by Bill Bonner /
The dollar 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 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 dollar 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 dollar; 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.
Until next week,
Bill Bonner
The Daily Reckoning
Editor's Note: Bill Bonner is the founder and editor of The Daily
Reckoning . He is also the author, with Addison Wiggin, of the
national best sellers Financial Reckoning Day: Surviving the Soft
Depression of the 21st Century and Empire of Debt: The Rise of an Epic
Financial Crisis .
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