Fiat Currency, Dollar Dominance, and the War on Terror

Texas congressman Ron Paul attempts to tie all the pieces together (and I do mean ALL the pieces). It's bit on the sketchy side, but there could be something to it... If nothing else, there's probably a top-selling novel in it.

Sidenote: I love this blog (the source of this link).

The Decline of Dollar Hegemony

Just came across a link to this speech about Dollar Hegemony (http://www.house.gov/paul/congrec/congrec2006/cr021506.htm). It lacks some of the more nuanced and subtle points, but the fact that it was delivered before the house of representatives pleases me. I do recall having read another speech on the same topic by Ron Paul in the past. You may also have seen it.

It is a shame that addressing the halls of congress is now merely a way of having one's sentiment officially entered into the record. If the house of representatives were actually a place of argument and debate something like this might spark a meaningful discussion about a pressing issue facing our nation. As things are, it will only serve as a testament to Mr. Paul's prescience after more serious problems arise.

Gold Rush

It's been some time since I've posted anything on currency issues. It appears Henry was ahead of the curve on investing in gold. Gold recently hit a 22-year high, and is getting a fair amount of attention from the press. The very fact of this attention may signal that the market has already made its move, at least for now. But score one for the anti-fiat-currency libertarians...

Greenspan Barks at the Moon

Alan Greenspan appeared before the House Budget Committee today and declared that the current budget management was fiscally destabilizing, warning of economic stagnation and urging tax increases and spending cuts. Yeah right, Mr. Chairman. Dick Cheney says deficits don't matter. Who the hell do you think you are?

The Ever-Diminishing Dollar

Sparked by the decision of South Korea's central bank to diversify its currency funds away from the dollar, the New York Times has both an editorial and an op-ed by Thomas Friedman worrying about the ultimate fate of the dollar. Nothing we haven't discussed here before, just another update in this continuing saga.

More Questions on the Dollar Decline

There is a fascinating article on Asia Times by W Joseph Stroupe predicting doom for the dollar. I'm not sure who the guy is, and his web site looks pretty sketchy. But he throws out a ton of data, I just wish he would have cited his sources. Some of the interesting bits apparently come from this Japan Times story, but even there are only cited back to Morgan Stanley analyst Stephen Roach. So, while I take little of this at face value, the article suggests a number of interesting points to investigate.

• Stroupe asserts that the Fed is printing $1.5 trillion per year. This seems like an absurd amount of money. Is it true? How much does this vary from traditional levels?
  
• Stroupe adds $44 trillion in obligations to Social Security, Medicare, Medicaid, and other government spending to the existing $7 trillion national debt to come up with a "total national debt" of $51 trillion. He cites this number to Fortune magazine. I posted a story here some time back about a treasury department study (initiated by Paul O'Neill, before he got the boot) which found that the US had $44 trillion in unfunded obligations over the next four decades or so, which is probably where the $44 trillion comes from. This is a frightening number, but it strikes me as unfair to count long term obligations directly as existing debt.
  
• The article states that including off-budget items the current federal deficit is nearly $1 trillion per year. That sounds high to me. My impression has been that this number would be somewhere in the $500-700 billion area.
  
• Mentions heavy investment ($180 trillion) in derivatives as unstable investments. I have no idea what he's talking about here, but I'd like to find out.
  
• The article states that US consumer debt is $8 trillion. I was searching for this number myself a couple weeks back, without success. I'm curious where he got it.. Also what is the level of US commercial and business debt?
  
• Then there's the quote from Stephen Roach stating that the US currently has $38 trillion in debts. What exactly is being counted in this number?
  
• The article states that Warren Buffet has mostly pulled out of the US stock market. I know that he published an article a couple years back explaining, in great depth, why he was for the first time investing outside the US, citing many of these concerns about debt and the trade deficit. But has he really pulled out all of his US investments?
  
• One of the best parts of the article was the discussion of Russian economic policy. Here he talks about the possibility (which has been discussed here before) that the global oil market may shift from dollars to euros, with disatrous effects on the value of the dollar. Stroupe makes assertions about statements by Vladimir Putin hinting that this change is imminent. I should certainly like to see those statements. He also asserts that Russia has substantially shifted their currency reserves out of dollars. It would also be nice to verify that..
  

Anyway.. there are some very powerful numbers and assertions here, and if this guy is not a complete nut (which it's quite possible he is), disaster may be nearer than I expected.. There are also numbers published in another Asia Times story showing US personal savings as a percentage of income dropping over 15 years from about 7% to 0.2% (again without any cited source). Consumer spending may have kept our economy afloat so far, but that ride looks to be nearing its limit. We live in interesting times...

Update: I went hunting for more info on Stephen Roach's $38 trillion figure, and while I didn't find it, I did find an insightful recent column by Roach analyzing the economic prospects for the Bush administration's second term.

re: Spending Addicts

By the way, Ryan, nice to have you back! Robert Samuelson has a Washington Post column discussing the possibility of precipitous drop in the dollar. He absurdly dismisses the impact of budget deficits, and focuses purely on the $665b trade deficit (he still ends up with a scenario not so different from those theorized on at Boys' Weekends). When you consider that somewhere around half the $500b budget deficit is being financed by foreign investors (not to mention commercial and private debts), we're dumping nearly a trillion dollars (10% of GDP) onto the global markets each year. That is just unbelievable. Meanwhile, Bush claims he is going to fight for a strong dollar, not surprisingly the currency markets think he's full of shit.

Experts to Investors: Dump Your Dollars

It has been a while since we've heard anything on this front, but The Christian Science Monitor has an article advising investors to buy up foreign currency, citing higher interest rates and declining dollar values. Here I was worried about foreigners not wanting dollars any more. We may beat them to it.

Paying the Price for the Dollar

CSM is running a column that dismisses the frequently cited causes for rising oil prices (conflict in the Middle East, swelling demand, etc), and pins the blame on the falling dollar values. The authors point out that while the price of oil in dollars has risen 51% in the past two years, the price has only risen 4% in euros. They further tie the fall in the dollar to ruinous government budget deficits. While the popular political ploy is to blame rising prices on the greed of OPEC nations, it clearly would be worthwhile to consider the impact of our own budget decisions.

Money Still Fleeing US

It's been what, a month or two since I last posted a record trade deficit story? Well, it's still getting worse. Even the plumetting dollar has done little to curb the trade imbalance...

Oil For Gold

So Dean got whomped in Iowa. More comments on that once the fallout has fallen a bit...

In other news, the rest of the world is getting wise to the plan Henry posted of intentionally pushing the trade deficit so that other countries are holding all the dollars (and dollar debt-load) and we hold all the goods, leaving them in position of needing to prop up our dollars in order to make their holdings worth anything. Former Malaysian Prime Minister Mahathir Mohamad is warning OPEC nations to avoid this scenario by only trading oil in exchange for gold. If his advice were followed, I believe the impact would quite serious.

Alan Greenspan, Evil Mastermind?

Here's a bit of a guest column, Hank's response to the email with the review of Financial Reckoning Day, posted yesterday:

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Just thought I'd give an update on my economy watching (and throw in an opinion about Alan Greenspan).

My crackpot theory about Alan Greenspan is that he is doing all of this quite deliberately. I think that he realized twenty years ago that the American financial situation was already intractable. He wanted to put the world back onto a sound financial footing, but realized that this could not be done without ruining the American economy. He realized, in a very Machiavelian turn of mind, that the extreme exploitation of the existing system, which he thoroughly despised, could simultaneously make America tremendously wealthy and precipitate a financial collapse that would stand in perpetuity as a warning against the excesses of fiat money. Thus Greenspan's primary virtue would be his ability to dramatize. He has convinced the American people that the final boom of the twentieth century was real; and he has convinced the IMF and the world's central banks that he is working to protect their interests, while quite obviously working to the contrary.

Thus we get to the point that we are at today. The world's central bankers have finally begun to put the question to the U.S.: "What the hell do you think you're doing?" On the surface they seem stern, but deep down they're terrified that they might already know the answer. The European Central Bank has finally expressed concern about the declining dollar. This expression of concern indicates a likelihood that the ECB will take action against the plummeting dollar, such as lowering European interest rates (already at the lowest rate since immediately after WWII: 2%). Of course this lowering of interest rates would not stop the dollar's actual fall, but merely pressure the Euro to fall with it.

While the ECB and the BoJ (which, having already established zero interest rates, must exchange Yen for Dollars in massive quantities [the cap on borrowing for this purpose has been increased dramatically for the coming year] in order to pull off their own intervention) scream for the U.S. to normalize its finances, and former treasury secretaries Paul O'Neil and Robert Rubin openly criticize our current economic policies, Greenspan and the current administration continue to laugh off their concern. Their levity is understandable. The White House can laugh because they're insulated enough to ignore the criticism, ignorant enough to fail to understand it if they listened, savvy enough to realize that responding to the criticism would be politically untenable even if they understood it, and wealthy enough to not suffer even if the criticism proves correct. Greenspan can laugh because he knows that Europe, Japan, and China are foolish enough to give us everything they own (via the mechanism of their "export driven economies") in a vain attempt to prevent the U.S. from defaulting on the debt (via inflation, a mechanism that prevents them from ever laying claim to the goods we bought from them with their own money, for technically we will pay the debts, with extremely debased money) which constitutes the entirety of their savings. The inconceivable response of these foreign powers to our debonair fiscal policy is to accelerate their lending.

Hence we see the wisdom of Greenspan's approach. Terminating this cycle would be a painful and shocking process, nothing is more onerous to the politician. As the status quo makes Americans more wealthy there is no reason for our politicians to bear the terrible burden of ending it. Instead we will simply exploit our position to the fullest until the time that foreign pols are able to overcome their shortsighted constituents and bring about the correction that would put them back on an even footing with the U.S. The only potential downside to this strategy is that after the system collapses America's credit with the world will be ruined; but by then there will be nothing left for us to borrow anyway, as they will have already given it all to us. The only alternative is to pay the debt off legitimately; this policy would be ruinous.

Anyway, the recent show of concern by the ECB with regard to the dollar's decline has brought that decline to a halt. The anticipation of European action has induced hesitation as to the Euro's future prospects. Currency speculators who had invested their money in gold as a hedge against the declining dollar have pulled out en mass bringing about a 15$ decline in the last two days. Of course this statement by the ECB changes U.S. economic prospects not at all. The dollar's decline against the Euro may slow but this does not mean that the dollar is strengthening, it simply indicates that the only major currency that had remained aloof from the devaluation has decided to participate. After all, the dollar isn't falling because the European interest rate is too high, but rather because the U.S. interest rate is to low. The result of any change in ECB monetary policy will merely be competitive currency devaluations, an environment that would enhance the value of holding
gold. Thus I would say that this current decline in gold should be a good buying opportunity (which should prove serendipitous for mom).

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My mom mentioned in the email regarding the article, that she may start to take some action on Henry's gold buying advice..

Oh, That Dirty Old Dollar

Here's a little more economic pessimism from me (surely you haven't had enough yet). Thanks to my mom for pointing this one out. A couple of financial writers have a new book out predicting a dollar collapse. They seem to have borrowed a lot of theory from the Austrian school. It's more or less what Henry said, and the ideas are starting to bubble up in more and more unexpected places.

Going Down?

The dollar continues to sink..

Going for the Gold

Henry's not the only one worrying about the state of the dollar. Even Clinton labor secretary Bob Reich is concerned about the possibility of a run on the dollar. I still suspect that the Euro may not be the best place to hide from dollar instability. If the dollar collapses, the Euro may well come with it..

A Banking Intro

Henry has been delving deeply into the world of global banking systems. He has many interesting theories on the subject, which I'm sure he'll enlighten us with once he's through with finals. He has concerns regarding fiat currencies, particularly with the overextension of the US's fiat currency, and seems to be mostly in agreement with the "Austrian school" of economics as established by Ludwig Von Mises. He assures me that although mises.org has been hijacked by intellectually inbred libertarian lunatics, there is much merit in Mises's economic theory. So in order to better equip myself for these discussions I've dug through the Asia Times archive to find a large, multi-part banking system primer written by Henry C K Liu (if he ever wrote any sections beyond 4c, I haven't been able to find them). If anyone else wants to get a head start on this topic, there ya go...

The Dollar Drama

Also on CSM today, the latest installment of the ever-gripping dollar drama. In today's episode a number of experts propose that now may be an "optimal time to achieve the inevitable dollar correction". If so, hopefully he means sometime before next fall. :)

A Tangled Web

Asia Times has a very interesting story discussing the Bush administration's moves attempting to get China to revalue the yuan. They are critical of this policy for number of reasons. (FYI, it looks like China is rejecting this pressure in any case...)

First is that we have been running a huge trade deficit with China for some time (which is, of course, the administration's reasoning for this move). During this time China has been piling up US currency, but they have little motivation to buy anything from the US (or anyone else) with it. What can they get from the US that they can't produce cheaper themselves? So in an effort to do something productive with this money they've mostly been buying US government securities (ie financing the US federal budget deficit). If the US reduces this trade deficit at the same time that our budget deficit soars to record levels it will become difficult to find takers for securities to finance our debt. This will result in the US raising interest rates in order to make the securities more attractive, countering Alan Greenspan's intensive efforts to stimulate the US economy with low interest.

They also mention that a majority of the products imported from China are actually produced by American companies (something highlighted in the Oxfam report as well). To some extent this makes the trade deficit illusory (or at least makes it appear much worse than it is). Forcing these companies out of China will make their products more expensive and less attractive on the world market and could end up hurting American business.

Additionally it will have the effect of making products more expensive to Americans (whether the products continue to come from China, or are manufactured elsewhere, including the US), stifling US consumer spending or driving up consumer debt, which is already at dangerous levels.

Finally, the article does not discuss this, but I wonder how much of that manufacturing would return to the US even if China becomes less attractive? Wouldn't Indonesia, the Philippines, and India still be more attractive places to move these manufacturing centers to? I think there would have to be a more intensive effort to devalue the dollar to actually bring manufacturing back home. There is also a CSM article today discussing this general topic.

In all it becomes a very difficult situation to project. However, one thing is clear in all this: our massive budget deficit and national debt clearly constrain our ability to control our own economy with regards to international trade. These are penalties beyond simply mortgaging our future prosperity and indebting future generations. The debt locks our monetary and fiscal policies together, forcing us to make a choice between them. We can keep interest rates low to try and spark growth, but it means maintaining a strong dollar which hurts trade. Or we can devalue the dollar to reduce our trade deficit, but it will cost us higher interest rates to finance our debt. We can't have both.

Discussion: Coming Back to Life
(I upgrade this from random spewage)

I wanted to get my two cents in before we left for our two-week trip to Vermont, where I hope to do a more throrough background check into this Dean fellow. For the record, I have not placed my allegiance behind anyone quite yet, but I still think Dean is worth keeping an eye on for the time being. His position on the death penalty is a little disappointing, but what interests me most about him is that he was most certainly the most vociferous anti-war candidate, and that puts him in the best position to call for an independent commission to investigate the evidence (or lack thereof) used to justify the war. By the way, Dean has recently called for the resignation of Rumsfeld and other administration officials who misled the nation about the war (see here). This may be a little premature, but at least he is not letting the issue slip away.

I think that President Bush is dead in the water from the WMD issue. It may be just wishful thinking, but President H.W. Bush was unable to capitalize on the 1991 Gulf War, and that was without the level of controversy that President Bush finds himself swimming in. And I think there will be more to follow. For instance, tomorrow the BBC is conducting an interview with Ron Manley, who oversaw the elimination of Iraq's chemical weapons program following the 1991 Gulf War and who is expected to argue that Iraq posed no significant military threat. OpenDemocracy.net is also planning to publish an article about Ron Manley.

I have little to add to Joe's interesting commentary on the current situation in Europe, other than to note that Foreign Policy magazine had an interesting article in this month's issue about how US-European relations may be affected by the decline in the US dollar. It notes all the potential upside to a weakened dollar, but fails to discuss how this might be a bad thing. Call me a pessimist if you must.

Article: Barry is on the Money

There is a story on BBC marking the descent of the dollar and pound against the Euro. Apparently investors don't realize the true impact of the upcoming $700b tax cut. It's a little known fact that the US debt clock only has 15 digits, so once it hits $10t it rolls back to zero. We're well on our way!

Update: there is now another article documenting the rise of the Euro.