Monday, December 24, 2007

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]

Tuesday, December 18, 2007

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]

Friday, December 07, 2007

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]