Bloomberg has a commentary by Mark Gilbert, summarising the evidence to support the idea that the U.S. dollar’s days are numbered. His commentary concurs somewhat with one made by Bill Bonner on The Daily Reckoning. He describes the merciless battle between the forces of inflation versus deflation, but with rather more frankness suggests that the U.S. is doomed:
In a larger sense, the US is at war with capitalism…and with nature herself. Markets have natural rhythms. They go from boom to bust…from inflation to deflation…from expansion to contraction naturally. Trying to stop the bust is futile. It is a fight against Fate…a losing proposition. And it is diabolically unnatural.
Mr. Gilbert, despite his pessimistic views, believes that the US will not default on its debt obligations and, furthermore, will not have its credit rating downgraded from AAA status:
It is undeniable that the U.S. government’s ability to finance its borrowing commitments has deteriorated as its deficit has ballooned.
Using the definitions outlined by Standard & Poor’s, a one-step cut into the AA rated category would nudge the U.S.’s creditworthiness into a “very strong” capacity to fulfill its commitments, just weaker than the “extremely strong” capabilities demanded of AAA rated borrowers. That seems an appropriately nuanced sanction — albeit one that the rating companies might turn out to be too cowardly to impose.
In my view, there are mistakes in both analyses, owing to incorrect assumptions. Firstly, Mr. Gilbert may well be playing down his pessimism so as not to be accused of fearmongering, but surely he is aware of the degree to which U.S. mortgages are heading for the wall. The current picture is looking much worse than that which existed even before this whole economic crisis began.
Credit rating companies are not independent, scientific and unbiased organisations by any stretch of the imagination. They are privately owned outfits with great power in swaying public opinion. Indeed, they are crucial part of the fiannce sector, able to make or break whole economies by their assessments. They are, in a sense, no different to mainstream media outlets, privately owned by an oligarchy, providing heavily filtered news with bias at every turn. Yet both are threatened now by the obvious. More and more, media outlets are being forced to report undeniable facts (political and economic) which go against the current “political correctness”.
The world’s population is becoming painfully aware of the economic failings of the U.S., and to suggest that credit rating companies will ignore this fact is like suggesting that Fox News would fail to report an anti-war protest in Washington DC with ten million angry people brandishing torches and fighting riot police with their rubber bullets and teargas. As much as Fox News would probably like to under-report it as being several hundred angry youths having a small scuffle with police, it could not get away with it. The credit rating of the U.S. economy will be revised downwards. It’s as good as given already.
Mr. Bonner, on the other hand, is a believer in markets. They are, in theory, beautiful things. People come and trade, buying and selling whatever can be bought or sold. In so doing, they set the price and value of everything, ensuring the most efficient use of resources of a society. If markets are natural, then one can expect undulations in pricing, rises and falls depending on seasons, social changes and other explainable phenomena. One can even expect massive corrections in pricing as a result of a major changes in government policy (the chief cause of bubbles). On that thought, the U.S. economy has so many bubbles at the moment, that it could be better described as a froth economy. If we blow off the froth, what are we likely to find?
Unfortunately, markets today are far from natural. The presence of hedge funds, the Plunge Protection Team, the undeniable pervasiveness of insider trading, interventionist governments and the hysterical mass media all ensure that market movements are, more or less, predetermined.
Instead of sailing on an ocean, where navigation and seamanship are a fair mix of art and science, investing in the stock market today is like sailing in the presence of a wave machine and massive propeller fans generating false winds. All is well until someone decides to switch the wave machine off or alter the fans without notice. It would have been better for most not to have sailed at all. Yet how nice it would be to be a friend of the wave machine operator. What advantages could be had!
Death comes like a thief in the night, unpredictably and suddenly (except for when it doesn’t, of course). Whereas the miser wakes early each morning, thinking he will avoid danger, the thief rises the night before and was already at work before everyone else. The death of the U.S. currency will come in the form of a great heist. Already, the middle classes are being robbed blind. In a way, they have been blind drunk on credit, but are now waking with a splitting headache only to discover that the foam has been blown off their beer and, after all that, the glass is empty.
While to many it is an extreme view, even now, it is inevitable that the U.S. will soon default on its credit obligations. It might not be called a default, or a bankruptcy, or anything suggestive of the term ‘failure to pay’, but it will nonetheless happen. Like the bankruptcies of GM and Crystler, the U.S. economy and its people are going to be sold off, divided up and redistributed to its creditors. Some names will change, others will stay the same. Euphemisms are probably still to be invented to describe the coming events, but the coming ‘restructuring’ of the U.S. economy will be nothing less than the settlement of failed debts on an international level, which will effectively result in the handing over of sovereignty to foreign interests. With or without a war, the final and determining step in this process will be the dissolution of the U.S. currency and the adoption of a world reserve currency, and with it the end of the era of Democracy.
An article appeared today in Pravda.ru entitled: “USA has two options to save its economy: declare default or trigger off war”:
Inga Foksha, an analyst with Aton Investment Company, agrees that the US default is quite possible, although she is certain that it will not happen unless the world finds an alternative to the US dollar. The dollar will collapse immediately in case of default, which is absolutely unacceptable, because 63 percent of world reserves are saved in dollars. Their collapse will trigger the global economic collapse.
While the analysis is quite good, they have the title wrong. It should read:
The USA has but one option: declare default and trigger off war.
The US Dollar, as a fiat currency, is on track to losing all credibility. The United States of America is already practically bankrupt. And since “63 percent of world reserves are saved in dollars”, the Federal Reserve’s action to dilute the value of the dollar by issuing irrational amounts of new money without any kind of capital to back it up will act to offend the holders of that 63 percent. Anyone who thinks it will all be taken lying down is kidding himself.
Like an unemployed man’s wife, Hilary Clinton has made her way to the Bank Manager (China) to beg for leniency on non-payment on the mortgage.
“Because our economies are so intertwined the Chinese know that in order to start exporting again to its biggest market, the United States had to take some very drastic measures with this stimulus package,” Clinton said.
In other words, the furniture has been sold and they have promised to pay the baker, the butcher and the milkman. With money, of course. The sons sit idle, illiterate and unskilled. The daughters are already working the street corners and public houses in the town but it just isn’t making ends meet.
As she walks into the bank, all dolled up, the bank clerks eye the woman with hatred and jealousy. They all talk amongst themselves. One of the secretaries knows about the Banker and tries to wave her hands at the woman to tell her of the dangers, but the woman is very quickly intercepted at the door and ushered to the waiting room.
The Banker is looking at the books and can see that foreclosure is on the cards. He invites the woman into his office.
“Lend me a bit more” pleads the woman, “my daughters will work harder and my sons promise to learn to read”. The Banker just leaned back and smiled.
The US secretary of state had said on Saturday after meetings with China’s leaders that Beijing was still confident in US Treasury bonds and expressed Washington’s appreciation for the investments.
So said the woman as she adjusted her blouse and redid the strap on her high heels. She stumbled out of the manager’s office hurriedly.
But everybody could sense what really happened in the Banker’s office.
The Times Online expresses its fears of civil unrest in the United Kingdom arising from the ever escalating financial crisis. It’s all believable, what with a record budget deficit, collapsing exports, escalating unemployment, astronomical personal debt levels and the real possibility of further bank failures.
Some of the comments made to the original article point out what the public might be thinking:
Yes, we all hate bankers — but replace them with what? If the ideology of capitalism is discredited, the alternative — socialism — collapsed in 1989. So we are now left without any ideas at all. Which is why everyone is running around like headless chickens.
A narrow-minded comment, as there are surely more than two ideologies in the world. The ideology of capitalism is not discredited but would have been working perfectly had it been allowed to. If life were a game, then the reason why people are losing at it is because they weren’t told the rules and the others are cheating. The most likely mistake that people have made is to neglect the most basic question to ask when investing:
What is a risk, what is a gamble and what is plain stupid?
A risk is taken by an investor when he is certain of the maximum gain and maximum loss that may occur, that the benefit probably outweighs the potential loss, and is hopeful that he will get the maximum return. Any future investment plans are made, depending on their priority, on what is certain, probable or hopeful. In following this principle, the investor would have known not to trust “financial instruments” as a “certainty”, for example.
A gamble is taken when the investor considers the potential loss to be 100% (or has no idea), and believes that the maximum gain is probable (but he cannot quantify this probability). No risk vs. benefit analysis can be reasonably taken, no plans can be based on the projected outcome because there is nothing that can be done with zero money.
Plain stupid is the investor who thinks everything is a risk when most of the time it is a gamble. Banks were in a position of having so much money, so many people’s deposits, that they lost all sense of risk vs. gamble. They gambled all over the place. This has happened, particularly in the UK, because of the absence of a real meritocracy. Stupid people became CEO’s on the basis of club memberships and family associations. The same phenomenon exists all the way down the management chain. Arrogant and afraid of being shown up, the decision makers ignored sound advice, departed from concrete principles and sailed the navy of fools straight towards a reef.
The reason people are such suckers at this time is that they have too much faith and no Faith. The ancient wisdom contained in traditional religion would have saved the skins of many, had they applied it. Building a house on a rock is about more than architecture. Keeping one’s affairs tidy as though it were the last day has greater meaning than attending confession regularly and saying one’s prayers. The thought that God is watching our every thought and act is about more than the supernatural world. It is an aide to proper conduct in times of chaos and lawlessness. The prosperity of previous generations was built on this kind of sound reasoning.
In the absence of this time-proven wisdom, people turn to men in fancy suits for their dose of religion. Instead of believing in angels and saints (an altogether harmless undertaking) they believed in money and bankers. Instead of betting on real horses at the races, where one can at least take a bit of a look at the horse and see if it is limping or, perhaps not even a horse, they gambled on the hearsay of a financial advisor and his pie charts, bar graphs and trend analysis.
In any case, it’s all done now.
It would be nice if there wasn’t a bloody solution to all of this mess, but if people aren’t willing to turn away from the emptiness and the lies that got them to this point, then blood and death is the inevitable way out. The reason there is so little hope for the likes of the United Kingdom and the USA is that, by and large, people are not the decent sort that their grandparents were. They keep telling themselves that the reason their grandparents don’t swear but behave civilly towards each other is on account of their age. They don’t realize that it was because their grandparents were better cultured. And now the older generation is gracefully moving on.
The greatest pity is that the current generation has altogether broken its link with the past and remains adrift in a sea of lies with fools at the helm. A shipwreck is all that can come of it.
When Joe Bloggs down the street can’t pay his debts fair-square, but services them with his credit card collection, it’s only a matter of time before the fat men in dark glasses come around to punch his lights out.
Yahoo News carries an opinion piece stating that Banks are responsible for the ongoing woes in the US financial system by their insistance that debtors pay their debts on the terms of the existing contract:
One reason foreclosures are so rampant is that banks and their advocates in Washington have delayed, diluted, and obstructed attempts to address the problem. Industry lobbyists are still at it today, working overtime to whittle down legislation backed by President Obama that would give bankruptcy courts the authority to shrink mortgage debt.
The problem, of course, is that the system is unfair and patching up wounds through a partial debt jubilee won’t work. Banks are usurers. The current credit system is totally immoral and nobody should take any part in it. But government, by borrowing to “bail out” the economy, is placing itself in the same position as the banks. It is usury upon usury.
When a bank issues a loan, it charges a rate of interest roughly proportional to the rate of inflation, but this is usually higher. Inflation causes the value of money to shrink and is a reflection of the diluting power of increasing the supply of money as occurs with the issuing of new loans.
The real interest that one is paying on a loan is therefore much higher than the stated value. When a housing loan is set at 6% annual interest, and inflation is roughly 5%, the real rate of the loan is going to be somewhere between 6 and 11%, depending on whether wages are increased in parity with inflation. It has been the case over the last thirty years that in most established industries, wages do not grow at the rate of inflation. People don’t notice this as their own pay goes up as they rise in seniority and rank, but if they ask what the entry level job is paying, then it becomes clearer.
Any bank that charges more than 5% on a loan, in real terms (taking into account inflation and wages growth), is guilty of usury.
If a government is in debt to a bank that is placing the same burden on the government as occurs to other victims of usury, then it follows that every tax payer is subject to that same usury. Governments should not be allowed to go into debt on these terms. It’s immoral.
So why are people defaulting on their loans?
The value of housing was being inflated because of speculation and the reality of inflation. People ran to property to protect themselves, like people running for a tree to get out of the rain. If everybody chooses the same tree, however, then the tree cannot realistically protect them all. So the property bubble has burst, especially in the US, where people were building houses at such a rate that an oversupply resulted.
At the same time, people’s incomes have failed to rise with inflation and interest. Taxes have been increased in various ways to fund wars and service ever growing debt. Poorer, year by year, people finally collapsed under the heavy burden imposed on them by banks and government.
The solution, then, is to take away this burden, to phase out the system of debt on which economies are currently based and to reduce taxes. Put an end to usury.
Sadly, however, our governments are not talking about usury. The word has been lost from most people’s vocabulary. Instead, governments are bailing out, borrowing, spending, spinning in circles faster and faster, yet none of it is working. The scary thing about it is that a massive loss of life becomes a likely event when governments take such desperate, counter-productive measures.