Dollar dips, deficits rise, U.S. falls into danger

[FaGal]

Dollar dips, deficits rise, U.S. falls into danger
www.nj.com - February 25, 2005


While President Bush was busy wooing our European "allies," he got whacked by one of our Asian allies.

On Monday, South Korea's central bank let it be known that it will begin stocking its reserve of foreign currencies with fewer dollar assets and more of other currencies, such as the high-flying euro. It's called "diversifying" one's portfolio, a euphemism for saying the good old greenback doesn't look like such a good investment bet these days.

The Koreans are not alone. Russia actually led the way, with its central bank announcing last fall that it would begin purchasing euros as opposed to dollars. Other central banks on the Continent, notably those in Germany and France, have sent similar signals and for the same reason: The spiraling American trade and budget deficits -- and the Bush administration's apparent indifference to both -- have begun to erode confidence in the buck.

It's nothing close to a crisis as yet. A mild turn away from the dollar has been under way for months. Even South Korea's decision was more a psychology than an immediate fiscal blow. But if it continues unchecked, the dollar's slide will have serious consequences for America's role as global economic leader and for the quality of life of ordinary Americans.

This is not rocket science, though some in the economic dodge would make it seem so. It's really a simple story. The government, like you and me, can't keep spending and borrowing in ever- larger amounts without finding its credit tapped out.

The trade deficit with the rest of the world -- the value of what we import compared with what we export -- hit a record-high $617.7 billion last year. And it's still growing. The federal budget deficit is equally bad. The red ink this year is calculated at approximately $420 billion -- and that's not counting $80 billion for operations in Iraq and Afghanistan and who knows how much for Bush's prescription drug plan and Social Security privatization scheme.

To finance all this high living, our federal fiduciaries are borrowing roughly $2 billion a day. The world is awash in dollars owed. And unless Washington is running a Ponzi scheme, it's all going to have to be paid back one day.

The impact on the dollar has been dramatic. In the last three years it has lost roughly 15 percent of its value against the currencies of most of our major European trading partners. The decline would be worse but for the action of China and Japan, which are buying up dollar-based securities, like treasury bills, at a frantic pace. (By propping up the dollar, they hope to help their own trade surpluses.)

How do we get out of this fix? Not without pain. Already, the dip in the dollar has helped drive up the price of oil since oil is traded worldwide in dollars. Most foreign central bankers want Bush to raise taxes to help reduce the budget deficit; at the very least they want him to back off making his tax cuts permanent. So far, Bush is resisting; he always gets his back up about tax increases. After all, cutting taxes wins votes.

But that act may wear thin, if not just now then sometime soon. Already, interest rates are beginning to climb. And if the dollar slips much further -- as many economists believe it will -- rates will have to climb even more to attract the foreign investors we've become so dependent upon.

That's the catch-22 aspect of our twin-deficits dilemma: We need an even lower-valued dollar to discourage import buying and make our own exports more affordable, but that produces higher interest rates, which tend to chill economic growth and job creation. A nice mess, huh?

So far, Bush and his supply-side alchemists have turned a blind eye to the problem, perhaps on the theory that they'll be long gone from Washington before the bill comes due. But that's reprehensible, as the Washington-based Economic Policy Institute, a nonpartisan think tank, makes clear.

"Doing nothing is not an option," the institute said in a recent report. "The consequences will be much too costly. As a nation, we are financing today's consumption by mortgaging tomorrow's living standards ... the bill will be a whopper."

In "Debt and the Dollar," institute economist Josh Bivens calculates that U.S. foreign debt exploded from 4 percent of the economy (gross domestic product) in 1992 to 24 percent by the end of 2003. And it's still growing. At its current trajectory, it would total 64 percent of GDP in 10 years, Bivens concludes.

"Although the U.S. economy may not be eating its seed corn," he writes, "it is financing current consumption by selling away today the claim to income generated by tomorrow's harvest. This is not a healthy state of affairs."

Amen to that.

 

[FaGal]

Russia and Korea send dollar plummeting
english.pravda.ru - February 26, 2005



The reign of the US dollar is obviously coming to its end


The rate of the American currency is sliding on the world markets again. The USD has dropped against the euro, the English pound, the Swiss frank, the Japanese yen and the Russian ruble. Yet another reduction of the US dollar rate occurred because of the decision of the South Korean Central Bank to convert a part of its dollar reserves into euros.

The Central Bank of Korea announced the decision to diversify its gold and forex reserves on February 22nd. Money profiteers estimated the statement as Seoul's aspiration to transform a part of its assets (totaling $200 billion) into other means of payments, the euro, first and foremost. The dollar lost over 1.5 percent of its cost as a result of the subsequent tender and dropped to the level of $1,322 dollars per euro.

Some analysts still believe that the reduction of the dollar is still good for the American economy. The growing euro has already created serious problems for the European export as it cut the competitive ability of the goods on the world market. The expensive euro has exerted a very negative influence on the economic growth in the eurozone. Analysts believe that the economic growth may stop in the EU if the euro rate exceeds the level of $1.4 per euro.

Nevertheless, it is only one side of the medal. Speculating for the fall is a dangerous occupation indeed. On the one hand, a weak national currency improves the competitive ability on foreign markets. On the other hand, it decreases the purchasing capacity of the population. More importantly, one should not forget that the US dollar is still the international means of payment. The devaluation of the dollar may automatically result in the outflow of all dollars to their issuer - the USA. Such a turn of events will lead to a global economic catastrophe.

It seems that foreign specialists are currently considering the same issue too. Well-known financier George Soros has recently accused Russia and other oil-exporting states of causing deliberate damage to the American currency. Soros believes that oil exporters are converting their dollars into other currencies, presumably the euro, speculating for the fall of the American currency.

Such an acknowledgement of the Russian economic power would be flattering, of course. However, Mr. Soros exaggerated Russian oil-exporting opportunities. The real reason is to be found in the USA itself. Here is one example. George W. Bush sent the federal budget plan for the 2006 financial year to the US Congress in the beginning of February. According to the White House, the $2.57 trillion budget is supposed to contain the all-time high deficit of $427 billion. In other words, the most economically strongest country turns out to be the largest debtor too. Therefore, other countries will not be willing to continue saving their assets only in US dollars. The Central Bank of Russia, for example, has repeatedly announced its intention to cut the dollar constituent of its assets and acquire more euros. Now it is Bahrain that is following the example of South Korea, pondering on the same question.

It goes without saying that no one is interested in the sudden demise of the US dollar: it would crash not only the American, but the global economy too. However, it will be rather hard for old EU members to resist the temptation of moving the dollar aside on the pedestal of the international means of payment and placing the euro on it instead.

 

[FaGal]

New York Times
The Daily Reckoning PRESENTS: A lot of people were angered by Alan Greenspan's remarks to the House of Finance Committee, but no one was more livid than the Mogambo Guru...then again, when is he not infuriated by the Fed Chairman? Read on...

GREENSPAN GOES BANANAS
by The Mogambo Guru

A lot of people were watching Alan Greenspan testify at the House Finance Committee, and like a lot of us, most thought it was a laugh-riot. Peter Schiff of EuroPacific Capital is one of them, and in an essay, "Greenspan Tells More Whoppers," he writes, "Like a kid in a candy shop I don't know where to start in refuting these claims. Perhaps the most memorable moment of the entire spectacle was Congressman Ron Paul quoting Greenspan to Greenspan, requiring the chairman to admit that his younger self was wrong. Unfortunately, Greenspan the younger was not wrong, just early. It seems only fitting that in a testimony fraught with contradictions, Greenspan's greatest critic was in fact himself."

Personally, I missed most of it, as I was caught up in the clutches of the American healthcare system, and while I missed almost all of the testimony, I am able to lend credence to the reports that there are a lot of people on Medicaid and Medicare, because let me tell you that it is the damn truth, as the only other patients I ever saw, the whole damn time, were old and/or poor, although all of them were better looking than me, and better dressed than me, and smelled better than me, which none of them seemed to tire of pointing out.

But I get a few minutes to quickly catch some of the testimony. As soon as I walked in and turned on the TV and turn off the VCR which is still in "pause" mode from where I was screening a how-to video on making a machinegun out of old washing machine parts, my stomach convulses into a knot, as there is Alan Greenspan listening to a question and he licking his lips, with his beady, rat-like eyes darting from side to side in panic, and I know that he knows, although I don't know HOW he knows, but he knows that I am suddenly watching him, and he senses that I am using my Secret Mogambo Vision (SMV) to stare into the foul darkness of his soul, a soul so corrupt that is going straight to Hell when he dies for sinning against the Eleventh Commandment, "Thou shalt not debase thy money," which is one of the little-known and long-suppressed Missing Commandments, recently discovered by me, The Mogambo, while using a variation of the Da Vinci Code search algorithm to find hidden messages in

But the mystery of the Missing Commandments is now revealed, thanks to the Da Vinci code, which involves going through every page looking for "hidden" words that are written backwards, or diagonally across the page, or something. Unfortunately, as it is being used now, it is a very labor-intensive process, and so therefore very unpopular with lazy guys like me, who want instant fame and fortune for doing as little as possible and who are upset and angry when we don't get them, and people call us childish, and make fun of us, and pretty soon my own family won't sit with me in restaurants because the restaurant always has this convenient "policy" where they can refuse service to anyone, and that apparently includes older men screaming and crying and kicking and whining because he didn't get as much love and money as he wanted.

But in a moment of "Eureka!" I was inspired to hurry things up, and forthwith I invented the Mogambo Method Of Enhancing The Da Vinci Code Search Engine (MMOETDVCSE). It's all very complicated, of course, but in essence I go through the Bible and circle those words and letters that spell out what I want to find, going page by page, and searching for letters only in that area of the page that corresponds to using a roughly sine wave function that goes on page after page, because when you print out my results on a computer, man! It looks impressive as hell! This beautiful regular pattern is going up and down the page, like some undulating wave out on a gently rolling ocean. It screams, "Proof!" which in itself screams, "Nobel Prize for The Mogambo, because he could sure use the money!"

The essence of this Missing Commandment is "Money shall be only gold and silver" which is eerily echoed in the Constitution of the United States itself, a point that I will bring up in my next book, "The Mogambo Explains How the Founding Fathers Knew of the Missing Commandments." But you can see that governments, being the dirt bags that they naturally are, would not like the idea of not being able to print up as much money as it wanted, anytime it wanted, to spend on anything it wanted.

But I'm looking at the TV screen and you can see by the expression on his face that his heart has turned to some mutant, stone-like material like the stuff that must be clogging up the arteries in his brain when he realizes that The Mogambo is out there, watching his every move, and it is not going to be pretty, because I am going to criticize his every word, deed and action, tearing his ass up every chance I can. And if I don't get any chances, then I will make up some lies about him that I hope will get him in trouble, and that brings up my brilliant Mogambo insight (BMI) that all our economic problems could have been prevented if we had appointed someone younger to be the chairman of the Federal Reserve, instead of Alan Greenspan, who is a zillion years old, and if we had instead appointed a YOUNGER Fed chairman, then I could call up his mother and tell HER what her idiot son is doing, and SHE could do the rest for us!

But one line that keeps ringing in my head is when Alan Greenspan said that maybe one reason why foreigners keep buying American debt is that our debt is so safe. Well, as far as getting money back and paid, then, yes, I guess it IS "safe." After all, as long as we have paper and ink, we can always print you up as many dollars as you like! And with electronic blip money, the creation of more and more money is even easier.

But this is not the Mogambo definition of "safe," as my definition of safe is that I am saving buying power, and I expect to get all my buying power back, with interest. For example, suppose that I am on my way to the army surplus to get that spiffy self-propelled cannon that I have had my eye on, when I am accosted on the street by a guy who convinces me to take that money, "invest" that money in some American debt, and in a few years I get all my money back, and a little something extra to pay me back for the pain of having postponed the gratification of consumption for those few years, and then I will have enough money to buy the cannon AND a few rounds of that special ammunition that they keep in the back storeroom that they don't tell anyone about.

THAT is how it is supposed to work, as interest rates typically are higher than both inflation and tax reduction added together. Nowadays, interest rates are, as hard as it is to believe, less that the sum of these two! People who are ******cally "investing" in U.S. debt are voluntarily losing purchasing power, because the dollars they get back after all those years won't buy squat! Hahahaha! Suckers! They are voluntarily making themselves less wealthy! That IS a conundrum! But as it is REALLY working, the chump who buys American debt will only get back enough money to buy half of a cannon! Hahahaha! So you have suffered the pangs and regrets of postponing glorious, delicious, wonderfully satisfying consumption, but you also lose half a cannon!

In fact, Greenspan said as much! He said: "We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power." But he can! The Fed Chairman is guaranteeing less purchasing power by his every word and deed since 1998!

Ron Paul asked him whether a gold standard would prevent the government from amassing such huge debts. Greenspan replied, " I think we have been remarkably successful, in my judgment ... mimicking much of what the gold standard does... I think in that context so far we have maintained a stable monetary system." Hahahaha! What an idiot! His monetary system has ZERO is common with a gold standard! What does he think we are? A bunch of chumps that we don't know what a gold standard is? Hahahaha!

Then he REALLY goes bananas when he says, "I do not think that you could claim that the central bank is facilitating the expansion of expenditures in this country" Hahahaha! I am laughing so hard in contempt and rage I am spitting up blood! What a lying moron!

Regards,

The Mogambo Guru
for The Daily Reckoning

Editor's Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter, an avocational exercise to heap disrespect on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications. If you're inclined to read more, you'll find the whole Mogambo here:

Alan Greenspan is Destroying Your Money