U.S. Dollar in a Race for the Most Worthless Currency

On Aug. 1, I-35W Mississippi River Bridge collapsed in Minneapolis USA… killing 13 and injuring 100 motorists. Since August 1, the dollar’s value has collapsed 3.4% against the world’s major currencies. Maybe there’s a connection… at least metaphorically.

For decades, United States federal inspectors knew that a flaw in the structure of the eight-lane I-35W bridge over the Mississippi could easily take down the entire structure. But year after year, the government let the bridge pass inspection.

According to the U.S. Department of Transportation, 756 steel deck truss bridges span America’s waterways, just like the one in Minnesota.

Built in the 1950s and 1960s… approximately 11% of these steel bridges have weaknesses much like the one that caused the I-35W bridge’s collapse. 80+ bridges at $250 million each?

The American society of Civil Engineers now warns that the United States has fallen so far behind in maintaining its public infrastructure – roads, bridges, schools, dams – that it would take more than a trillion and a half dollars over five years just to bring it back up to standard.

So the United States government now needs $1.5 trillion just to sprinkle Band-Aids across America’s degenerate body.

For a quick perspective, consider this:

The Iraq war has cost the United States $458 billion to date.

Meaning, patching potholes and solid waste will cost roughly three times as much as the full-fledged war.

How will American taxpayers pay for all that, we ask? We’re not sure. But it seems to us that he will pay for it with dollars… and that’s the heart of the problem.

Every imaginable rescue mission for the overly indebted American consumer, not to mention the overly indebted American government, leads to increasing quantities of dollars and credit, which can only mean one thing: U.S. Dollar-holders beware.

Strong economies need strong infrastructure.

Strong infrastructure needs strong spending.

More spending means more government contracts. More contracts mean more campaign donations.

It gets better.

Every elected official represents a district with a broken bridge. A new bridge needs a new ribbon and a new name. Hence, the more bridges they build, the more votes they receive.

And here’s the best part. They accomplished this benevolent feat without losing lives or raising taxes!

Better yet, everyone in Washington can play along.

Unfortunately, more spending means more debt. The U.S. Congress will turn to the U.S. Treasury. The Treasury wants to balk. But they turned on CNN and another bridge collapsed over the mighty Mississippi.

So they shrugged.

The U.S. Treasury will turn to foreign buyers. Foreign buyers should (will) require a higher rate of return for holding a depreciating fiat currency. Interest rates should (will) rise. The race to sell U.S. assets to foreign hands continues.

To make matters worse, analysts forecast future rate cuts. The latest U.S. Federal Reserve Meetings on Oct. 9 show a consensus supporting a 50 basis point cut… maybe so, maybe not. We really don’t care. We have no idea what direction interest rates are heading. But we do know this.

The American dollar should (will) continue to decline.

Eurozone finance ministers quiver. On Oct. 8, the day before the U.S. leaked a forthcoming rate cut, the Europeans announced their intentions to actively depreciate the euro against the Chinese renminbi, the U.S. dollar and the Japanese yen. They claim a weaker euro will ease pressure on the European economy.

Europe, in a sense, showed its hand. And the U.S. Federal Reserve quickly trumped it one day later.

This dubious policy is finance-speak for this: The sovereign nations of the world are engaged in a perpetual sprint to boast the least valuable currency. They’re in a race to the bottom, so to speak… a race to become, well, in a sense, worthless.

The reason: Currency depreciation makes domestic goods less expensive to foreign buyers. Consequently, a perceived re-emergence in a nation’s domestic manufacturing may take place, as foreigners demand cheap “Made in the Most Worthless Currency” widgets.

You see, it’s a win-win for Washington.

Washington’s charitable handouts (debts) bought the bridges that bought the votes. Those charitable handouts (debts) also undermined the dollar- denominated debt.

The cheap dollar creates cheap exports. More exports create more jobs. More jobs… more votes. The cycle continues.

But here’s the real kicker: Devaluing the greenback devalues the foreign debt that started this whole mess to begin with. So in the long run, we don’t owe as much as we borrowed, inflation adjusted.

It’s a win-win for Wall Street, too. The municipal underwriting business takes off. Banks now repackage municipal debt like mortgage debt. The fees keep rolling. Seven figure bonus days are here once again.

However, this game has one or two setbacks.

First, higher spending sans higher taxes works only when foreigners demand our debt. But that may not be the case much longer. The Chinese have eased their appetite for American IOUs.

Second, more debt means we print more money, which means more inflation.

Alan Greenspan is no dummy. He knew when to jump ship. Greenspan said that over the long run, the biggest problem facing the U.S. economy is “the re- emergence of inflation,” and rising interest rates.

We concur with Mr. Greenspan.

Unfortunately, high inflation combined with high interest rates kill the middle class. That’s the real long-term problem of fiat currencies. A fiat money system prompts legislative profligacy and inevitably produces inflation. The system stimulates the growing gap between the haves and the have-nots.

Consequently, the have-nots will turn to their elected saviors in Washington. They’ll demand a change. And the elected saviors will provide some version of “something for nothing.”

As Bill Bonner points out: “The goal here – as with all government programs – is to produce the desired benefits while pushing the costs onto someone else. That’s how politics work. You promise something… and you force someone else to pay for it. You rob one Peter voter… and spread the loot among the Pauls.”

But as the IOUs pile up, and the U.S. dollar’s value withers, the Pauls will realise that they’ve been robbed as well.

Christopher Hancock
for Markets and Money

Chris Hancock
Christopher Hancock has spent the last two years doing investment research primarily focused on emerging markets, specifically China and Hong Kong. After working with Citigroup in Hong Kong on the challenges and opportunities associated with the forthcoming RBM flotation reform, Christopher left many of his friends behind and decided to return to the States to pursue a career in equity research. Christopher's desire to work for an independent firm led him to Agora Financial, where he now is the editor of Free Market Investor. Christopher travels extensively and utilizes his contacts across the globe to recommend the best international investments in the world right now for his subscribers.

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