserves may soon join the flight from US assets.

Vietnam is seen as weather vane for the bigger Asian powers. Asia together holds over 65 per cent of the world's total. The concern is that once one or two members of the region jump ship, it could set off a broader scramble.

Separately, the gas-rich Gulf state of Qatar announced that it had cut the dollar holdings from 99 per cent to 40 per cent, switching into investments in China, Japan, and emerging Asia. The move can easily be seen as a vote of no confidence in US economic management.

Last month, Saudi Arabia set off jitters in the currency markets when it decided not to cut interest rates in lockstep with the US Federal Reserve, raising doubts about its commitment to the Saudi dollar peg.

Kuwait has already abandoned its dollar peg, fearing that its economy would overheat if it continued to import America's loose monetary policies.

Separately, Iran said it would soon refuse to accept dollars for its oil exports, preferring to be paid in a "more credible currency".

If a number of OPEC suppliers began demand long-term futures contracts in euros instead of dollars, this would have an impact over time.

Hans Redeker, currency chief at BNP Paribas: “OPEC and Asia have been the two blocks funding the US current account deficit."

[The Telegraph]

U.S. nears $10 Trillion in the red

Congress just raised the limit once again, and the U.S. debt nears $10 trillion.

That's comes out to about $30,000 for every American.

For the fifth time since 2001, Congress is raising the debt limit, increasing it by $850 billion to $9.815 trillion. That's $9,815,000,000,000.00.

According to the folks who follow this stuff closely, the national debt has been rising by an average of $1.36 billion per day since September of last year.

Congress has an easy solution to deal with the rising tide of red ink. Instead of fretting over it, members simply allow the government to borrow more money, much to the consternation of some critics.

Sen. Kent Conrad, D-N.D., who heads the Senate Budget Committee, said the United States is ''in hock'' to Japan, owing more than $600 billion, and China, owing more than $400 billion.

He said the rising debt comes at the worst possible time, right before a flood of baby boomers retires, but that Congress has no choice but to raise the debt ceiling.

''If we fail to act in a timely way on raising the debt limit, the creditworthiness of all United States instruments would be called into question,'' Conrad said. "That could have a very severe effect on already shaky financial markets.''

[Excerpt of an article by Rob Hotakainen, McClatchy News Service]

The Crash has begun

The saga of the sagging American dollar continues. For the first time in 31 years, the Canadian loonie is stronger than the U.S. dollar.

In recent days, the dollar has also fallen to a record low against the euro for the seventh consecutive session.

Former U.S. Federal Reserve chairman Alan Greenspan said it is possible that the euro could replace the U.S. dollar as the reserve currency of choice.

Until the dollar might REALLY tanks, how dies the weakening dollar affect Americans? US consumers' standard of living may drop as they pay more for foreign goods, but demand for American labor will rise, say economists.

The last time that the buying power of the US dollar was this low was about a decade ago, and the major difference was that the price of oil ranged from $22 - 26 a barrel (in 2006 dollars). However, today the price of oil is about $80 a barrel.

Like when the buying power of the dollar was low, China's exports were tiny. The Census bureau reports the trade imbalance with China alone is $141 billion through July.

Globally, that skepticism has seeped over into the gold market and is one reason the price of gold is now above $732 a troy ounce, a 27-year high. So far this year, gold is up about 15 percent.

How the U.S. economy remains afloat

What does it mean that the US has a $800 billion trade deficit? It means that Americans are consuming $800 billion more than they are producing.

How do Americans pay for it? They pay for it by giving up ownership of existing assets--stocks, bonds, companies, real estate, commodities. America used to be a creditor nation. Now America is a debtor nation.

Foreigners own $2.5 Trillion more of American assets than Americans own of foreign assets. When foreigners acquire ownership of US assets, they also acquire ownership of the future income streams that the assets produce. More income shifts away from Americans.

How long can Americans consume more than they can produce? American over-consumption can continue for as long as Americans can find ways to go deeper in personal debt in order to finance their consumption and for as long as the US dollar can remain the world reserve currency.

Americans have increased their consumption by dropping their saving rate to the depression level of 1933 when there was massive unemployment and by spending their home equity and running up credit card bills.

Foreign governments and investors are diversifying into other traded currencies. As a result, the dollar prices of the Euro, UK pound, Canadian dollar, Thai baht, and other currencies have been bid up. In the 21st century, the US dollar has declined about 33 percent against other currencies. The US dollar remains the reserve currency primarily due to habit and the lack of a clear alternative.

[Excerpt of an article by Paul Craig Roberts, Assistant Secretary of the Treasury in the Reagan administration, and Associate Editor of the Wall Street Journal editorial page.]

Is China quietly dumping US Treasuries and buying Gold?

A sharp drop in foreign holdings of US Treasury bonds over the last five weeks has raised concerns that China is quietly withdrawing its funds from the United States, leaving the dollar increasingly vulnerable.

"We won't know if China is behind this until the Treasury releases its TIC data in November, but what it does show is that world central banks are in a hurry to get out of the US. They don't seem to be switching into other currencies, so it is possible they are moving into gold instead. Gold is now gaining momentum across all currencies," Hans Redeker, currency chief at BNP Paribas said.

Any evidence that China was pulling out would risk setting off an unstoppable stampede, which is why such a policy would never be announced. It holds the world's biggest pool of resrves, followed by Japan.

While the greenback has been resilient over recent weeks, most experts believe that America's $850bn current account deficit will eventually cause the dollar to resume its relentless slide.

[Excerpt of an article by Ambrose Evans-Pritchard, The Telegraph]

The Market Chaos

How could something so small — delinquent subprime mortgages, which account for less than 2% of U.S. mortgage lending — trigger a financial meltdown so severe that it drove the formerly thriving stock market down 10%, sharply tightened credit for both homeowners and businesses, and even scared the Federal Reserve?

Little by little, the factors that contributed to the fall are becoming clearer, even if the relationship among them is not fully understood.

Much of the disaster has to do with the way those shaky mortgages were turned into complex investments and sold to banks, hedge funds and other institutions, here and abroad. As the risks of those securities became clear and their value fell, their owners were squeezed, particularly if they'd bought the securities with borrowed money to amplify their potential profits. To raise cash to cover their losses, they sold off unrelated investments, notably stocks. Markets tumbled.

The Fed — which had minimized the threat until the crisis began to unfold — began pumping liquidity into the system and on Friday cut the interest rate on the money it lends directly to banks. Whether the threat is now contained or will spread deeper into the economy is, for now, guesswork. What seems clearer is that these complex investment strategies are creating greater risks than was generally recognized.

[Excerpt of USAToday Opinion]

Just how vulnerable is the U.S. economy?

The last time the Federal Reserve stepped in to rescue the U.S. economy, to the extent it did yesterday, was just after that infamous September 11th when investment confidence had been shattered.

A couple days ago, China let Washington and Wall Street know that China’s considerable holdings of US dollars and Treasury bonds “contributes a great deal to maintaining the position of the dollar as a reserve currency.”

In other words, "We got you by the short hairs!"

Adding that “the Chinese central bank [may] be forced to sell dollars, which might lead to a mass depreciation of the dollar.”

The delusion that the US is “the world’s sole superpower” is no longer a reality.

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