A news story appearing in Reuters on October 25 bore this most interesting headline: Economists smile as greenback drops
The first paragraph went like this:
WASHINGTON (Reuters) - The swift decline in the US Dollar is addressing two of the most worrisome problems facing the US economy -- a gaping trade deficit and looming slowdown -- with few ill effects."
The gist of what follows is that many US "economists" are pushing the line that the US Dollar fall is to be welcomed because it will "fix" the US trade and current account deficit, make US exports more competitive, support the local US economy, and of course make the US debt smaller when "valued" in terms of the currencies against which the US Dollar is falling.
Isn't this just peachy!! Even the IMF is calling the drop in the US Dollar "healthy". This is the same IMF which spent the first 60 years or so of its existence, the years before the US Dollar begain its present bear market, riding to the rescue as currency after currency threatened to go into (and often DID go into) freefall. The IMF did not see these currency meltdowns as "healthy" at all. They quite often prescribed rather strong medicine, including big hikes in interest rates and huge cuts in government deficit spending, to fix the problem. Actually, they went further than that. They demanded and got such actions from governments all over the world before they deigned to go in and fix the problem.
We have little doubt that the other members of the G-7 put similar requests in rather strongly worded terms to the US representatives at the Washington DC meeting on October 19. Of course, nothing about this appeared in the communique which was released after the meeting. The reason, as has been subsequently revealed, is that Treasury Secretary Paulson vetoed any such inclusion in the communique.
In the current issue of The Privateer, (Number 589 published on October 21), we put forward a means by which the US actually could - with the cooperation of the EU and its major Asian creditors - make a credible start to addressing the problem of the plummeting Dollar. Alas, we ended the outline for this plan like this: "Regrettably, with President Bush in charge of the US, the chances of this ...are next to nil."
That section of the current Privateer has been posted by Bob Moriarty (with our permission - and thanks) at 321gold. You can read it here.
In a fiat currency world with floating exchange rates, a currency falls in exchange value relative to other currencies for a number of reasons. The interest rates offered on debt paper denominated in that currency may not be high enough to reflect the perceived risk of holding it. The nation of the currency in question may be inflating (increasing its stock of money) at a higher rate than are other nations. The nation may be a net external debtor and that debt may be increasing. The malinvestment and over-investment engendered by a long held policy of artificially low interest rates may have come to light. The relative international standing of the nation in question may be seen to be deteriorating.
There are other reasons too. But no matter how many of them one may care to list, they are ALL applicable (and how!) to the US today. And since neither US establishment figures nor politicians nor Central or Commercial bankers nor investment houses nor "economists" want to address ANY of them, there is no foreseeable "solution" to the falling US Dollar.
That being the case, the age old remedy is being trotted out. If one doesn't want to take the steps necessary to fix a problem, one can ignore it and hope that it will go away. If that doesn't work, if the problem is causing ever more serious dislocations both outside and INSIDE one's own nation, one can try to deflect attention by pretending that it's not a problem at all. This is not an "optimum" solution as far as governments are concerned. The optimum solution is to create a diversion, and the favorite way to do that is to start a war. That's what the Bush Administration did in Iraq in 2003 when the US Dollar fall was getting underway. That's what they are considering doing now as their belligerance towards Iran grows seemingly by the day. But as yet, they have NOT actually started in on Iran. So they have to fall back on the inferior "solution".
Wall Street pundits, money center banks, the Fed, the Treasury, the US government itself - both the Administation AND the Congress, are all pretending that the diving Dollar presents no impediment to "business as usual". Behind them all, the US establishment is clinging desperately to this fiction because it is the wielding of the US Dollar as the world's reserve currency which is the ultimate foundation of their global power.
According to what is now coming out, a falling Dollar (as long as the fall is "orderly") is just what the US needs. If you doubt it, examine this quote from an analyst at Lombard Street Research: "Why should the US worry about the danger of a dollar meltdown? It's the solution, not the problem."
See what we mean: "If You Can't (Or Won't) Fix It - Pretend It Ain't Broke!"
The $US index (USDX) has been below the 80 level, the level it was never allowed to fall below before, since September 9. It has been below any previous low in its post 1973 history for the past two weeks. Since it has never been this low, there is no support for it in historical terms. This week, the $US Oil price hit an all time high and the $US Gold price soared over $US 28 in the four trading days between September 23-26.
And to go back to the Reuters quote with which we started this analysis, it is a measure of how far removed from economic reality the "powers that be" are to maintain that the Dollar is falling with "few ill effects". A visit to a supermarket, a petrol (gas) pump, a neighbourhood where most of the houses stand empty, or a kitchen table where a family wonders how they are going to maintain their mortgage payments for another month are not part of the "scenario" now being desperately painted by Washington or Wall Street.
The tragedy is that few of those, inside or outside the US, on whom the falling Dollar is having very ill effects indeed understand the situation or have taken any steps at all to protect themselves from it. The "powers that be" are, of course, counting on that too. If you don't know how it works, you are not in a position to know if it needs "fixing" or not.
As you can see, Gold is now at new 2007 highs in terms of three of the four currencies in our table. It is at new bull market highs in terms of only two of them however. The new upleg on the $US bull market was confirmed last week when Gold broke above $US 760. We are still waiting for the REAL upmove, the one in which Gold storms higher in terms of ALL currencies.
|