Posted on 12/11/2006 7:14:32 AM PST by kellynla
Even as the stock market is hitting new record highs almost every day, the Federal Reserve and Treasury Department are quietly coordinating a devaluation of the dollar that the Bush administration hopes will be a slow decline rather than a dollar collapse.
This week, in an unusual move, the Bush administration is sending virtually the entire economic "A-team" to visit China for a "strategic economic dialogue" in Beijing Dec. 14 and 15.
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are leading the delegation, along with five other cabinet-level officials, including Secretary of Commerce Carlos Gutierrez. Also in the delegation will be Labor Secretary Elaine Chao, Health and Human Services Secretary Mike Leavitt, Energy Secretary Sam Bodman, and U.S. Trade Representative Susan Schwab.
The Bush administration wants to get China's cooperation in preventing a dollar collapse. That's the conclusion of John Williams, an experienced professional econometrician, who writes the "Shadow Government Statistics" blog.
Williams has re-created M3, a money-supply measure whose data the Federal Reserve simply stopped publishing after issuing a technically worded March 2006 announcement.
Williams reports M3 is currently growing at close to a 9.6 percent rate and trending higher, compared with an 8 percent rate early this year, when the Fed quit reporting the measure.
"The Fed is pumping liquidity into the U.S. economy," Williams told WND, "and the Fed evidently did not want the markets to follow too closely what the Fed was doing with the money supply."
China today now is holding a historically unprecedented $1 trillion in foreign exchange reserves. During the Thanksgiving holiday, an announcement by China that their central bank planned to diversify foreign-exchange holding away from the dollar caused the dollar to drop in value on international currency markets. Since then, the dollar has hit a 20-month low against the euro.
"This was almost an orchestrated announcement," Williams claimed. "Around Thanksgiving the markets were thinly traded. I'm not sure who was playing games there, but the signal was clearly heard."
"You're dealing with mass psychology here," Williams argued. "The central bankers around the world know they are going to take a hit on their dollar holdings. None of the central bankers want to start a dollar panic, but none of the central bankers want to be the last out of the dollar, either."
Williams explained that the Federal Reserve is in a bind.
"Raising rates would kill any chance of avoiding a recession, but in terms of the dollar, we can't raise the rates fast enough when the dollar starts to slip quickly."
Are we experiencing a dollar collapse?
"Not yet," Williams answered. "I believe we're going to have a dollar collapse, but the Fed is going to do its best to slow play the dollar's decline in value, so that it takes a year or two for the dollar value to reach its low point."
Williams explained the risk of collapse the dollar faces:
"There will be a central bank, most probably in Asia, who will start the move away from the dollar and when it happens, you're going to see other central bankers covertly trying to follow. The move will magnify very quickly and it could become a full-fledged panic and a dollar collapse."
The Fed is struggling right now to contain inflation and stimulate economic growth. All the Fed is doing right now with all their grand policy shifts is using a lot of propaganda and market massaging to try to prevent a financial panic."
Recent reports have shown that U.S. gross domestic product growth slowed to 1.6% in the third quarter, the lowest in more than 3 years.
Will a declining dollar help narrow the U.S. trade deficit with China?
"You could take a 30 percent decline in the value of the dollar," Williams argued, "and it wouldn't make much of a dent in our trade deficit with China, not as long as Bush administration trade policy continues to one-sided in favor China."
"The Fed is faced with an impossible circumstance with the trade and budget deficits being run by the Bush administration," Williams told WND, "and they are just playing games with the markets and the public by not publishing M3, the broadest measure of money supply and the best indicator we have of long-term activity."
M3 is the broadest measure of the total money in the economy, including checking and savings accounts, cash, time deposits, and money-market funds. Economist Milton Friedman, one of the key economists contributing to the conservative theories that led to the development of "Reaganomics," argued that money supply is a key measure correlated both with economic growth and inflation.
Free market bump!
Its something we have done to ourselves.
Not that I like it any better or makes it any easier.
We will be a worthless 3rd world husk...but then so will the rest of the "Western" world.
Well, if it collapses during the next two years and everything goes to hell in a handbasket, we can blame it on the Democrats.
Geez... what did the Republicans expect would happen when they did not do anything to reduce government spending. If this isn't a wake up call for some kind of a balanced budget amendment, I don't know what is.
The idea is to not be the one left holding the bag.
The cost of entring the capitalist world will be a lesson in economics. Don't trade all your stuff for promissory notes. Make sure you have collateral.
Corsi should stick to Viet Nam. Gold is selling for $625 this a.m. and has been centering on this figure for some time. Unless gold skyrockets anticipate currency fluctuations but no dollar plunge.
Any time the foreigners don't want our money they will stop buying. The foreign mercantilists are the ones doing the complaining. China is the worst example.
Japan is another example. They have been doing everything possible to cheapen their currency. They too are always eager to sell to America.
America has been the consumer of last resort. This is in the process of changing. If China and Japan just want to export and not import their currencies will soar unless they go to extreme lengths to cheapen them.
In the meantime they face the fact they are sending us real goods and services for pieces of paper. A weakening dollar is more their problem than ours.
IMHO they are going to China to tell them we are going to allow the dollar index to sink to .80 or .85 unless they remedy their reluctance to import.
A balanced budget amendment is a call for higher taxes. Go look at any of the states that have balanced budget requirements.
Politicians are simply incapable of reducing spending in a democracy.
If the dollar were to undergo a significant slide it would likely trigger the great depression talked about in this article. China has as much or more to lose as we do.
Crisis in China Could Devastate the U.S. ^
Posted by A. Pole
On News/Activism ^ 12/10/2006 5:25:11 PM PST · 48 replies · 1,507+ views
http://www.freerepublic.com/focus/f-news/1751492/posts
I understand that... but you cannot go on forever spending more money than you take in, the interest on the Federal Debt will soon become the largest line item in the Federal Budget at this rate. Perhaps if you made it harder to raise taxes (e.g., a 2/3 vote, or even a unanimous vote in Congress) then such an amendment would actually control spending.
Here's a couple of articles from 2004:
From the Pittsburgh Tribune-Review, Dec 7, 2004
Members of the world's crude oil cartel have been cutting back on U.S. dollar-denominated holdings for three years.
The Bank for International Settlements, in its latest quarterly report, notes members of the Organization of Petroleum Exporting Countries have cut the proportion of deposits held in dollars from 75 percent in the third quarter of 2001 to 61.5 percent, the Financial Times reported Tuesday.
And, in cash terms, OPEC members' stock of dollar-denominated deposits has fallen by 4 percent since 2002, the bank said.
The primary -- though by no means sole -- reason for the shift is the dollar's decline against the euro and the Japanese yen. Because crude oil sales are typically denominated in dollars, a falling dollar cuts into OPEC revenues.
But there are other reasons for the shift: Middle East investors are worried Washington will freeze assets in its war on terror, especially since President Bush was re-elected, and OPEC members spend heavily in Europe and Japan where the dollar's purchasing power is weakest.
From the Guardian, Dec 5, 2004:
Japan is warning the White House that there will be 'enormous capital flight' from the dollar if the Bush administration maintains its laissez-faire approach to the mounting currency crisis.
Tokyo fears that Japan's strongest economic recovery in a decade could be derailed by the sudden appreciation in the yen against the greenback.
The criticism of President Bush's inaction, by a senior member of the ruling Liberal Democratic Party, will be taken as a veiled threat that Japan could start to sell off its multi-billion-dollar holdings of US Treasuries. 'The Japanese government is going to ask for a strong dollar policy; if it continues to fall, there would be enormous capital flight from the dollar,' said Kaoru Yosano, chairman of the LDP's policy council, adding that Japan would be calling on its fellow G7 governments to demand the US deal with the massive fiscal deficit that has helped to prompt the dollar's decline.
Yosano's remarks echoed a warning from a senior Japanese Ministry of Finance official that if the US does not push up interest rates to make the dollar more attractive, 'the one-way sentiment on the dollar will have a negative impact on the flow of capital into the US.' He added that Japan is urging its European counterparts to join a campaign of coordinated currency-market intervention, saying: 'If the dollar is depreciating, we should have coordinated action: that has already been communicated to my European counterparts.'
Like Japan, the eurozone fears that its tentative recovery could be choked off by the fall in the dollar, which European Central Bank president Jean-Claude Trichet has called 'brutal'. However, the ECB has so far dismissed the idea of intervening.
Japan is taking a double hit from the decline in the dollar because the Chinese renminbi is pegged to the US currency, so Japanese exports are simultaneously becoming sharply dearer in both their major markets. Takeo Fukui, the chairman of Honda, admits, for example, that an appreciation of 1 yen against the dollar, if it lasts for more than three months, knocks 10 billion yen off the carmaker's profits
From the Jan 5, 2005, Financial Times:
Central banks are shifting reserves away from the US and towards the eurozone in a move that looks set to deepen the Bush administration's difficulties in financing its ballooning current account deficit.
In actions likely to undermine the dollar's value on currency markets, 70 per cent of central bank reserve managers said they had increased their exposure to the euro over the past two years. The majority thought eurozone money and debt markets were as attractive a destination for investment as the US.
The findings emerge from a survey of central bank reserve managers published today and conducted between September and December of last year. About 65 central banks, controlling assets worth $1,700bn, took part and the results showed a marked change in attitude over the past two years.
Any rebalancing of central bank reserve portfolios has serious implications for the global financial system as the US has become increasingly dependent on official flows of funds to finance its current account deficit, estimated at $650bn in 2004.
At the end of 2003, central banks held 70 per cent of their official reserves in dollar- denominated assets and central bank purchases of US securities had financed more than 80 per cent of the the US current account deficit in 2003.
Any reluctance to increase exposure to dollar assets further could cause the greenback to plunge on currency markets. "The US cannot take support for the dollar for granted," said Nick Carver, one of the authors of the study conducted by Central Banking Publications, a company that specialises in reporting on central banks.
"Central banks' enthusiasm for the dollar seem to be cooling off."
In a further worrying sign for the greenback, 47 per cent of reserve managers surveyed said they expected the growth of official reserves to slow to less than 20 per cent over the next four years. Between the end of 2000 and mid-2004, official reserves had increased by 66 per cent.
Slower reserve accumulation growth implies the supply of official finance is likely to become more limited but few expect the demand from the US for finance to slow. The consensus among economists is that the US current account deficit will increase to $694bn in 2005.
More than 90 per cent of central bank reserve managers said that the income from reserve management was "important" or "very important".
In the two years since a similar survey was conducted, reserve managers had begun to seek higher returns for the money under management.
For these managers, dollar assets have become less attractive because the fall in the dollar since 2002 has reduced the yield they received and, in some cases, has led to negative real returns.
Alan Greenspan, the chairman of the Federal Reserve, warned in November that there was a limit to the willingness of foreign governments to finance the US current account deficit.
The survey was conducted on the guarantee of anonymity for the banks involved. The 65 central banks that participated control 45 per cent of global official reserves. Individually, they had up to $250bn under management.
Bottom line is that this stuff has been going on for a few years now. So personally, I think that Corsi is a little bit breathless about this, seeing as the trend is hardly new.
Too late. The Dems are in charge now. We all know what will freeze over before they cut any spending...except maybe on national defence.
Dear Dr. Corsi:
The REAL reason Bernanke and Paulsen are going to China (along with cabinet members of Jewish, Hispanic and Chinese descent) is that they want Chinese help with the trans-Texas corridor.
[And as we all know, the latter will bring about a transnational North American government controlled by the international Jewish-Chinese conspiracy. Very suspicious!]
Since the days of FDR, we have been filling our deficits with investment money (mostly from abroad). This worked because there were enough people willing to purchase US bonds (in the post WWII world, they really didn't have much of a choice. The rest of the world was either dirt poor, communist, a pile of rubble, or all three). When those people decide to stop buying bonds, we will have to either cut costs or look for new sources of income.
Sadly, an economic collapse may be the only way to exact real change in our nation's fiscal policies.
Bush has been no better for America than Clinton was. Our enemies could not have planted two more incompetent men in the White House than Clinton and "W". What was the purpose of Bush granting China 'most favored nation' trade status? It has helped China, our Communist enemy, far more than it has heled the U.S. And what of Bush's Mexican policy, that seeks to grant millions and millions of illegal invaders amnesty? "W"'s Iraq policy has been inadequate at best; his is a PC war that will drag on endlessly because our men can't use their full force and must live in fear of harming a "friendly" Iraqi. Oh well, I suppose the good news is that no matter who our next President is, he can't be any worse than the previous two boneheads.
The sad irony is that, for all our efforts to not harm the civilian population in Iraq, we've made it eminently easier for the terrorists to do it instead.
By having such a large proportion of the U.S. debt to be held by a foreign country means the U.S. will become the servant and not the master of its fate. By promoting such unbalanced trade with China through deficit spending, on the part of the government and on the part of individuals, we are now in debted (directly as a nation and indirectly as individuals through increased borrowing for consumer spending) to this nation. He who has the gold makes the rules.
If you have 401(k) options that have foreign investments, now would be a good time to shift a chunk of your asset allocations to them.
Corsi is an embarrassment.
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