There is one regard in which nothing has changed:
"The fundamentals of our nation's economy are strong,"
US President George Bush - September 21, 2007
"I feel very strongly that a strong dollar is in our nation's interest and we believe currency values should be set in a competitive marketplace based on underlying economic fundamentals"
US Treasury Secretary Henry Paulson - September 21, 2007
Without getting into arguments about who is being the straight man for whom, it is clear that the perception of the US economy asserted by these two gentlemen is in a rather small and dwindling minority. Outside of the beltway in Washington DC and Wall Street, one would be hard pressed to find an American who agreed with them. And outside the US, one would be hard pressed to find ANYBODY.
Ironically, Mr Paulson made his obligatory remark about the "strong Dollar policy" in Canada - on the day when the Canadian Dollar reached parity with its American counterpart for the first time since 1976. Even more ironically, Mr Paulson was in Quebec as the US representative at a G-7's "Financial Stability Forum(!?)" meeting. The G-7 Finance Ministers will meet in Washington DC next month.
Three days before these by now almost ritualistic pronouncements by the President and Treasurer of the United States, the Central Bank of the United States had done what they always do when they see a possibility that the US economy might be slipping away from their control. They lowered interest rates. Of course, the Fed had acted almost exactly a month before to lower rates, they cut 0.50 percent of their Discount rate on August 17. On September 18, at their scheduled Federal Open Market Committee meeting, they cut again. This time it was a 0.50 percent cut for both the Fed Funds rate and the Discount rate.
Let's take a good close look at this. Over the last month, while the global interbank lending freeze intensified and as the US Dollar inexorably sank, the US Central Bank - along with every other major Central Bank in the world - has decanted hundreds of $US Billions into the system. That didn't "fix" the problem. The US Central Bank then took a step which no other Central Bank took, they lowered their Discount rate by 0.50 percent on August 17. That didn't fix the problem either. On September 7, the $US index (USDX) dipped below 80.00 at the close. It has not regained that level since, on the contary, it has continued to weaken. And last weekend, we had the crowning financial glory so far in the form of a full on BANK RUN in the UK.
As all these problems multiplied and worsened, the usual fixation grew in US financial and government circles. The FOMC is meeting on September 18. They will do what they always do to bail out the lenders. They'll lower the Fed Funds rate. That ALWAYS works.
Well, on September 18 the Fed did just that. They cut 0.50 percent off the Fed Funds rate and another 0.50 percent off the Discount rate - making it a 1.00 percent cut in a month for that rate. Please remember that NO other major Central Bank has met the equivalent problems in their own financial systems with an official rate cut. Most of them - notably the ECB and the Bank of England - have merely stopped raising rates. And some of them - Russia, China, Norway and Sweden included - have actually gone right on raising rates.
None of that registers in Washington DC or on Wall Street. They see no reason why a nation with a currency which has been weakening for nearly five years and is now threatening to plumb depths never before reached should succumb to LOWER interest rates. They see no reason why foreign holders of TRILLIONS of debt paper denominated in that currency should get the least bit nervous about the future viability of their "investments". They see no reason why economic law should apply to them. The United States of America is after all the world's sole superpower. It is the biggest, richest, most prosperous and dynamic economy on earth. What applies to other nations, other Central Banks, other currencies and other economies does not apply to them. Why should they see a reason, it never has. Ever since the end of WWII, successive generations of American politicians, financiers and establishment figures have become used to the immunity which their control of the world's "reserve" currency has given them from the economic and financial vicissitudes suffered by ordinary mortals who don't live in the USA.
The world "hubris" might have been invented to describe their attitude.
The panacea is to lower rates, induce another round of borrowing, measure the amount of that borrowing and call it economic "growth", and get on with it. It worked at the end of WWII. It worked at the end of the Korean war. It worked in the early 1960s. Then, once the "strait jacket" of a Gold connection to the US Dollar was jettisoned in 1971, the floodgates opened. Yes, there was a brief "hiccup" at the end of the 1970s when the world had to be enticed out of Gold and "other" currencies and back into US Dollars and Treasury debt paper by means of uncomfortably high interest rates, but that blew over in a couple of years.
Once that lesson had been learned, and the new borrowing was being channelled into "financial assets" instead of economic goods and services, there was no looking back. But now, twenty-five years later and as the end of the longest and biggest credit expansion in history dawns, the usual "fixes" are no longer working.
Everything that has happened over the past six weeks illustrates that fact, but nothing illustrates it better than the accelerating fall of the US Dollar - and the inexorably rise of $US Gold to the point where it has hit new bull market highs this week. All of this has taken place since August 17, the day when the US Fed sprung the surprise 0.50 percent Discount rate cut.
Old habits die VERY hard. The knee jerk upside explosion on US and world stock markets in the immediate aftermath of the September 18 rate cut illustrates that clearly. But the fall of the US Dollar is accelerating, oil is hitting all time highs in $US terms, Gold is at new bull market highs, Silver has risen nearly $US 1.00 over the past week, and Gold stocks are soaring. None of this is "supposed" to happen. Yet it is.
If you, like us, have been watching this situation unfold over a period of decades, you know that the monetary powers that be in the US have spared no effort or "expense" to arrest the fall of the Dollar and to prevent the rise of the Gold price. Up until very recently, they could count upon the active assistance of their fellow governments and Central Bankers. There would have been some kind of co-ordinated intervention in the global currency (and Gold) markets as there was in 1987, in 1992, in 1995 and in the wake of 9/11 in 2001. That is NOT happening, or if it is, it is proving woefully insufficient to the task.
It has now reached the point where the only thing that further Fed rate lowerings will do is to put more DOWNWARD pressure on the US Dollar and more UPWARD pressure on alternatives to the US Dollar, first and foremost Gold - and Silver. Yes, US stock markets are still holding up, but there is no way they can continue to do so as more and more evidence of the growing weakness in the US economy comes to light.
To contradict Mr Bush, the "fundamentals" of the US economy are terrifyingly WEAK - and are deteriorating rapidly. The "fundamental" of ANY economy, the base on which its prosperity stands or falls, is the soundness of its MONEY. The US Dollar, and all other fiat currencies, are fundamentally UNSOUND and cannot be made sound by any amount of economic and/or market manipulation.
The sooner some nation recognises and ACTS on that fact, the sooner the world can begin the journey back to genuinely sound economies. In the meantime, we face the intensifying prospect of an economic implosion as the grotesquely inflated system of debt collapses along with the valuations of its collateral. The basic problem is that there is no "collateral" whatsoever underpinning what the world uses as money. The problem now is to re-introduce it. For that task, only Gold will do.
As you can see in this table, the $US Gold price exceeded its 2006 high spot future close this week and has therefore reached a new high in its bull market. It joins the Japanese Yen. The Euro Gold price hit a new 2007 high this week but is still below its highs of 2006, as is the $A Gold price which set its 2007 high back in February.
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