The Big Black Hole in the Dollar’s Future

[Bankotsu]

The Big Black Hole in the Dollar’s Future

by F. William Engdahl

For months the US Government has insisted that the worst of the “recession” is nearing an end and that “green shoots” of recovery are at hand.

The reality is opposite. The financial crisis that began in August 2007 in the small “sub-prime” or high-risk segment of the $20 trillion mortgage debt market is now spreading, lawfully, to the “prime” or high-quality segment.
The economy of the world’s sole Superpower is coming to resemble more than of the Roman Empire in the fourth Century as it collapsed into anarchy, debt and chaos.

Nations of the world are taking steps to move away from dollar dependency. China, Russia, Brazil, Kazakhstan are calling for a new reserve currency. China is quietly making bilateral currency swap agreements with Asian trade partners as well as Latin American and former Soviet Union countries.

The major trade currency of the China-ASEAN Free Trade Area will not likely be the dollar. In Latin America the ALBA countries are switching to sucre as a trade currency instead of dollar starting from January 2010. MERCOSUR is going to refuse dollar in foreign trade in 2011.

The worst is yet to come for the world reserve currency.


The US economic reality

The reality of the US economy is opposite the propaganda of Wall Street.

In real economic terms, the US Economy is already in a Depression. The US economy is in its worst economic contraction since the first down wave of the Great Depression in the early 1930s.

As one former Reagan Treasury official recently stated, “There is no economy left to recover. The US manufacturing economy was lost to off-shoring and free trade ideology. It was replaced by a mythical ‘New Economy’ based on services. It was fed by the Federal Reserve's artificially low interest rates, which produced a real estate bubble, and by "free market" financial deregulation, which unleashed financial gangsters to new heights of debt leverage and fraudulent financial products.”

When that “virtual” economy collapsed, Americans' wealth invested in their real estate, pensions, and savings collapsed. The debt economy caused Americans to leverage their assets. They refinanced their homes and spent the equity. They spent their limit on numerous credit cards. They worked as many jobs as they could find. Debt expansion and multiple family incomes kept the US economy going over the past two decades.

Now suddenly Americans can't borrow in order to spend. They are over their heads in debt. Jobs are disappearing. America's consumer economy, approximately 70% of GDP, is dead. Those Americans who still have jobs are saving against the prospect of job loss. Millions are homeless. Fully 14% of all home mortgages are either in default or at least one payment behind, an historic record. Trend is worsening. Some have moved in with family and friends; others are living in tent cities.

The current economic downturn is far from over. This downturn will continue to deteriorate, be extremely protracted, extremely deep and not respond to traditional economic stimulus. The US economy is caught in a classic Third World “debt trap.”

The US economy suffers from severe underlying structural problems tied to consumer debt relative to income. Households cannot keep up with inflation and no longer can rely on excessive debt expansion for meeting short-falls in maintaining living standards. The structural issues are not being addressed by Obama stimulus programs.

They cannot be addressed without a significant fundamental change in government economic and trade policies, which under the best of circumstances still would drag out economic depression for many years to come.

Since 2007 US consumers have been saving to pay down their huge credit card, auto and home debts. They are not and will not consume for a long time. In the past 12 months they have reduced debt by a staggering $2 trillion. That has reduced the economic growth seriously and is the driver of the depression. There is no choice.

If we calculate data in absence of the official manipulation or “cooking the books”, the real estimate of unemployment is above 22% today, not the official 10%. The GDP is declining at the most severe rate since the Second World War and rapidly nearing levels of the Great Depression.

US manufacturing output is collapsing. Household debt levels are at the highest in US history over 300% of disposable income. Corporate debt is equally high. Government debt is at a record and soon to reach 100% of GDP. The United States economy is caught in a debt trap of its own making.

Prospects for the dollar

Since 1985 when the United States became a net debtor country for the first time since the First World War, the United States has become the world’s largest net debtor country. As of January 2009, America's net international investment position was a negative $3.47 trillion, the Commerce Department reported.

That represents the difference between the value of U.S. assets owned by foreigners ($23.36 trillion) and the value of foreign assets owned by Americans ($19.89 trillion).

The USA as a single entity, public and private owes the world $3.47 trillion. Much of that is to China as well as Japan and Russia. The USA is a military superpower today but an economic dwarf. During 2008 alone the USA net debt grew by $1.33 trillion, or 62%.

The tendency is not getting better as bank bailout and other economic coats soar. Foreigners now hold nearly 50% of the federal government's publicly held debt. If foreign investors significantly reduce their purchase of future US Treasury debt securities, US interest rates will soar and the dollar collapse. America's net debtor status with foreigners is at the highest level in US history.

The major source of dollar support has come from trade surplus countries with the USA whose central banks have little place to invest those dollars as safe as in US Government debt. The largest dollar debt buyers in the recent past for different reasons have been the central banks of Russia, Japan and, far ahead of all others—The Peoples Bank of China.

The United States economic model of trade and current account deficits is not sustainable. No one can say when the dollar will fall further, but it must fall in the months ahead. Only a dramatic and unexpected war might conceivably buy a little more time for the dollar. Even that is not certain so great are the deficits.

The United States today is caught in a deadly debt trap much as Argentina or other Third World countries were during the 1980’s. But that is not all. The prospects for Federal US Government deficits going forward are extremely negative as well.


Conclusion

The US government's budget deficit has jumped from $455 billion in 2008 to $2,000 billion this year, with another $2,000 billion for 2010. Obama has just intensified America's expensive war in Afghanistan and initiated a new war in Pakistan. There is no way for these deficits to be financed except by printing money.

The US government's budget is 50% in deficit. That means half of every dollar the federal government spends must be borrowed or printed. But the world is growing unwilling to lend $2 trillion annually to Washington.

America's largest creditor, China, is warning Washington to protect China's investment in US debt and discussing a new reserve currency to replace the dollar before it collapses. China is spending down its holdings of US dollars by acquiring gold and stocks of raw materials.

According to well-placed sources in Saudi Arabia, there have been secret meetings in recent months between the major Arab oil producers, including Saudi Arabia, and reportedly also Russia, with the leading oil consumer countries including two of the three largest oil import countries―China and Japan. Their project is to quietly create the basis to end a 65-year long “iron rule” of selling oil only in US dollars. That would be catastrophic for the dollar role.

Nothing in Obama's economic policy is directed at saving the US dollar. Obama's policy, like Bush's before him, is controlled by Wall Street and the arms industries. The US economy is going into severe depression and the dollar with it unless there is a new world war, God forbid. __________________________________________________ _________________________

F. William Engdahl is author of the best-selling book on oil and geopolitics, A Century of War: Anglo-American Oil Politics and the New World Order, has been published in eight languages. He is one of the more widely discussed analysts of current political and economic developments, and his articles and analyses have appeared in numerous newspapers and magazines and well-known international websites. In addition to discussing oil geopolitics and energy issues, he has written on issues of agriculture, GATT, WTO, IMF, energy, politics and economics for more than 30 years, beginning the first oil shock and world grain crisis in the early 1970's. His book, ‘Seeds of Destruction: The Hidden Agenda of Genetic Manipulation documents the attempt to control world food supply and populations. He is a winner of the ‘Project Censored Award’ for Top Censored Stories for 2007-08.

After a degree in politics from Princeton University (USA), and graduate study in comparative economics at the University of Stockholm, he worked as an independent economist and research journalist in New York and later in Europe. He is a Research Associate of Michel Chossudovsky’s well-respected Centre for Research on Globalization (www.globalresearch.ca (http://www.globalresearch.ca)), and a Visiting Guest Professor at the Beijing University of Chemical Technology. Engdahl contributes regularly to a number of international publications on economics and political affairs.

http://en.fondsk.ru/article.php?id=2684

(http://en.fondsk.ru/article.php?id=2684)
F. William Engdahl
http://www.engdahl.oilgeopolitics.net (http://www.engdahl.oilgeopolitics.net/)

[Bankotsu]

Sarkozy wants end to dollar dominance

Thursday, 7 January 2010 11:52

French President Nicolas Sarkozy has urged an end to the US dollar's predominance, warning that its weakness poses an 'unacceptable' threat to European competitiveness.

'The monetary disorder has become unacceptable,' said Sarkozy. 'The world is multi-polar, the monetary system must become multi-monetary,' he added.

The dollar has weakened considerably against the euro in the past year as optimism for economic recovery has grown, making euro-priced exports more expensive and putting euro zone producers at a competitive disadvantage.

Sarkozy had said on Wednesday that the dollar's weakness posed a 'considerable' problem for French businesses and should be 'at the centre of international debate'. His comments today came in a speech to a Paris conference on new approaches to capitalism.

During the financial crisis, Sarkozy has taken a harsh stance against freewheeling capitalist practices and pushed hard for a stricter line on bank regulation and tax evasion.

He has said he planned to work to transform the international monetary system when France takes over the leadership of the G20 nations in 2011.

http://www.rte.ie/business/2010/0107/dollar.html

[Bankotsu]

Panic at the FED or Back to Normalcy?


ByF. William Engdahl, 24 February 2010



The decision of the US Federal Reserve to raise its key interest rate was definitely not a sign of confidence in the US economic recovery or a signal that Fed policy is slowly returning to normal as claimed. It was rather a signal of panic over the weakness in US Government bond markets, the heart of the dollar financial system.



Financial markets have reacted with jubilation, by buying dollars and selling Euros, at the decision by the Fed to raise rates for the first time since 2006 for its so-called Discount Rate, going from 0.5% to 0.75%. The Discount Rate is the interest rate charged for banks to borrow from the central bank. At the same time the Fed left its more important short-term Fed Funds rate unchanged and historically low -- between 0.0% and 0.25%. In its official statement the Board of Governors said the rate move was intended to push private banks back into the private inter-bank borrowing market and away from reliance on Federal Reserve subsidized money which had been provided since the financial crisis began in August 2007.

The decision, in plain words, was framed so as to give the impression of a ‘return to business as usual.’ At the same time, financial players like George Soros continue to speak openly about the fundamental weakness of the Euro. This has the effect of taking speculative pressure away from fundamentally worse economic and financial fundamentals within the dollar zone at the expense of the Euro. The reality is that the dollar world is anything but returning to ‘normal.’



‘Unsustainable deficits’

The conservative President of the St. Louis Federal Reserve Bank, Thomas Hoenig recently warned in a little-reported speech that if the size of the Federal Budget deficit is not dramatically and urgently reduced, public debt will soon look like that of Italy or Greece, exceeding 100% of GDP.

In a recent speech Hoenig noted, “The fiscal projections for the United States are so stunning that, one way or another, reform will occur. Fiscal policy is on an unsustainable course. The US government must make adjustments in its spending and tax programs. It is that simple. If pre-emptive corrective action is not taken regarding the fiscal outlook, then the United States risks precipitating its own next crisis….”

Translated into laymen’s language, that means savage cuts in Government spending at a time when real unemployment is running in the range of an unofficial 23% of the workforce, and the states are struggling to cut their own spending, as Federal dollars disappear.

In brief, the United States economy, though no one is willing to say so, is caught in a Third World-style ‘debt trap.’ If the Government cuts the deficit, the economy sinks deeper into depression. But if it continues to print money and sell debt, buyers of US Treasury debt will at a certain point refuse to buy, meaning US interest rates could be forced severely high in the midst of depression conditions―equally catastrophic to the economy.


Bond boycott?

The second option, a boycott by buyers of US bonds, may have already begun. On February 11, the US Treasury held an auction of $16 billion worth of 30-year bonds and securities to finance its exploding deficits.

In a little-reported feature of a sale which did not go well in terms of demand, foreign central banks reduced their share of purchases from a recent average of 43% of the total to a mere 28%. The largest foreign central bank buyers of US debt in recent years have been China and Japan. Secondly, it appears that the Federal Reserve itself was forced to buy the slack demand, some 24% of the total of bonds sold versus 5% only a month before.

The Federal deficit will reach an estimated $1.6 trillion in the current fiscal year that ends September 2010 and will continue next year and for at least another decade, above $1 trillion annually.

The situation will be further aggravated because the largest generation born after the Second World War, the so-called Baby Boom generation born between 1945-1966, has just begun retiring in huge numbers. That deprives the Federal Government of their Social Security tax revenues, which will now go from an asset in the Federal budget to a liability, as the Government must pay out their monthly retirement pensions. This will hugely aggravate the size of the deficits over the next decade and longer.

The highly-touted Clinton era Budget ‘surplus’ was in reality not the result of anything done by Clinton or his Treasury Secretaries Robert Rubin and Larry Summers. Rather it was because of the deceptive practice of counting on the Social Security tax revenues from that generation as US Government surplus revenue during their peak earning years in the late 1990s. That tax inflow has now begun to turn into what will be a huge outflow over the next decade.


A new ‘China syndrome’

However, in the face of all this the White House seems to be implementing a series of foolish policies, with one action in direct contradiction to another. This is the case in terms of recent Washington behaviour towards China, the largest holder of US Government bonds, at least until this past month.
The Obama White House has recently approved punitive import tariffs on Chinese auto tires.

Then it increased friction in relations with its largest creditor by announcing a provocative new arms sale of billions of dollars to Taiwan over strong Chinese protest. In addition, Secretary of State Hillary Clinton has meddled in internal Chinese Internet regulation by openly criticizing China for alleged censorship.

Then, as if to rub salt in a wound, despite further official Chinese protest, US President Obama officially met with the Dalai Lama in a Washington ceremony on February 18. Genuine concern for the well-being of Tibetan monks was not likely the reason. It was to signal heightened US pressure on China. Officially, to date, Beijing has reacted calmly, if firmly. Its real response, however, might be coming in a financial arena, not a political one, something that the ancient Chinese military philosopher, Sun Tzu, would have no doubt suggested.

It appears that the Chinese government has already begun to react to the ill-timed US pressures on China by boycotting US Treasury debt buying. In December the Chinese were net sellers of US Government bonds, selling more than $ 43 billion worth of US debt.

Given its huge annual trade surplus from its export earnings, the National Bank of China currently holds reserves of foreign currencies and other assets, including gold, worth $ 2.4 trillion. At least 60% of that is believed to be in US Treasury and other Government-guaranteed debt, perhaps some $1.4 trillion. If China continues to dump US debt onto international financial markets, the dollar will plunge and a full panic will ensue in Wall Street and beyond.

To try to reverse this trend of boycotting US bond purchases by foreign central banks and others was likely the real reason that the Bernanke Fed now suddenly raised a key interest rate, despite the worsening of the domestic economy in real terms. They seem to be engaged in a colossal market game of bluff, trying to convince that “the worst is over.”

That Fed move, as well as recent hedge fund and Wall Street attacks on the Euro in the context of the Greek events, are looking more and more like covert economic warfare for the future survival of the US dollar as world reserve currency. As my latest book, Gods of Money: Wall Street and the Death of the American Century explains, US global power since 1945 has depended on having the dollar as undisputed world reserve currency and the US military as the world’s dominant power. If the dollar falls away, the over-extended military becomes vulnerable as well.

The Fed is in a desperate situation of trying to avert a full bond market selling panic that would trigger such a financial chain reaction collapse. This is why it raised one rate while leaving the more important Fed Funds rate at zero. It’s a desperate bluff. So far the lemmings in the financial markets appear to have bought the trick. How long that will last is unclear.

As the Greek crisis is resolved and it becomes clear that the situation, however difficult, in Spain and Portugal and Italy are not about default, as their problems are no where near terminal, the prospects for the dollar and euro could change dramatically.

In this situation China’s central bank holds major power to decide the possible outcome. One possible outcome of the growing global impasse is the prospect that the People’s Bank of China will dramatically increase its purchases of gold and silver reserves. That, in turn, could serve China far better than buying more US debt, and serve as a basis to establish a future role of its currency in regional trade and international business independent of the dollar or the euro.



A golden opportunity

China’s gold reserves until recently have been relatively low compared to the size of its reserves. Official Chinese central bank gold reserves were 1,054 tons as of March 2009, worth about $37 billion at today's prices. That represents a mere 1.5% of its total reserves, and that is itself up by 76% since 2003. On average, international central banks hold about 10% of their reserves in gold.

The German Bundesbank holds some 3,400 tons of gold, the second largest after the US Federal Reserve. To even get to that 10% level, China would have to buy more than $200 billion worth - about two years' global mine output.

Silver is not a significant part of most countries' reserves, but China is historically an exception, since in Imperial times before 1900 it was on a silver standard rather a gold standard, and so retained substantial silver reserves. One aim of the 1840’s British ‘Opium Wars’ against China was to drain the Chinese state of its entire silver currency reserves to the advantage of the British gold standard.

In 2001 and 2002 China was a major seller of silver, selling a total of 100 million ounces at its then-price of less than $5 an ounce. Since then, it has stopped selling silver. Last September 2009, the Chinese government passed a decree encouraging Chinese savers to buy silver, explaining that buying silver was a good deal since the gold/silver price ratio at 70-to-1 was historically very high, offering them convenient small-value ingots with which to buy it, and prohibiting the export of silver from China.

This was almost certainly a move designed to dampen stock-market speculation and reduce money supply growth, since bank deposits converted into silver would effectively be sterilized. What's more, if the long-awaited Chinese banking crisis ever developed, the effect on the long-suffering Chinese public would be mitigated if people held substantial wealth in the form of readily negotiable silver ingots.

It's likely that China is now a very large buyer of silver, possibly even more than gold. Thus, a selloff in People's Bank of China holdings of US Treasuries could be offset by purchases of gold for its own account and of silver to supply to the Chinese public.

http://www.engdahl.oilgeopolitics.net/Financial_Tsunami/Panic_at_FED/panic_at_fed.html