A
Dollar The Size Of A Postage Stamp
By Mike Whitney
28 November, 2007
Countercurrents.org
Lately
it seems as though everyone wants to take a poke at the dollar. Last
week, it was the Brazilian supermodel who demanded euros for her jaunts
on the catwalk instead of USD. The week before that, hip-hop impresario,
Jay-Z, released a video dissin' the dollar and praising the euro as
the 'baddest Dude in the 'hood'.
Lambasting the greenback
has become trendy. It's a favorite pastime of politicians, too. At the
November OPEC meeting in Riyadh, Iran's president Mahmoud Ahmadinejad
asked the assembled finance ministers to "study the feasibility
of selling oil in another currency." Ahmadinejad disparaged the
dollar as "a worthless piece of paper".
The fiery Venezuelan President,
Hugo Chavez, followed Ahmadinejad's lead predicting that the demise
of the dollar would mean the "end of the Empire."
Hugo may be on to something.
The dollar is America's Achilles heel; if the dollar tanks, so does
the empire. That means the taxpayer will have to foot the bill for Bush's
bloody-interventions in Iraq and Afghanistan, rather than the Chinese.
That also means that the US will have to export something of greater
value than Daisy Cutters and gulags. That could be a tall-order, now
that Bush has boarded up the factories, hollowed out the industrial
base, and outsourced 3 million manufacturing jobs. We'll have to scrape
the rust off the machinery and get back into the widget-making business
like we were before the Free Trade fiasco.
Central banks across the
globe are trying to figure out how to ditch their dollar reserves without
triggering a stampede for the exits. No one wants to see that. But,
then, nobody wants to be stuck with vaults full of Uncle Sam's green
confetti either. So, the question arises; What is the best way to divest
oneself of $5.6 trillion (total USD held overseas) before the Lusitania
capsizes?
Kuwait, Venezuela, Iran,
Russia, and Norway have already opted to ignore the destabilizing effects
of "conversion" from dollars and are in some stage of divestiture.
Others will follow. The UAE, Bahrain, Qatar, Oman and Saudi Arabia are
considering switching from the dollar-peg to a basket of currencies
so they can hedge against the inflation that's battering their economies.
It's only a matter of time before the Petrodollar System---which links
the dollar to petroleum sales and creates a de facto "international
currency"---unravels completely, precipitating the final collapse
of Breton Woods.
Talk of America's impending
currency disaster is no longer relegated to the Internet blathershere.
Mainstream journalists have joined the chorus and are sending up their
own red flags. The UK Telegraph's economics's editor, Liam Halligan,
made this grim observation in his recent article, "Bet Your Bottom
Dollar Tensions Will Follow":
"The importance of "dollar
divestment" cannot be overstated. At the very least it means the
greenback has much further to fall - plunging the US into recession.
But it begs a bigger, more alarming, question. How will Washington react
to the end of the US hegemony?"
The dollar was savaged by
the monetary policies of the Federal Reserve. The Fed's policies were
designed to coincide with Bush's Middle East Crusade. They were supposed
to work like two wheels on the same axle. The administration believed
that, by 2007, the military would need only 30,000 or so troops to maintain
security in Iraq. That would give Bush's legions the chance to turn
east and push on to the next target-state, Iran. If things went according
to plan -- and no one thought the high-tech US war machine could be
stopped -- the US would control two-thirds of the world's oil. This
would allow America to keep writing bad checks on green paper for the
next century.
But then, of course, the
plan hit a snag. The Iraqi resistance mushroomed, the US got bogged
down in an "unwinnable" war, and the once-mighty dollar shriveled
into nothingness. Now we're at a turning point and our leaders are in
a state of denial. Bush is still playing Teddy Roosevelt, while Paulson
and Bernanke are just plain shell-shocked. They probably know the game
is over. As the dollar continues to wither; the frustration is beginning
to mount in Europe. Liam Halligan sums it up like this:
"Europe has finally
had enough of America's "benign neglect" dollar policy. As
a large economic area, with a floating exchange rate, the eurozone suffers
most. Over the past seven years, the single currency has risen by a
shocking 82 per cent against the greenback. That's hammered eurozone
exports - provoking serious trade disputes between the EU and US, the
world's two biggest trading blocks. No wonder French President Nicolas
Sarkozy describes America's drooping dollar as "a precursor to
economic war". (UK Telegraph, "Bet Your Bottom Dollar tensions
Will Follow")
Sarkozy is leading the charge
for "intervention"; the buzzword for shoring the greenback
through exchange controls and buying up billions of dollars. But it's
a risky business; especially when net capital inflows -- which are the
monthly purchases of US-backed securities and Treasuries --have gone
negative for the last two months. That means the US isn't attracting
enough foreign investment to finance its trade deficit. So the dollar
will have to fall to compensate.
So, how much loot is Sarkozy
willing to put up to keep the dollar from slumping further -- $100 billion,
$500 billion, $1,000 billion? And where's the bottom?
The fact is, the greenback
took a "header" down the stairwell and by the time it picks
itself up, it could be eye to eye with the peso. Who knows? Maybe its
time we all learned Spanish?
More than two-thirds of all
sovereign foreign exchange holdings are denominated in dollars. When
those dollars are converted into back into foreign currencies and start
recycling into the US; we're in deep trouble. Inflation will soar. Surely,
the Fed must have known this day would come when they were pumping trillions
of dollars into subprime mortgages and complex debt-instruments which
served no earthly purpose except to fatten the bottom line for rapacious
bankers and hedge-fund managers. The Fed also knew that the nation's
wealth was not being "efficiently deployed" for capital improvements
on factories, technology or industry. Oh, no. That would have ensured
that America would remain competitive in the global marketplace into
the new century. Instead, the money was shoveled into the bottomless
sinkhole of stucco homes with composition roofing and toxic credit default
swaps.
The stock market lost another
237 points yesterday; the third 200-plus slide in a week. Now all three
indexes are down more than 10% since their record high on Oct 9. Treasury
yields are plunging as investors flee the stock market looking for safety.
That means the Fed will have to slash rates again at its December 11
meeting to provide more low interest crack for the investor class. Traders
see an 82% chance that Bernanke will cut the Fed Fund's rate by another
quarter point to 4.25%. All that is likely to do is put the dollar into
free fall and send food, oil and gold prices to the moon. It won't pay
off the overdue mortgage payments and it won't remove the billions of
dollars of debt from the banks' balance sheets. It's pointless. The
US is headed for a "hard landing" and its dragging the rest
of the world along with it.
Harvard Economics professor,
Lawrence Summers offered this sobering warning yesterday in an article
in the Financial Times, "Wake up to the dangers of a deepening
crisis":
"Three months ago it
was reasonable to expect that the subprime credit crisis would be a
financially significant event but not one that would threaten the overall
pattern of economic growth. This is still a possible outcome but no
longer the preponderant probability. Even if necessary changes in policy
are implemented, the odds now favor a US recession that slows growth
significantly on a global basis. Without stronger policy responses than
have been observed to date, moreover, there is the risk that the adverse
impacts will be felt for the rest of this decade and beyond. Several
streams of data indicate how much more serious the situation is than
was clear a few months ago."
Summers is not the smartest
guy on the block. If he was he wouldn't have said men are smarter than
women and he'd still be president of Harvard. But he's a capable economist
and he can sniff disaster as it comes stampeding round the corner.
Mike Whitney
lives in Washington state. He can be reached at: [email protected]
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