by Mike Whitney
The U.S. Dollar is kaput. Confidence in the currency is eroding by the day.
A report in The Sydney Morning Herald stated, â€œAustraliaâ€™s Treasurer Peter Costello has called on East Asiaâ€™s central bankers to â€˜telegraphâ€™ their intentions to diversify out of American investments and ensure an â€˜orderly adjustmentâ€™â€¦.Central banks in China, Japan, Taiwan, South Korea, and Hong Kong have channeled immense foreign reserves into American government bonds, helping to prop up the US dollar and hold down interest rates,â€™ said Costello, but â€˜the strategy has changed.â€™â€
Indeed, the strategy has changed. The world has come to its senses and is moving away from the green slip of paper that is currently mired in $8.3 trillion of debt.
The central banks now want to reduce their USD reserves while trying to do as little damage to their own economies as possible. Thatâ€™ll be difficult. If a sell-off ensues, it will start a stampede for the exits.
Thereâ€™s little hope of an â€œorderly adjustmentâ€ as Costello opines; thatâ€™s just false optimism. When the greenback begins listing; things will turn helter-skelter quickly.
In September, we saw early signs that the dollar was in trouble. The trade deficit registered at $70 billion but the Net Foreign Security Purchases (NFSP) came in at a paltry $33 billion. That means that our main trading partners are no longer buying back our debt which puts downward pressure on the greenback. The Fed had two choices; either raise interest rates substantially or let the currency fall. Given the tenuous condition of the housing bubble and the proximity of the midterm elections, the Fed did neither.
A month later, in October, the trade deficit hit $69.9 billion but, then, without warning, a miracle occurred. The Net Foreign Security Purchases skyrocketed to a â€œhistoric highâ€ of $116.8 billion; covering both monthsâ€™ shortfalls almost to the penny.
Not likely. Either the skittish central banks decided to â€œstock upâ€ on their dollar-denominated investments or the Federal Reserve (and their banking-buddies) is buying back its own debt to float us through the elections.
This is exactly the kind of hanky-panky that people expected when Greenspan stopped publishing the M-3 last March keeping the rest of us in the dark about what was really going on with the money supply.
Are we supposed to believe that the skeptical central banks suddenly doubled up on their T-Bills while theyâ€™re (publicly) moaning about the dollarâ€™s weakness and threatening to diversify?
Thatâ€™s a stretch.
According to the Wall Street Journal the Chinese Central-bank governor Zhou Xiaochuan stated unequivocally that â€œWe think weâ€™ve got enough.â€ The Chinese presently have nearly $1 trillion in USD and US Treasuries.
The United States runs a $200 billion per year trade deficit with China. If theyâ€™ve â€œgot enoughâ€ weâ€™re dead-ducks. After all, it doesnâ€™t take a sell-off to kill the dollar, just unwillingness on the part of the main players to stop purchasing at the same rate.
Of course, everyone in Washington already knew that doomsday was approaching. Thatâ€™s the way the system was designed from the very beginning. Itâ€™s all part of the madcap scheme to â€œstarve the beastâ€ and transfer the nationâ€™s wealth to a handful of western plutocrats. Thatâ€™s explains why the Fed and the White House whirred along like two spokes on the same wheel; every policy calculated to thrust the country headlong toward disaster.
The administration never created a funding mechanism for the $400 million tax cuts or for the 35% expansion of the Federal government. Defense spending increased by leaps and bounds as did the â€œno-bidâ€ contracts for friends of the Bush clan. At the same time, interest rates were lowered to rock-bottom to put as much money as possible into the hands of people who couldnâ€™t meet the traditional criteria for a mortgage. And, if gluttonous waste, reckless overspending and â€œMickey Mouseâ€ loans were not enough; the Fed capped it off by doubling the money supply in 7 years; a surefire prescription for hyper-inflation.
So, which one of these policies was not deliberate?
The financial crisis that we now face was created by design. It is intended to destroy the labor movement, crush the middle class, quash Medicare, Medicaid and Social Security, reduce our foreign debt by 50 or 60%, force a restructuring of Americaâ€™s debt, privatize all public assets and resources, and create a new regime of austerity measures which will divert more wealth to the banking and corporate establishments.
The avatars of neoliberalism invariably use crooked politicians to spawn enormous â€œunsustainableâ€ debt so that the nationsâ€™ riches can be transferred to ruling elites. It works the same everywhere. Itâ€™s a form of corporate colonization, only this time the victim is the good old USA.
â€œThe Phase of Impactâ€
According to Richard Daughty in his prescient article â€œThe Phase of Impactâ€ the Federal Reserve and the Treasury Dept have already manned the battle-stations. Hereâ€™s an excerpt:
â€œMr. Paulson, the Secretary of the Treasury, is, by virtue of his ascension to the throne, now the head of the shadowy Presidentâ€™s Working Group of Financial Markets (which was created by Presidential Order 12631) and he is insisting that they meet more often, namely every 6 weeks!
This whole Working Group thing was originally set up as a fallback, ad-hoc, if-then defense to deal with possible economic emergencies, but now they are routinely meeting every 6 weeks. He has even ordered Jim Wilkinson, his chief of staff, to â€˜oversee the creation of a Treasury Command Center to track markets world-wide and serve as an operations base in a crisisâ€! (Wall Street Journal) World-wide!! The American government is moving to take control of the world-wide economy as the result of an anticipated crisis? Yikes!â€
Daughty goes on to say: â€œSo a lot of the hubbub is obviously being caused by some approaching upheaval, perhaps reflected in something sent to me by Phil S., which is the Global Europe Anticipation Bulletin No8 which reminded us that last May they predicted that the economy would have a â€˜phase of accelerationâ€™ that would begin in June, and it â€œwould be spread out over a period of a maximum of 6 monthsâ€™, which it subsequently did. They said then, and are saying again now, that a â€˜phase of impact will begin in November 2006â€™, and that this impact phase would be the â€˜explosive phase of the crisisâ€™.
This â€˜phase of impactâ€™ that is due to begin momentarily is, they explain, â€˜a period when a series of brutal crises starts affecting by contamination the total system. This explosive phase of the crisis, which will last 6 months to one year, will affect directly and very strongly financial players and markets, the owners of investment schemes with fixed incomes in dollars, pension funds and the strategic relations between the United States on the one side, and Europe and Asia on the other.â€ (Richard Daughty; â€œThe Phase of Impactâ€ Kitco.com)
Predictions, of course, are rarely reliable and Daughtyâ€™s scenario may be a bit too apocalyptic for many. But if we accept the premise that the tax cuts, the expansion of the federal government, the doubling of the money supply, and the $10 trillion that was sluiced into the housing bubble were not merely â€œhonest mistakesâ€ made by â€œsupply sideâ€ enthusiasts; then we must assume that this is all part of a loony plan to demolish the economic foundation-blocks of the current system and remake society from the ground up.
Domestically, that plan appears to involve the activation of the police state.
In the last few weeks the Bush administration has passed the Military Commissions Act of 2006 which allows the president to arrest and torture whomever he chooses without charging him with a crime. Also, unbeknownst to most Americans, Bush signed into law a provision which, according to Senator Patrick Leahy, will allow the president to unilaterally declare martial law. By changing The Insurrection Act, Bush has essentially overturned the Posse Comitatus Act which bars the president from deploying troops with the United States. The John Warner Defense Authorization Act of 2007 (as it is called) also allows Bush to take control of the National Guard which has always been under the purview of the state governors. Bush now has absolute power over all armed troops within the country, a state of affairs which the constitution purposely tried to prevent. The administrationâ€™s dream of militarizing the country under the sole authority of the executive has now been achieved although the public still has no idea that a coup that has taken place.
Internationally, the falling dollar means that Americaâ€™s debt will be reduced proportionate to the percentage-loss of the dollar in relation to other currencies. This is a great deal for the U.S. First the Fed prints fiat money to buy valuable resources and manufactured goods and then it nabs a discount by depreciating its currency. Itâ€™s a â€œwin-winâ€ situation for Washington, although it will undoubtedlycheat unwitting foreign-creditors out of their hard-earned profits. Itâ€™s doubtful that their interests will weigh very heavily on the money-lenders at the US Treasury or the Federal Reserve.
The dollar faces a second crisis at home which is bound to play out throughout 2007. The $10 trillion dollar housing bubble is quickly losing air causing a precipitous drop in GDP. The housing industry is seeing its steepest decline in 30 years and home equity is beginning to shrivel. Housing has been the one bright spot in an otherwise bleak economic landscape. With the housing market slowing down and prices decreasing, the $600 billion of consumer spending which was extracted in 2005 from home equity will quickly evaporate triggering an overall slowdown in the economy. (Consumer spending is 70% of GDP)
By the Fedâ€™s own calculations; â€œThe total amount of residential housing wealth in the US just about doubled between 1999 and 2006 up from $10.4 trillion to $20.4 trillion. (â€œTimes Onlineâ€) If these figures are accurate than we can assume that much of Americaâ€™s â€œperceivedâ€ growth has been nothing more than the expansion of debt. In fact, that seems to be the case. Wages have been stagnant since the 1970s, 3 million manufacturing jobs have been outsourced, savings have shrunk to below 0%, and personal debt is soaring. We have become an â€œasset-basedâ€ society and when the principle asset begins to loose its value, we are in deep trouble. As housing prices continue to decline through 2007 we can expect a full-blown recession. If energy prices rear their ugly head again, (were they lowered for the elections?) it will just be that much worse.
So, how will recession affect the dollar?
Capital has no loyalties. It follows the markets. When Americaâ€™s bustling consumer market stalls, weâ€™ll undergo capital flight just like everywhere else. The 3 million lost manufacturing jobs, the 200,000 lost high-paying high-tech jobs, the tax incentives for major corporations doing business outside the country; all signal that corporate America has already loaded the boats and is headed for more promising markets in Asia and Europe. A sluggish consumer market could further weaken the dollar and force Americans to begin saving again but, (and hereâ€™s the surprising part) the decision-makers at the Federal Reserve and the Treasury Dept donâ€™t really care if the face-value of the greenback goes down anyway.
What really matters is that the dollar retains its position as the worldâ€™s reserve currency. That allows the Federal Reserve to continue to print the money, set the interest rates, and control the global economic system. The dollar presently accounts for 66% of foreign currency reserves in central banks across the globe, an increase of nearly 10% in one decade alone. The dollar has become the international currency, a de-facto monopoly. This is thegoal of the globalists and the American ruling elite who dream of one system, the dollar-system;with usrunning it.
So, how will this cadre of plutocrats coerce the other nations to continue to use the dollar while it plummets from its perch?
As long as oil is denominated in dollars, the central banks will be forced to stockpile American scrip regardless of its value. Itâ€™s no different than holding a gun to someoneâ€™s head. They will use our debt-plagued greenbacks or their cars and trucks will sputter, their tractors and factories will wheeze, and their economies will grind to a halt. Itâ€™s just that simple.
America cannot maintain its superpower status unless it continues to control the global economic system. That means the linkage between the dollar and oil must be preserved. The Bush troupe sees this as an existential issue upon which the future of Americaâ€™s ruling class depends. By 2020, 60% of the worldâ€™s oil will come from the Middle East. Bush will do everything in his power to control the resources of the Caspian Basin, thereby expanding US dollar-hegemony and paving the way for a new American century