"The Senate's swift action on the debt limit today helps to protect the full faith and credit of the United States and avoids creating unnecessary uncertainty in the US Treasuries market. I commend Congress for passing legislation that ensures the US government can deliver on promises already made, such as Social Security and Medicare payments"
US Treasury Secretary Henry Paulson - Friday, September 28, 2007
Now where (and when) have we heard this before?
Oh yes, now we remember. We heard it in 2002, in 2003, in 2004, in 2006, and we are now hearing it again in 2007. That's right, the US Congress has raised the Treasury's debt "limit" five times since President Bush first took office in January 2001. The total of these rises is now just short of $US 4 TRILLION. The entire funded debt of the US Treasury only hit $US 4 TRILLION in 1992, the year Mr Bush's predecessor, Mr Clinton was elected for HIS first term.
It took the US Treasury about 113 years, from 1787 to 1900, to run up their first $US 1.5 Billion in funded debt. In 1900, that's all the debt there was, there was no "unfunded debt", there wasn't even an income tax or a Central Bank. It took about 43 years - a world war, a "great depression" and a large part of another world war - to run the total up to $US 100 Billion in 1943. The $US 1 TRILLION level was reached 37 years later in 1981. And now, here we are 26 years later in 2007 and the debt "limit" has just been raised to almost $US 10 TRILLION. Congress and the Treasury are hoping that the latest rise will be enough to get them through the Presidential elections in a bit more than a year from now.
In 1913, the year that the Sixteenth Amendment brought in a federal income tax and the year of the establishment of a Central Bank (the Federal Reserve) for the US, total Treasury funded debt stood at $US 2.9 Billion. Treasury funded debt (the Treasury's unfunded liabilities are MUCH higher), as of September 27, 2007, stands at $US 9,000 Billion. Of that debt:
As you can see, we put the entry for 1971 in the above list in bold type on purpose. $US 95.29 of every $US 100 in Treasury debt has been borrowed into existence since August 15, 1971, the day when the US Dollar lost its last remaining official connection to Gold. We can think of no more telling depiction of the result of this historically tragic decision than the list above.
The events which turned the US from republic to empire were the establishment of the income tax and the Central Bank in 1913. That was the equivalent of the revolution of the "Grachii" in Republican Rome in about 130 BC. The event which ensured the demise of the Republic in favour of an Empire for the US was the repudiation of Sound money when Gold and the US Dollar were severed by President Nixon in 1971. This was the US crossing its "Rubicon".
The results have been similar for the US as they were for Imperial Rome, but telescoped into a much shorter period of time. One thing that 2000 years of progress has meant is that events move much faster nowadays than they did in the time of the Caesars.
And now, the profligate borrowing and spending which began with the US government and which has now widened to incorporate the entire US population has come home to roost. For the fifth time in the six years - since 2002, the US government has been forced to de facto declare "bankruptcy" by arbitrarily raising the amount of money they will allow themselves to borrow in order to continue to function at all. The "debt limit" has been raised yet again.
"We have no choice but to approve it. If we fail to raise the debt ceiling soon, the US Treasury will default." So said Senate Finance Committee Chairman Max Baucus. Senator Baucus went on to add this: "Plainly, especially in this credit crisis, we cannot let that happen".
The difference with THIS debt ceiling increase as against almost all the previous ones is not that this time there is a global financial "credit crisis". It is that this time, the epicentre of that global credit crisis IS IN THE US ITSELF. This is not being reflected on Wall Street - yet. It is being reflected, to a mild degree so far, on the climbing $US Gold price and the $US prices of commodities and economic goods of all descriptions.
But the MAJOR victim of this credit crisis has been the US DOLLAR itself. As you probably know by now, on September 28 as the Senate was passing the increase in the debt limit, Gold was rising $US 10.10 to a new bull market high spot future close of $US 742.80. What you may not know is that at the same time, the trade-weighted $US index (USDX) was falling 0.62 points to a new bear market low of 77.62 points.
That spot future close of 77.62 is the lowest in the HISTORY of the USXD. The index goes back to the beginning of the era of global "floating currencies" in March 1973. The era of "floating currencies" was, in its turn, made inevitable by the decision of the Nixon Administration to sever the remaining tie between the US Dollar and Gold on August 15, 1971. Prior to that date, foreign governments and Central Banks could still demand Gold in return for the US Dollars they held at the official rate of $US 35 per troy ounce. Americans could not do this, they were barred by law from owning Gold at all and had been for nearly 40 years.
When Nixon closed the "Gold window", the US Dollar became a pure "fiat currency" - a currency given its status as a medium of exchange by nothing but edict and the power of government to enforce that edict. The US Dollar was connected to nothing. That made any kind of "fixed" global currency regime impossible because the anchor attached to the key or "reserve" currency, the US Dollar, had been jettisoned. Hence the era of "floating exchange rates" and "floating currencies" which began in March 1973.
With the USDX, which was born with the "floating currency" era, having now hit new ALL TIME LOWS, the financial world is in literally uncharted waters. The US Dollar has never been this low before. There are no "support levels" left underneath it. The US Dollar has had no backing for nearly 40 years. Now, it literally has "NO BOTTOM".
The implications of this disastrous and potentially catastrophic event are not being talked about by Central Bankers and Treasurers/Finance Ministers, least of all by those in the US. Every time the 80 level was approached before, there was a concerted international effort to support the US Dollar. That happened in 1975, in 1980, in 1987, in 1992, in 1995 and again as recently as 2004. This time - IT IS NOT HAPPENING. Not yet anyway.
If you are not yet convinced that the US Dollar (or any other fiat currency) is absolutely unsuited to be any form of "reserve currency", this precipitous fall of the US Dollar should give you pause to re-examine the situation. It is fundamentally unviable in terms of economic and monetary theory. It has never "worked" in all of economic history. There are no exceptions. Nor will there be one this time.
Obviously, the upside potential for Gold (and Silver) in current circumstances is explosive. On purchasing power terms, the present $US 742 spot future Gold price is less than one-third of what it was when Gold hit $US 850 in 1980. To call Gold "overvalued" at its current levels is absurd. But sadly, Gold remains the "political metal" and will be so until the day dawns when money and politics are once again divorced. Only a global return to a Gold standard can accomplish that.
The lower the USDX goes from here, the closer that day comes.
|