The greenback is falling against almost everything… even against Iraq’s dinar.
Both Bernanke’s rate cuts and Bush’s ‘tax rebate’ plan have a fruity odor to them. The tax ‘rebates,’ for example, will not return any money to its rightful owners. The U.S. government can’t afford it. Instead, they’ll send out checks to 117 million people – including many who never paid any tax in the first place, encouraging people who have already spent too much to spend even more. Where will the money come from?
The Bernanke/Bush team isn’t saying. They’re so eager to avoid a serious correction that they are throwing caution to the wind – and the U.S. dollar too. Let it fly wheresoever it wouldst – as long as it goes down. Besides, who cares? Most of the world’s dollar reserves are held by foreigners. And foreigners don’t vote in U.S. primary elections. “It may be our dollar,” Treasury Secretary John Connelly once shrewdly observed, “but it’s your problem.”
But overseas greenback holders are beginning to notice the tropical flavor of U.S. finances. The dollar has lost 30% of its purchasing power during the last 7 years. Against gold, oil and other key commodities – and other major currencies – it is down much more. In many sunny places with shady finances, this must seem all-too familiar. The ‘banana republics’ did business this way themselves – running up huge debts to overseas lenders… selling off their capital assets to foreign savers… printing money by the boatload… and generally making themselves look ridiculous. Now, the kvetchers are labeling the United States as “the world’s largest banana republic.” One calls the dollar a “Bernanke peso.” Another says the United States is following “Zimbabwe economics.”
Here at Markets and Money, we have been critical of the U.S. economy in the past. But today, we rise not to carp and criticize, but to defend it: The United States has little in common with a banana republic. It has no bananas. It is not a republic. And its weather is not as good.
That said, there are similarities…
Real wages for men are lower today than they were 37 years ago. Robert Reich, former Secretary of Labor, writing in the Financial Times, explains that Americans were only able to increase their standards of living by putting their wives to work, putting in more hours on the job, and finally, going deeply into debt.
In the last seven years of the Bush administration, the federal debt increased by two-thirds while U.S. household debt doubled. Despite all this extra spending, median real incomes have continued to go down. Practically all new jobs have been created either by government, or in housing, health care, bars or restaurants. Jobs in manufacturing are now at levels not seen since just after WWII.
“This is the profile of a third world economy,” says former Under Secretary of the Treasury Paul Craig Roberts.
How does an economy like this keep going? It depends on the kindness of strangers and the stupidity of friends. Who but a fool or a friend would buy a U.S. 30-year treasury bond at a 4.28% yield? This number is only a few basis points from the number for annual increases in consumer prices. Which means, if all goes well, investors can expect to make a return of zero on their investment over the next 30 years. And if all this talk of Zimbabwe economics and banana republic finances turns out to be true, they can expect to suffer another round of losses – measured in the trillions. And why shouldn’t it be true? The American Empire is a bit like General Motors, says Martin Hutchinson. It has heavy fixed costs, an aging workforce, worn-out equipment, mammoth debts, and it is losing market share. At immense cost, America maintains its legions in more than 100 overseas garrisons. At home, the mobs call for bread. And every candidate for office – save the forgotten man, Dr. Ron Paul – offers more of it. “We cannot afford another year without decent wages because our leaders could not come together and get it done,” said Barack Obama in South Carolina.
GM, of course, cannot print money. But as Ben Bernanke himself put it, the United States, like Zimbabwe where inflation is running at 150,000%, “has a technology called the printing press.” What can you expect? We would modestly predict that those 30-year T-bonds, sometime between now and 2048 when they mature, will become worthless.
Maybe sooner rather than later. Because both friends and strangers are wising up. The Gulf Sates have the largest foreign currency reserves in the world. But at the end of November, Sultan Nasser al-Suweidi, governor of the central bank of the UAE told The Wall Street Journal , “the connection to the dollar has contributed much to our economy… in the past. Nevertheless, we come to a bifurcation… ” Kuwait already switched away from the greenback; for its reserves it now uses a basket of currencies.
Meanwhile, China is said to have about 70% of its $1.53 trillion pile in U.S. dollars. Cheng Siwei, Vice President of the Popular National Congress: “In terms of the structure of our international reserves, we must take advantage of the appreciation of strong currencies in order to offset the depreciation of weak currencies.” ‘Sell the buck,’ he must have whispered to his broker.
And in even the formerly weak currency zone of Latin America – the home of the real ‘banana republics’ – the dollar is wilting. Central banks in Argentina, Peru and Colombia have had to intervene to hold up the greenback. According to Mario Bodersohn, in the Buenos Aires paper, La Nacion , there’s “no precedent for such an intense sell-off of a reserve currency.” Usually, it’s their own pesos, reals, colons, and australs that people are laughing at. Now, it’s the gringo notes that get the punch lines.
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