Important trip to China (in brief: US will beg/threaten? China to take the fall for its deficit before dollar goes down as Japan did in the 80s) and more adverts for gold. In case anyone is interested, this and other recent dollar/downturn posts reposted from Meltdown mailing list -a selfexplanatory title for an increasingly prescient-looking mailing list.
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Prudent Bear Guest Commentary, by Richard Benson
The Dollar Dam is Breaking
December 6, 2006
Richard Benson is president of Specialty Finance
Group, LLC , offering diversified investment banking
services.
Treasury Secretary, Henry M. Paulson, is rushing off
to China next month and will lead a delegation to
Beijing for the inaugural meeting of the U.S. – China
Strategic Economic Dialogue. He’ll be taking
high-ranking Administration officials with him,
including Federal Reserve Chairman, Ben S. Bernanke.
Because Hank and Ben are responsible for stabilizing
the financial markets and need to work together to try
and stabilize the dollar, their activities in China
will undoubtedly be closely watched worldwide.
Hank and Ben are also part of the Working Group in a
team which includes the heads of the SEC and the
Commodity Futures Trading Association, commonly
referred to on Wall Street as the “Plunge Protection
Team” (PPI). This Team has the entire United States
Treasury at their disposal and this trip to China
could undermine faith in the Administration’s ability
to fix the massive Trade Deficit problem in an orderly
manner. Preventing another 1987 “Black Monday” is on
the Agenda, but the investing public will never be
told that it is.
The China trip means that the ticking time bomb at the
bottom of the dollar dam needs to be defused before it
blows up, and the value of the dollar is swept away.
Both the Republican Administration and the Democratic
Congress want China, and the rest of Asia, to end
their policies of manipulating their currencies down,
by building up massive foreign exchange holdings. The
new Congress is tuned into the fact that China has
tariffs of 25 percent on imports such as autos, and is
very tired of seeing American labor slaughtered. (In
2007 GM, Ford and Chrysler – as well as auto parts
suppliers such as Delphi – are buying 100,000 workers
out of their jobs or just “letting them go”.) To
make trade fair again, Congress is willing to take the
action of imposing tariffs if China and Asia do not
revalue. In turn, China may threaten to dump their
dollars, unless the Fed keeps interest rates high. If
China starts selling dollars, the dam will break.
Not only does the U.S. owe a net $3 trillion to
foreigners, we now pay more in interest overseas than
we collect from abroad. Foreigners hold $13 trillion
in dollar assets that are at immediate and painful
risk to any dollar weakness. Indeed, that volume of
liquid assets is just about equal to the total GDP. A
30 percent drop in the dollar, could cost foreign
investors an easy $3 trillion in lost purchasing
power, not to mention the loss to U.S. citizens who
own over $46 trillion in dollar net worth assets. Our
leaders must find a way to lower the U.S. Trade
Deficit, or risk the dollar losing its unique position
as the World’s Reserve Currency. This fact alone
warrants the trip to China.
America’s currency problem is a very sad day for the
Republic. It used to be that the Federal Reserve
policy was set simply with domestic economic policy in
mind. In years past, we could virtually ignore the
dollar in setting monetary policy because it was
totally secure in its role as the World Reserve
Currency. But today, because of our country’s
profligate fiscal and over-easy monetary policies, the
dollar has been undermined so much so that, sadly, it
may be no more secure as a store of value than the
citizens of Baghdad are, walking the streets.
The Federal Reserve must now be aware that the dollar
has held its value on the world exchanges for two
reasons: First, compared to the Euro, Yen, or Yuan,
America has the highest interest rates by far. We pay
carry traders to borrow in Yen at less than one
percent and invest in U.S. assets, creating an
artificial financial demand; Second, we have winked
and have done nothing but talk as the Chinese,
Japanese – and the rest of Asia – have manipulated
their currencies down to rob America of its factories
and keep consumers dumb and happy with artificially
low interest rates, and excess consumption. All the
while, the Asians have ended up with America’s money.
Since Ben Bernanke is a student of history, it’s
likely he remembers when Alan Greenspan was put to the
test during the stock market crash of 1987. You may
recall this crash was triggered by the dollar taking a
nosedive. Think now of those foreign investors, I
mentioned earlier, who are holding $13 Trillion in
U.S. cash, stocks and bonds. What if they lost 20
percent on the price of their stocks as the stock
market sold off, and another 30 percent as the dollar
value plunged? Their losses in purchasing power
could reach 40 percent! The financial market sell-off
would be accelerated by the carry traders who borrow
cheap foreign currencies, and could quickly be forced
to sell at a really big loss, as the foreign currency
moves up against them. The smart investors will dump
when they realize the dollar is spiraling downward.
Hank and Ben may not talk openly with Chinese
officials about this crash possibility, but you can be
sure it’s on their minds. The possibility of a panic
and crash from foreigners fleeing the dollar will be
with us for quite some time. Therefore, it is highly
unlikely in my view that interest rates will be cut
until the recession is self-evident. Managing the
dollar decline won’t permit the Fed to ease too soon.
So, with the U.S. stock markets up smartly the second
half of this year, now is a wonderful time to cash in
your chips at the stock market casino and head for the
exit door before the mad rush. Remember, if you own
dollar assets, a falling dollar can cause havoc to
most American and foreign investors. Only those who
invest in foreign financial assets or real assets
(such as commodities or gold and silver) are likely to
be safe and not swept away when the dollar dam breaks.
