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Onward,
Alexander, Jeffrey, Becky and Deva
November
9, 2006
Hard Times on the Way
Bush's
Chernobyl Economy
By MIKE WHITNEY
In the next few months, a financial
crisis will arise somewhere in the world which will jolt the
American economy and trigger a swift and precipitous decline
in the value of the dollar.
This is not speculation; it
will happen and there is nothing that the Bush administration
can do to stop it.
All of the traditional supports
for the dollar have been removed by the shrinking economy, a
massive $800 billion account deficit, dramatic increases in the
money supply, and the reckless manipulation of interest rates.
Now, the noose is tightening.
Our foreign trade partners can see that we are drowning in red
ink and are refusing to buy back our debt in the form of US Treasuries.
This is a death sentence for the dollar. It means that in a matter
of months the once-mighty greenback will crash through the floor
and free-fall through open space.
Mike Swanson of the WallStreetWindow
explains the worrisome details related to last month's trade
deficit:
"Just a few days ago the
US Treasury reported that the net capital inflows from the rest
of the world into the US fell for a 6th month in a row. Private
(purchases) from abroad fell to $34.7 billion in August and from
$72.9 billion in July. Asian central banks made up for the shortfall.
If they hadn't the current account deficit would have exploded.
The NY Times quoted Ashraf Laidi, a currency analyst at MG Financial
Group as saying, "foreign central banks saved the dollar
from disaster. The stability of the bond market is at the mercy
of Asian purchases of US Treasuries."
Swanson poses an interesting
theory, but it can't be verified since we the Fed stopped printing
the M-3 (which would provide the relevant facts about the current
cash inflows) and since China and Japan have slowed their purchases
of UST Bonds.
Jim Willie of GoldenJackass.com,
offers an entirely different theory in his recent article "Spent
Dollar Momentum". Willie opines:
"Behind the scenes are
the many illicit London-based firms busily buying US Treasury
Bonds with freshly-printed money from the Dept of the Treasury.
Their tracks are covered by the blackout on the money supply
statistic. (M-3) An isolated US government with a well-oiled
printing press as the primary support device makes for a dangerous
currency situation."
Willie's "conspiracy theory"
jives nicely with the US Treasury's figures on the "Foreign
Financing of US Government Debt" (June 2006) Surprisingly,
between 2005 and 2006 our friends in the United Kingdom purchased
an additional $142 billion of USD bringing their stockpile of
dollars to $201.4?!?
Why?
Why would UK investors suddenly
stock up on dollars when everyone else in the currency market
is bemoaning the greenback's systemic problems?
Could it be that banks in the
UK are just hiding the paper trail for friends in America who
want to forestall a collapse in the dollar until after the election?
Of course, there could be another
explanation for the irregular activity in cash inflows, (purchase
of US Treasuries) that is, that we're still living in a "faith-based"
Wonderland where our overseas trading partners are more than
willing to buy an endless supply of worthless paper from a well-meaning
Goliath who is busy spreading democracy to the "great unwashed"
in developing world.
This is an utter fiction. The
world is backing away from the dollar and whether one accepts
the conspiracy theories or not, it's clear that the Federal Reserve
is trying to cover its tracks and conceal its shadowy maneuverings.
There is nothing accidental
about the crisis we'll soon be facing. Officials at the Federal
Reserve and the US Treasury are fully aware of the devastating
effects of massive trade deficits, increasing the money supply,
and self-serving interest rates manipulations. They have set
the country on the path to ruin as part of a broader scheme for
remaking the global-system according to well-known precedents.
In truth, the plan to modify the present system has a long history;
going back to the 1980s when many of the same actors in government
today were in positions of power in the Reagan administration.
For the last 6 years they have been patching together their strategy;
producing record deficits, unfunded tax cuts, mammoth government
expansion, and doubling the money supply.
How can anyone argue that they
did not understand the implications of their actions?
Did Greenspan know that by
lowering interest rates in 2001 to 1.5% that he would sluice
trillions of dollars into the real estate market producing the
largest equity bubble in history? And, if he didn't know, then
how is it that the Fed provides the statistics which state precisely
how large the housing bubble really is?
Didn't Greenspan read the charts
and graphs put out by his own organization?
And why did Greenspan support
the shaky "no down payment", "interest-only"
loans and ARMs which allowed "high-risk" people to
qualify for mortgages when the Fed knew, according to their own
figures, that when interest rates went up, foreclosures would
skyrocket?
Of course he knew; they all
knew. How could they NOT know? They produce the facts and figures
themselves! It's all part of a madcap scheme to shift wealth
to the top 1% and drive a wooden stake into the heart of the
middle class. When Greenspan saw that doomsday was approaching,
he got "cold feet" and bailed out. Now the scholarly
Bernancke is left to supervise the economic meltdown and face
the public scorn.
Trouble
Ahead
Currently, the U.S. economy
is held together by the slimmest of threads; literally duct-taped
together by massaging all of the crucial economic numbers, pumping
as much cheap fiat-currency into the system, and by "increasingly-suspicious"
maneuverings in the futures markets. After the elections, they'll
be no reason to conceal the rot at the heart of the system. After
all, we are not facing an unforeseen catastrophe, but a planned
demolition intended to increase the disparity between rich and
poor to such an extent, that democracy, as we know it, will no
longer be possible.
Nothing is more repugnant to
America's ruling elite than the notion that every man, however
broke and insignificant, can participate in our system of government.
The Federal Reserve's bloody
fingerprints are all over our present dilemma. The privately-owned
Fed has never operated in the public interest. By doubling the
money supply in the last 7 years and keeping interest rates artificially
low, the Fed has generated a $10 trillion housing bubble while,
at the same time, ignoring a $800 billion trade deficit which
is sucking up American assets and crushing American industry
at an unprecedented rate.
This massive expansion of debt
has increased the likelihood that an unexpected event, like a
bank failure or a teetering hedge fund, will cause a major disruption
in the markets sending tremors through the global system. Even
if nothing explosive happens, the faltering real estate market
will continue to swoon, consumer spending will dry up, and the
fragile economy will crash to earth. In fact, this is taking
place right now; retail sales are anemic, residential housing
dropped a whopping 17% in the last 3 months, and economic growth
shrunk to a measly 1.6% in the third quarter. The only thing
keeping the economy from collapsing entirely is the sudden drop
in oil prices which "conveniently" coincided with the
midterm balloting.
This won't last. According
to industry analyst Matthew Simmons the world production of oil
may have already peaked setting the stage for a leveling-off
period before the inevitable decline. Simmons has data to show
that "world supply of oil has declined to 83.98 million
barrels per day in the second quarter after hitting 84.35 million
bpd in the forth quarter of 2005." Oil production is going
backwards not forwards.
No one believes the price of
oil is going down any time soon. As energy prices rise and the
housing market falls; consumer spending, which added $825 billion
from home equity into last year's economy, will continue shrivel.
Thus, the Fed will have to make the tough-choice of whether to
loosen the purse strings and lower interest rates to keep the
economy sputtering along or ratchet up rates to attract more
foreign investment. (Keep in mind that the real estate market
is already in retreat, even though, the full force of the Fed's
interest rate increases won't be felt for up to 6 to 12 months
after they have been raised. The worst is yet to come)
Most economists believe that
Fed Chairman Bernancke will be forced to lower rates sometime
in 2007 to try to stimulate the economy and to affect a "soft
landing" in the housing market, but don't count on it.
I believe the Fed is more likely
to either keep rates the same or raise them to outpace the anticipated
increases in Europe and Asia. The reason for this is simple;
it presently takes nearly $2.5 billion per day to cover our current
account deficit. To continue to attract foreign capital, US Treasuries
must offer a higher rate of return than their foreign competitors.
Now that the economies in Europe and Asia are growing; naturally
their interest rates are going up accordingly.(to slow inflation)
That means that the only way that America can continue to expand
its debt, through the exchange of fiat currency for resources
and manufactured goods, is by raising the return on Treasuries.
And, that is probably what Bernanke will do, even though it will
skewer the struggling American worker and further damage the
US economy.
The secret of running the global
economic system is to control the issuance of currency and, thereby,
be in a position to expand one's own debt as one sees fit. The
Federal Reserve must preserve its "dollar hegemony"
if it wants to maintain the greenback as the world's reserve
currency. To achieve that, the dollar must stay one step ahead
of its competitors (higher rates) and prove that it is on solid
financial footing. This is impossible now that the US economy
is contracting, so Washington has decided to do the next best
thing; corner the oil market. By controlling Middle East oil
US policy-makers believe that they can force foreign nations
to accept the debt-plagued greenback regardless of the faltering
US economy. It is no different than any other extortion racket.
If the plan succeeds the dollar
will remain the de-facto international currency. But it is difficult
task and the escalating violence in Iraq suggests that the results
are far from certain.
Corporate
Colonization
"Free Trade" is the
Holy Grail of neoliberalism. It is essentially a public relations
scam intended to disguise the shifting of wealth, jobs and resources
from either the middle class or the public sector to the corporate
and banking establishments'. Despite the zealous cheerleading
of Thomas Friedman and his ilk; the basic facts have been thoroughly
examined and are not in dispute. Free trade has been a dead loss
for everyone except the people for whom it was originally designed;
the wealthiest and most powerful men on the planet. It has served
them quite well.
For example, "since NAFTA
went into effect in 1994, the US has lost over $4 trillion to
foreigners through its trade deficit""During that 11.5
year period , foreign ownership of US assets skyrocketed an amazing
400% from $3 trillion to over $12 trillion" "Foreign
interests now own 46% of US Treasury debt, 26% of corporate bonds,
and 13% of US corporate equities. Now nearly 100% of on-going
borrowings by the government are funded by foreign interests.""Foreign
interests also control a majority of US domestic industries such
as movies, music, publishing, metal ore mining, cement production,
engine and power plant production, rubber and plastics and are
major owners of US industries such as pharmaceuticals, chemical
manufacturing, industrial machinery manufacturing, motor vehicles,
and electronic equipment and componentsIn addition, the US has
lost 3 million manufacturing jobs over the last decade, real
wage growth after inflation has been essentially zero,"
and personal debt has never been higher. (Data from Thomas Heffner
EconomyInCrisis.org)
Since 1980, 13,730 major companies
have been sold to foreign corporations. We no longer produce
what we need to sustain ourselves.
These facts may have a mind-numbing
affect on the reader, but they make a point which is simple and
unavoidable. The country is being colonized by corporate predators
and its main assets are being sold off to the highest bidder.
This rampant carpet-bagging is taking place in full view of the
American public which still clings to the spurious idea that
"free trade" is generally beneficial for all. It is
not, and we are about to experience its full-effects as America's
"straw-house" economy topples from its loss of manufacturing-capacity
and its staggering account imbalances.
"Foreign investors now
own 46% of US Treasury debt" over $3 trillion dollars! The
Federal Reserve and their corporate she-wolves are planning to
prolong the hemorrhaging of US wealth as long as possible extracting
every last farthing from the prostrate corpse of the waning republic.
Now, we are at the brink. Energy
prices will go higher after the elections, manufacturing will
continue to flag, and the housing Zeppelin is drifting towards
the high-tension wires. To make matters worse, the American consumer;
the "engine for global economic growth", is drowning
in a sea of personal debt.
There's no place to go but
down.
Every part of this bleak picture
was anticipated by its architects. That's why they hastily slapped
together the requisite legislation for a modern-day police state.
After passing the Military Commissions Act of 2006 (which allows
the president the arrest whomever he chooses without charges)
and overturning the Posse Comitatus Act (the president is now
free to deploy the military within America against US citizens)
the Bush administration is as ready as they can be. Apparently,
they feel like they can manage the public's shock and outrage
with detention camps and water cannons.
We'll see.
In any event, the trap has
been set and any minor disruption in the hedge funds or derivatives
markets will put the economy into a violent tailspin forcing
our "Unitary" president to activate his plans for the
new world order.
Battle Stations;
Battle Stations
Last week an article by Ambrose
Evans-Pritchard appeared in the UK Telegraph, where he stated:
"(Treasury Secretary)
Paulson re-activated the secretive support team to prevent markets
meltdown. Judging by their body language, the US authorities
believe that the roaring bull-market is just a sucker's rally
before the inevitable storm hits.the plunge protection team is
a shadowy body with powers to support stock-index, currency,
and credit futures in a crash. Otherwise known as the working
group on financial markets, it was created by Ronald Reagan to
prevent a repeat of the Wall Street meltdown in October 1987".Paulson
has set up "a command center at the US Treasury that will
track global markets and serve as an operations base in the next
crisis." (Members include the heads at Treasury, Federal
Reserve and Securities and Exchange Commission)
Evans-Pritchard adds: "Mr.
Paulson has asked the team to examine systemic risk posed by
hedge funds and derivatives, and the government's ability to
respond to a financial crisisWe need to be vigilant and make
sure we are thinking through all of the various risks and that
we are being very careful here. Do we have enough liquidity in
the system?'"
And, finally, Evans-Pritchard
queries: (Do) Mr. Paulson and Mr. Cox (SEC) know something that
we do not: whether other hedge funds are in the same sinking
boat as Amaranth Advisors and Vega Management, keel-hauled by
bets on natural gas and bonds? Or whether currency traders with
record short positions on the Japanese Yen and Swiss Franc are
about to learn the perils of the Carry Trade, a high-stakes game
of chicken where you bet against fundamentals with high leverage
to make a quick profit. Everybody knows it will blow up if the
dollar goes into free fall".
"The entire global financial
structure is becoming uncontrollable in crucial ways its nominal
leaders never expected. Instability is its hallmarkContradictions
now wrack the world's financial system, and if we are to believe
the institutions and personalities who have been in the forefront
of the defense of capitalism, it may well be on the verge of
serious crisis."
Deregulation and reduced
market transparency have created a plethora of financial instruments
which are relatively untested and extraordinarily volatile. By
eliminating the "rules of the game" market-savvy investors
have raked in the profits but reshaped the economic landscape
in a way that no one can predict what the ultimate outcome will
be. Hedge funds are now loaded with over-leveraged debt-instruments
that promise a generous return in an up-tempo market, but certain
doom in an economic downturn. Now, that all the arrows are pointed
towards recession the devastating effects of this new "liberalized"
system will be felt throughout the global economy.
No one knows what is in store
for these high-risk hedge funds which have only been in existence
for a short time and which Americans have dumped trillions of
their hard-earned savings. As Kolko says, "The credit derivative
market was almost non-existent in 2001, grew fairly slowly until
2004, and went into the stratosphere, reaching $17.3 trillion
by the end of 2005."
Is it any wonder why the main
players at the Fed, the Treasury and the SEC are feeling a bit
jittery?
Any shock to the markets could
set off a system-wide cataclysm. Just this week, for example,
Taiwan was bracing for a stock market crash following the surprise
indictment of first-lady Wu Shu-chen. Even relatively small incidents
like this on the other side of the world create the potential
for contagion that can spread rapidly in this new world of globalized
markets. The danger is even greater when those markets are built
on a foundation of sand.
Hank Paulson was doubtless
selected as Treasury Secretary as the best possible "industry-insider"
to oversee the unwinding of America's humongous account imbalances
and flimsy "deregulated" markets. His job is to ensure
that, at the end of the day, US banking giants, the Federal Reserve,
and western elites still control the global economic system and
that the dollar reigns supreme. Whatever happens to the American
middle class in the process is of no consequence.
But Paulson faces a daunting
task from this point on; fudging the numbers only works won't
work forever. So far, the greenback has benefited from the manipulation
of oil prices, but that will soon end. (Better "fill er
up" now) The US economy is a shriveled shadow of its former
self; housing and manufacturing are in a shambles and growth
depends entirely on the expansion of debt. As GDP begins to nosedive,
foreign investment will dry up, capital will flee to more promising
markets in Asia and Europe, and the American people will totter
into a barren world of soaring unemployment, hyper-inflation,
and 1930s-type deprivation.
The country is now facing a
Chernobyl-type meltdown and the prospects for changing direction
appear to be minimal. The foundation blocks for sound economic
growth and prosperity have been replaced by a misguided faith
in military adventurism and police state repression. The results
are plain to see.
We are now more vulnerable
to a seismic economic event than anytime since the Great Depression.
The corporatists and the money-lenders have absconded with the
nation's wealth; gutting the manufacturing sector, creating enormous
equity bubbles, and raffling off our vital industries to foreign
investors. At the same time, the Bush administration has sown
dragons-teeth around the world leaving the US with precious few
friends to throw us a lifeline when ship starts taking on water.
Hard times are on the way;
only this time it'll be detention centers instead of soup kitchens.
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