Posted on 10/06/2009 7:32:36 AM PDT by NYer
If you’ve seen the movie Thelma and Louise, you’ll never forget the ending: In the last scene, the two main characters head down a dirt road in their top-down convertible. The road dead-ends at a very high cliff. The last picture of the movie shows the car in a dramatic free-fall off the cliff.
That ending is a perfect metaphor for the fate of the United States dollar. Our currency is headed for a free-fall off a cliff in the international foreign-exchange markets. Why is this almost a certainty? Consider the following:
At no other time in our nation’s history has the federal government ever attempted to embark on a borrowing binge like the one about to unfold; not during the Revolutionary War, the Civil War, or even World War II.
During World War II, marketable federal-debt levels reached a record 120 percent of GDP. Almost 100 percent of the financing for borrowing came from the savings of American citizens. When the war ended, the borrowing stopped. Our country emerged from the conflict with 100 percent of our industrial-economic might intact. We were a net-creditor nation to the rest of the world, we exported more than we imported, and we enjoyed this very strong economic position with no real competition for over 25 years. Most importantly, the U.S. dollar became recognized as the one and only global reserve currency. As the U.S. economy grew, the war debt was reduced to a comfortable 35 percent of GDP.
Today, our nation faces the opposite. We are now a net-debtor nation, we run large trade deficits, we have minimal private savings, we face significant economic competition from all corners of the globe, and, most ominously, over half of our marketable federal debt is owned by foreign countries that are not particularly friendly to our nation. Thus, the global-reserve currency status of the U.S. dollar is being seriously challenged. And yet, we continue to set records with unending federal borrowing.
How did this serious challenge to the reserve-currency status of the dollar happen?
About 10 years ago, an unprecedented economic imbalance developed in the world’s global trading pattern. China became the world manufacturer of first resort and the United States became the world consumer of last resort.
China, with its low-cost labor pool, became a magnet for global manufacturing. The result, after almost a decade, is that China has become a leading exporter of low-cost, quality-manufactured goods. The accumulated trade surpluses over the years have generated a cash surplus position for China of over 2000 billion U.S. dollars. Not surprisingly, the communist nation has become the single largest holder of U.S. Treasury debt outside the United States. About 800 billion of the 2000 billion cash surplus that China holds has been invested in U.S. Treasuries. The Treasury debt held by China now represents 23 percent of the 3428 billion of Treasury debt held by all non-U.S. citizens. Additionally, the 3428 billion of Treasury debt held by non-U.S. citizens now constitutes over 50 percent of all privately held marketable debt issued by the U.S. government. The 23 percent position held by China in particular, and the over 50 percent position held by non-U.S. citizens in general, represents a financial Achilles heel for the entire U.S. financial system and the reserve-currency status of the dollar.
Economic warfare against the United States is now a very real possibility. Should China and a like-minded group of other non-citizen holders of U.S. debt wish to diversify away from an excessive exposure to the U.S dollar, then our government’s ability to secure financing could become seriously questioned. In addition, our ability to conduct foreign policy and military operations anywhere in the world would also have to factor in the calculus of future financing. (There is plenty of precedent for this economic warfare; the 1956 Suez Crisis is one example.)
The risks are clear: We are a nation very dependent on future borrowing to support our current standard of living. We are also a nation dependent on sources of financing that are increasingly nervous with our future borrowing requirements. We therefore are a nation that could very easily loose access to the foreign-sourced financing we have become dependent on. In short, we are now a nation vulnerable to being forced to raise taxes dramatically or turn to the Federal Reserve to monetize our future funding needs.
As Treasury borrowing dramatically ramps up in the out years immediately ahead, the call for a new global financial regime will also ramp up. If that regime is implemented it will not be a U.S. dollar-based reserve-currency arrangement. The result will be a significant and permanent reduction in the standard of living of all American citizens almost overnight as the reserve currency role of the U.S. dollar is devalued.
Individuals can and often do go bankrupt. Sovereign nations can also go bankrupt. The bankruptcy of a nation just looks different. The beginning of the event is usually marked by a collapse of the nation’s currency. What unfolds next for a country like the United States will probably be highlighted by the number 20, as in 20 percent inflation, 20 percent unemployment, and 20 percent interest rates.
The origin of this financial train wreck has more to do with politics than economics. We are a nation hooked on borrowing simply to support government-sponsored consumption. We are a nation that demonstrates every day a clear lack of political will to cure our debt addiction.
Consider: If you were a career Washington politician, which would you view as the least painful: a decision that could result in personal political suicide or a decision to procrastinate on a decision that could avoid a national economic suicide that you might be able to blame on someone else?
I think we all know the answer to the question. Consequently, there will probably be a Thelma and Louise moment for the U.S. dollar in the not-too-distant future.
I did miss that!
But I have to say: it’s worth it. Defense is one of the few legitimate acts of Government. We just need to weed out the graft, corruption and waste from procurement.
This article could have been written a number of times since Bretton Woods. Not necessarily inaccurate, but about as timely as reports of recurring sunrises.
Again, if the US goes away, so do the billions of dollars in foreign aid and protection for the dirty f##king House of Saud and other barons.
The author thinks that economics is what he saw in Econ 101. People's choice of government is an ECONOMIC choice. American people, together with all other choices made at the time, have chosen a socialist-leaning government. That was an economic choice.
Thanks, blam, for the link! Hope all is well with you.
Ping!
Good time to sell or buy?
Agreed! It's all happened before - nations rise, peak and then collapse under the weight of their own legislation. Our nation peaked with the WWII generation.
Unless you hold a mortgage over his house, and want his property.
>>Unless you hold a mortgage over his house, and want his property. <<
Yes, but that only works if you can force him off his property. That is where the analogy breaks down.
Countries are like a bunch of houses in a neighborhood where there is no central government at all. No police, no 911 - full anarchy between neighbors. So the neighbors try to “self govern” their relationships. Sometimes it still leads to Hatfields and McCoys situations.
Countries are sovereign. People are not.
I wish that I understood the Big Picture financially, but I don't. Global economics have become a giant shell game of paper worth traded for empty promises. If any major player stops playing the game, the game ends, and the terrible truth will come out that much of the giant pot of wealth is just scraps of paper.
I've heard it said that debt is the currency of the 21st century. Bohica. The Man is at the door.
“If the US suffers a humbling loss of value and spending power, it is China who will feel the heat most intimately. And they know that. While they might hope that the US be taken down, they know that if that happens, their biggest customer will stop coming.”
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Peter Schiff, in his current book, makes the argument that the Chinese are on the verge of providing more than enough of their OWN demand for their economic output, and will not need the US consumer before too much longer.
>>If the US suffers a humbling loss of value and spending power, it is China who will feel the heat most intimately. And they know that. While they might hope that the US be taken down, they know that if that happens, their biggest customer will stop coming. Ships will sit idle and factories will shut down. Millions of Chinese will be pissed off and rebellious.<<
I’m not sure if you were serious or being sarcastic. Are you aware that your words are not describing a possible future? They are describing, in fair detail, exactly what has already happened. Are you aware of the ghost fleet? Are you aware of the rioting already starting in China?
We’re paying for way more than just defense. Way more.
” If the US suffers a humbling loss of value and spending power, it is China who will feel the heat most intimately. “
Ummmm....
When I’m sitting in my unheated, unlit house (in the country, thankfully) praying that my food stocks hold out until the beans are ready to harvest — the last thing on my mind will be the mood of the people in China....
Actually, it strengthens the analogy.
How's Tibet these days?
Do you really think that same China is afraid of upsetting the Kenyan crypto-homo in the White House, or his bought and paid for Feinsteins, Schumers, and Boxers?
We're about to be evicted from the lands our forefathers died to preserve, and it's at the hand of quisling traitors like the aforementioned reptiles who got 30 pieces of silver from China etc.
I’m aware that it has started, but the real impact is yet to be felt in the future. You ain’t seen nothing yet.
The reason I said my analogy breaks down is that with a homeowner the government actually has authority over him. He is morally obliged to bend to the government’s will. With countries, if China wants part of the US, there will be a fight. They would not attempt it because it would bloody both sides, and their net result would be more negative than the status quo.
Little countries don’t have a chance. They may have a right to fight, but so did Belgium against Nazi Germany.
I think we basically agree, based on what I am reading.
Yep. I think rioting in city centers will be the start within the US. I also think desperate beligerent countries will start attacking their “apparently weak” neighbors. Think the other legs of the axis of evil, Iran and NK.
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