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 The Daily Reckoning, 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.
Bill Bonner
The Daily Reckoning Australia
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About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by Coffee Addict on 4 February 2008:
My guess is that the Asian and Middle East governments buy T Bonds as a short term repository with the longer term view of investing in US equities when the time and price is right.
Could this partly explain market buoyancy in the face of economic despair?
Comment by novosonic on 4 February 2008:
you international speculators ought to cook up something besides trilateralist nonsense. where are the facts and figures the bourses locations and the odds on the predicitions...
i'm going to take some kits of whipping cream later so i can get a real good nights sleep. i have bills to pay in the morning.
but my personal spring plot to add value to my share of the homestead involves, collecting charcoal from the wood stove and store them in some galvanized buckes with matching lids.
then come spring time, i'll be doing a charcoal retort in my old scrap barbie.
i'll heat up some scrap iron i scavenged at my old factory job.
dip the blanks in a red hot fire, and hope i remember to do the time transform and get the bar out of the pit before it reaches triple point.
anyway, i'll set up my mail order anvil and one of my old hammers and beat the tarnation out of that scrap.
it's music to my ears, up to a point, because to make demascus steel i'll have to insert some of my mail order foam ear plugs.
but, that's too time intensive and i need my sense of hearing more than the speed reading.
but i have all sorts of tanto designs and a new french curve version with a reverse french pin drive.
i've done oak handles, and i've done maple handles, i've done birch handles, and i've done a rosewood handle. me gonna take a chance and lot for something new with my chain saw, aka big red....
but to breach another subject, it's gonna be difficult and expensive to get too the Henniker NH harware store. See, i make my own rivets and i new the secret ingrediant.
CODE patetern onnn.....
i befroe e except after c, except when you get voewls exchanged with dipthongs.
Comment by David Kendall on 5 February 2008:
Great article. I wish people would get more involved in learning abuot economic problems and become more aware of how their lives are directly and deeply affected by them. In the same regard, I wish people would spend more time learning about potential solutions that have been proposed.
While I hate to blow the mighty horn for only one set of ideas, Richard C. Cook is someone who dares to present such proposals. His ideas are at least a beginning toward closing the gap between empty complaints about problems and the formulation of real-world solutions.
While I also hate to post a comment comprised mostly of someone else's opinion, Cook does such a nice job of summarizing his ideas in the following excerpt, there is little point in my attempt to paraphrase. Here is a link to some of his most recent work:
http://www.economyincrisis.org/articles/show/1196
And here is the excerpt:
"What then is the remedy? In my opinion, our economy can only be restored by a program that recognizes credit as public utility, that restores our infrastructure, that eliminates debt, and that puts sufficient purchasing power directly into the hands of the people. Above all, our monetary supply should be created through the federal government spending money directly into existence, not through bank lending.
"Among the measures I have been proposing in my articles on Global Research and elsewhere are, first, an income guarantee to all citizens similar to the annual payments to persons in Alaska through the Alaska Permanent Fund. These payments today amount to almost $1,700 per person per year or $6,800 for a family of four.
"What I am calling a National Dividend would be a substantially larger amount and should be provided to everyone in society, whether they work or not. In other words, a subsistence level of income security should be a human right. Such an infusion of purchasing power would also encourage economic growth, particularly at the grassroots level, by allowing people to buy what they need without borrowing or else pay off what they currently owe.
"The second measure is a new system of public finance, starting with a federal self-collateralized infrastructure bank similar to the Reconstruction Finance Corporation that rebuilt America during and after the Great Depression. Such a bank has been proposed by Senator Chris Dodd and others, but the bank I have in mind would channel money directly into the economy without going through the Federal Reserve or the private banking system.
"A National Dividend combined with a self-collateralized federal infrastructure bank would also create a new American currency different from debt-based Federal Reserve Notes.
"Finally, the abuse of credit by the banking system should be stopped by outlawing the practice of lending for speculation, including most leveraged buyouts, mergers, acquisitions, and hedge funds. In other words, no more bank-created bubbles. Of course this is the system that is now crashing anyway.
"These programs would lead to real income security and revitalize the U.S. economy. It would do the same if applied in other nations. By contrast, a pittance of a tax rebate combined with slightly cheaper bank loans is a bad joke."
Comment by whooper on 5 February 2008:
I like it... am short t-bonds at around 120 on USH8 and sweating recently... it's got all the hallmarks of a great trade but it's hard to ride out the short term recession fear factor... With so many countries tied to the US we now have real yields in Hong Kong running negative which brings me onto my next trade - long Hang Seng. With China's managed capitalism trumping the tired old democratic model it's going to be a brave new world and we need to make as much as we can to prepare for it...
Comment by John on 6 February 2008:
Yea the US is going to shit, I need to move somewhere else.
I put in my vote for Dr. Paul this morning in Phoenix, AZ. At least I'll be able to say I did something...
Comment by David on 6 February 2008:
What we are witnessing id the contrived take down of America no less.
Which country allows all of its
manufacturing jobs to be sent abroad,Which country would maintain 750 bases around the world yet at home they are imploding.the middle class in America have begun moving from 300,000 dollar houses to tent cities.The richest country in the world and now on the verge of collapse no I won't insult your intelligence by saying they are in recession they are in full blown depression.
It is a contrived event to make sure the North American Union advances on schedule.A contrived
event to destroy America.On the ashes of America will rise the NWO
Comment by topshot on 6 February 2008:
Please allow me to correct the errors in this story.
The United States has little in common with a banana republic.
(The Corruption is about the same)
It has no bananas.
(Bush, B & H Clinton, J McCain, The Senate & Congress all bananas)
It is a republic.
(However the people fail to use it.)
Comment by Jean on 7 February 2008:
If I may correct an otherwise excellent article, we ARE a republic, not a democracy. Google the difference.
Comment by Doug on 7 February 2008:
It's more than a 30% loss. When Bush took office the Euro was worth about 0.72 USD. Now it is worth about 1.30-1.40 USD. That's almost a 50% reduction in value.