If you have been holding the US dollar in savings since 2002, you will find that you have now lost around 27 per cent or more of that wealth.
This has raised a stark question as to whether the US dollar can continue to become a standard of wealth. One US report has even gone so far as to suggest that the US is experiencing a breakdown of the dollar system, similar to the 1971 breakdown of the Bretton Woods system.
The US is now on the edge of a full-blown balance-of-payments crisis. Like Thailand during the pre-crisis of 1997, the US has been consuming beyond its means for several decades. This reflects in both the huge annual budget and trade deficits. At the same time, US consumers have been saddled with debt. Uncle Sam thought that it could bail itself out by printing the US dollar on even more debt. But the financial markets have their own rules.
A country may run a bad macro-economic policy for some time, but it can't continue to do it forever. A day of reckoning comes when the financial markets force the country to adjust the macro-economic conditions in a painful way.
Thailand faced that painful experience in 1997 when the financial markets forced it to abandon the currency peg, causing the baht to fall from Bt25-Bt26/dollar to Bt56/dollar between July 1997 and January 1998. With more than US$100 billion in foreign currency debt (Bt5 trillion), Thailand was declared bankrupt by the collapse of its currency. The US is about to face a similar crisis.
The US sub-prime mortgage crisis is a symptom of the US imbalances, which are the root of the crisis. Recent financial developments and extreme provisions of liquidity show that investors are now very bearish on the dollar. The US economy is led largely by domestic demand, driven by consumption. The Americans used to have easy credit. Now their access to credit has been shut down. As a result, US businesses are under financial strain. Dollar-denominated debt is trading at historically high spreads.
The US Federal Reserve has been providing unlimited liquidity to prevent the financial system from breaking down and to prevent the economy from sharp contraction. But unlimited liquidity does not address the underlying bad debt that has spread fast across the world's largest economy.
The US has been issuing Treasury bonds to finance its debt and to keep its financial system and economy afloat. So far there has not been a huge loss of appetite for US government bonds. But other countries, including Thailand, are shifting their reserve holdings into other assets such as the euro. With the contracting economy and the magnitude of the financial crisis, the US will find it even more difficult to attract foreign capital. If the situation is prolonged, it will face growing pressure on its balance of payments.
Sovereign funds from Singapore, China, and the Middle East snapped up US assets sold out at distressed value. Now a lot of people are saying that they got in too early, as the market is far from bottoming out.
The US balance of payments situation might lead to a sharp contraction of US consumption and also to a broader decline of the US dollar as US households find it difficult to get out of the debt cycle. The implication is that the income gap between US workers and those in emerging countries, now about 15 to 1, will have to narrow.
The US dollar decline will occur mostly against the emerging market currencies. So far, Asian countries, including Thailand, have been intervening in the foreign exchange market to curb the rise of their currencies. They all want to export goods because their domestic markets are too small to absorb their manufacturing activities.
Since 2002, the baht has appreciated by about 37.5 per cent against the dollar, compared with 35.6 per cent for the South Korea won, 33 per cent for the Singapore dollar, 31 per cent for the Japanese yen, 23.1 per cent for the Philippines peso, 19.5 per cent for the Malaysian ringgit, 18.2 per cent for the Chinese yuan and 10.3 per cent for the Indonesian rupiah.
This adjustment against the US dollar will continue and the pace is likely to accelerate. Singapore last Thursday announced a modest adjustment in the centre of its currency band. By doing so, it is telling the world that it is allowing its currency to adjust upward in a more orderly fashion. A UOB report on April 10 estimated that the Singapore dollar is likely to move up 2.50 per cent in the nominal effective exchange rate annually under the new currency arrangement.
The Thai authorities are also managing the baht under the nominal effective exchange rate framework, which has keep the currency relatively stable. The basket of currencies is believed to consist of 55 per cent dollar, 35 per cent euro and 10 Japanese yen.
Yet with China emerging as a regional anchor, any management of the baht will have to be in tandem with the yuan, which is also facing pressure of appreciation.
The world has not pondered deep enough what will happen to the dollar and the global financial system if the dollar loses its glamour amid the ongoing crisis. It could have far reaching implications.
Monday, April 21, 2008
Incoming Economic Depression
The dollar is RM 3.15 today. In no time it will reach its old levels of RM 2.80 to the dollar when it stabilises. This is the ringgit's 'real' level. But oil is touching $115 this week! It was predicted to touch $140 by year end but now we have to revise it to by mid July! This is the US revenge against China and rest of the third world for not opening up. What this means is economic chaos, with the malays most badly hit! Another 50,000 graduates will be unemployed adding to the existing 120,000, almost all malays. Cars and homes will be on the sales block at rock bottom prices. Supermarkets and shopping complexes will be empty.
The downward spiral has not run its course and I'm predicting a Depression for the world economy. The Sub Prime crisis has a way to go, the USD value is deteriorating fast and as a result the oil price and food costs spiral out of control. The US election is going to result in Obama or John McCain coronation and go figure what is going to happen to the economy? Yes, the world is going to experience a Depression before it gets better and that will be a way to go. So guys/gals cash up and don't play heroes with the share market.
THE $US is losing its value because the FED is printing more money than it should. The FED is saving their friends in the banking industry. The original objective of the FED was to protect the value of the $US. What happened is the opposite! Debasing the $US will only cause worldwide inflation as: - Commodity prices worldwide will rise to compensate for the loss in value of the $US. - China is NOW exporting inflation as the Yuan will appreciate - Demand for commodities exceed the supply of commodities. So price will go UP. CONCLUSION: Worldwide Inflation rate will rise significantly. Real Economic growth will probably stagnate. Inflation will erode purchasing power
We are left ... with the thought that the Federal Reserve Board does not know what it is doing. This is the "Wizard of Oz" (*) theory, in which we pull away the curtains only to find an old man with a wrinkled face, playing with lights and loudspeakers. The analogies to The Wizard of Oz work for a reason. According to later commentators, the tale was actually written as a monetary allegory (EX. Atlas Shrugged), at a time when the "money question" was a key issue in American politics. In the 1890s, politicians were still hotly debating who should create the nation's money and what it should consist of. Should it be created by the government, with full accountability to the people? Or should it be created by private banks behind closed doors, for the banks' own private ends? William Jennings Bryan, the Populist candidate for President in 1896 and again in 1900, mounted the last serious challenge to the right of private bankers to create the national money supply. According to the commentators, Bryan was represented in Frank Baum's 1900 book The Wonderful Wizard of Oz by the Cowardly Lion. The Lion finally proved he was the King of Beasts by decapitating a giant spider that was terrorizing everyone in the forest. The giant spider Bryan challenged at the turn of the twentieth century was the Morgan/Rockefeller banking cartel, which was bent on usurping the power to create the nation's money from the people and their representative government. Before World War I, two opposing systems of political economy competed for dominance in the United States .
One operated out of Wall Street, the New York financial district that came to be the symbol of American finance. Its most important address was 23 Wall Street , known as the "House of Morgan." J.P. Morgan was an agent of powerful British banking interests. [Now, as then, the European Monarchies and Rothschild Family.] The Wizards of Wall Street and the Old World bankers pulling their strings sought to establish a national currency that was based on the "gold standard," one created privately by the financial elite who controlled the gold. The other system dated back to Benjamin Franklin and operated out of Philadelphia, the country's first capital, where the Constitutional Convention was held and Franklin's "Society for Political Inquiries" planned the industrialization and public works that would free the new republic from economic slavery to England. The Philadelphia faction favored a bank on the model established in provincial Pennsylvania, where a state loan office issued and lent money, collected the interest, and returned it to the provincial government to be used in place of taxes. President Abraham Lincoln returned to the colonial system of government-issued money during the Civil War; but he was assassinated, and the bankers reclaimed control of the money machine. The silent coup of the Wall Street faction culminated with the passage of the Federal Reserve Act in 1913, something they achieved by misleading Bryan and other wary Congressmen into thinking the
Federal Reserve was actually federal. Today the debate over who should create the national money supply is rarely heard, mainly because few people even realize it is an issue. Politicians and economists, along with everybody else, simply assume that money is created by the government, and that the "inflation" everybody complains about is caused by an out-of-control government running the dollar printing presses. The puppeteers working the money machine were more visible in the 1890s than they are today, largely because they had not yet succeeded in buying up the media and cornering public opinion. Economics is a dry and forbidding subject that has been made intentionally complex by banking interests intent on concealing what is really going on. It is a subject that sorely needs lightening up, with imagery, metaphors, characters and a plot; so before we get into the ponderous details of the modern system of money- based-on-debt, we'll take an excursion back to a simpler time, when the money issues were more obvious and were still a burning topic of discussion. The plot line for The Wizard of Oz has been traced to the first- ever march on Washington, led by an obscure Ohio businessman who sought to persuade Congress to return to Lincoln 's system of government-issued money in 1894. Besides sparking a century of protest marches and the country's most famous fairytale, this little- known visionary and the band of unemployed men he led may actually have had the solution to the whole money problem, then and now . ..
The downward spiral has not run its course and I'm predicting a Depression for the world economy. The Sub Prime crisis has a way to go, the USD value is deteriorating fast and as a result the oil price and food costs spiral out of control. The US election is going to result in Obama or John McCain coronation and go figure what is going to happen to the economy? Yes, the world is going to experience a Depression before it gets better and that will be a way to go. So guys/gals cash up and don't play heroes with the share market.
THE $US is losing its value because the FED is printing more money than it should. The FED is saving their friends in the banking industry. The original objective of the FED was to protect the value of the $US. What happened is the opposite! Debasing the $US will only cause worldwide inflation as: - Commodity prices worldwide will rise to compensate for the loss in value of the $US. - China is NOW exporting inflation as the Yuan will appreciate - Demand for commodities exceed the supply of commodities. So price will go UP. CONCLUSION: Worldwide Inflation rate will rise significantly. Real Economic growth will probably stagnate. Inflation will erode purchasing power
We are left ... with the thought that the Federal Reserve Board does not know what it is doing. This is the "Wizard of Oz" (*) theory, in which we pull away the curtains only to find an old man with a wrinkled face, playing with lights and loudspeakers. The analogies to The Wizard of Oz work for a reason. According to later commentators, the tale was actually written as a monetary allegory (EX. Atlas Shrugged), at a time when the "money question" was a key issue in American politics. In the 1890s, politicians were still hotly debating who should create the nation's money and what it should consist of. Should it be created by the government, with full accountability to the people? Or should it be created by private banks behind closed doors, for the banks' own private ends? William Jennings Bryan, the Populist candidate for President in 1896 and again in 1900, mounted the last serious challenge to the right of private bankers to create the national money supply. According to the commentators, Bryan was represented in Frank Baum's 1900 book The Wonderful Wizard of Oz by the Cowardly Lion. The Lion finally proved he was the King of Beasts by decapitating a giant spider that was terrorizing everyone in the forest. The giant spider Bryan challenged at the turn of the twentieth century was the Morgan/Rockefeller banking cartel, which was bent on usurping the power to create the nation's money from the people and their representative government. Before World War I, two opposing systems of political economy competed for dominance in the United States .
One operated out of Wall Street, the New York financial district that came to be the symbol of American finance. Its most important address was 23 Wall Street , known as the "House of Morgan." J.P. Morgan was an agent of powerful British banking interests. [Now, as then, the European Monarchies and Rothschild Family.] The Wizards of Wall Street and the Old World bankers pulling their strings sought to establish a national currency that was based on the "gold standard," one created privately by the financial elite who controlled the gold. The other system dated back to Benjamin Franklin and operated out of Philadelphia, the country's first capital, where the Constitutional Convention was held and Franklin's "Society for Political Inquiries" planned the industrialization and public works that would free the new republic from economic slavery to England. The Philadelphia faction favored a bank on the model established in provincial Pennsylvania, where a state loan office issued and lent money, collected the interest, and returned it to the provincial government to be used in place of taxes. President Abraham Lincoln returned to the colonial system of government-issued money during the Civil War; but he was assassinated, and the bankers reclaimed control of the money machine. The silent coup of the Wall Street faction culminated with the passage of the Federal Reserve Act in 1913, something they achieved by misleading Bryan and other wary Congressmen into thinking the
Federal Reserve was actually federal. Today the debate over who should create the national money supply is rarely heard, mainly because few people even realize it is an issue. Politicians and economists, along with everybody else, simply assume that money is created by the government, and that the "inflation" everybody complains about is caused by an out-of-control government running the dollar printing presses. The puppeteers working the money machine were more visible in the 1890s than they are today, largely because they had not yet succeeded in buying up the media and cornering public opinion. Economics is a dry and forbidding subject that has been made intentionally complex by banking interests intent on concealing what is really going on. It is a subject that sorely needs lightening up, with imagery, metaphors, characters and a plot; so before we get into the ponderous details of the modern system of money- based-on-debt, we'll take an excursion back to a simpler time, when the money issues were more obvious and were still a burning topic of discussion. The plot line for The Wizard of Oz has been traced to the first- ever march on Washington, led by an obscure Ohio businessman who sought to persuade Congress to return to Lincoln 's system of government-issued money in 1894. Besides sparking a century of protest marches and the country's most famous fairytale, this little- known visionary and the band of unemployed men he led may actually have had the solution to the whole money problem, then and now . ..
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