Cracks in
Economic Foundation By Dene McGriff
Well, here we are – Monday after Thanksgiving and just weeks after American Presidential election. By slight of hand and a great deal of luck, elites have maintained appearance of prosperity across land. You have to give them credit for holding it together as long as they have. After four years of massive federal debt ($2.5 trillion) with much more red ink in future, and a balance of payments disaster that has grown to over half a trillion a year (called current account deficit), along with record low interest rates which has led to various speculative bubbles, whole house of cards is about to come falling down.
America’s spending binge has been supported by other countries who continually buy up its debt. Once these countries decide that dollar and U.S. treasury bonds may not be a good investment, dollar begins to fall bringing everything else with it. The United States has been absorbing 80 percent of world’s savings. But there are cracks forming in that great foundation of prosperity, greatest prosperity world has ever experienced!
Now, one country after another is beginning to dump their dollars – Russia, India, China, Japan, etc.
This morning, Bank of England's Chief Economist, Charlie Bean, said... "At some stage action will have to be taken to close U.S. fiscal deficit and, when that happens, real value of dollar will to fall if a sharp slowdown is to be avoided." (from The Daily Pfennig 11/28/04)
“Last night, central bankers of Japan, China, and rest of developing Asia, must have tossed and turned. Since 2000, world foreign exchange reserves - most of it in dollars and most of it in Asia - have increased from $2 trillion to $3.5 trillion. The increase in central bank foreign exchange reserves is about same as America's trade deficits during same period.
“Central bankers have trillions of dollars in their vaults. And their economies depend upon U.S. consumer. In order to spend, U.S. consumer must have access to EZ credit - for he has no savings and his income barely increases. In order to keep U.S. consumer consuming, central bankers must lend him money. Indeed, a study by New York Fed showed that it takes more than entire world's savings to keep Americans living in style to which they've become accustomed. Private investors have already withdrawn much of their support for dollar and U.S. consumer. If central bankers pull out too - jig is up. The entire world economy will have to face consequences of a collapse in consumer demand, a collapsing dollar...and end of Dollar System.” (from Daily Reckoning 11/25/04)
“On Friday, Deputy Chairman Konstantin Koreschenko said Russian Central Bank was moving away from ‘dirty’ float of ruble against dollar. The newspapers also reported today that bond market is down sharply on fears of a lack of foreign central bank demand (for U.S. assets) will cause rates to rise. And in case you haven’t been noticing since election dollar has fallen against Euro from 120 to 133 and a total fall of 70 percent from 78 three years ago. At same time, that old fake “gold” has gone from $252 to over $450 an ounce since February of 2001.
“But America's coming bust is likely to be in line with primary trend...a bust, not on way up, but on way down. It is a slump leading towards a lower standard of living, not a higher one. Why a lower standard of living? Because Americans did not save money...they did not build factories...they did not invest in skills and enterprises that will help them increase real earnings. Instead, they spent more than they could afford on trinkets, geegaws, and luxurious McMansions. Few people in world can afford to live in manner to which Americans have become accustomed. Sadly, not even Americans themselves”. (From Daily Reckoning 11/3/04)
