FacebookTwitterGoogle+RedditEmail

Greenback Surges, Euro Shrivels

The  greenback has surged 6 per cent in the last month alone. The euro, on the other hand, has been caught in the same recessionary downdraft that is buffeting a number of other currencies, all of which are unwinding at the same time although unevenly. Currency markets don’t move in straight lines, but don’t be fooled, most paper money is steadily losing value due to the unprecedented expansion of credit. Investors are moving to cash and hunkering down; the stock and bond markets are just too risky and real estate is in a shambles. As the equity bubble continues to lose gas, balance sheets will have to be mended and lending will slow to a crawl.  At present, Germany’s slowdown and Spain’s housing crash are drawing most of the attention but, the spotlight is shifting fast. Next week it could be shining down on the America’s failing banking system or poor corporate-earnings reports in the US. Then it will be the dollar marching off to the gallows.

Europe’s troubles have put to rest to idea that other countries can “decouple” from the US and prosper without the help of the US consumer. That might be true in the long-term, but falling demand is already visible everywhere. Retail and auto sales are taking a thumping and 2009 is shaping up to be even tougher.  It’s looking more and more like the Europeon Central Bank was faked-out by the early signs of inflation and missed the deflationary sledgehammer that was about to come crashing down. It was a catastrophic blunder by European Central Bank (ECB) chief Jean Claude Trichet and it could cost him his job. Raising interest rates while sliding into the jaws of recession is madness. Now all of Europe is headed for a hard landing and there’s no way to soften the blow.  The ECB doesn’t have the same tools as the Fed; Trichet can’t simply backstop the whole system with green paper and T-Bills like Bernanke. He can either slash rates or sit on his hands and hope for the best.

Deficits are expected to soar in the European south (particularly Spain, Greece and Italy) while growth in the industrial north, e.g., Germany, will continue to shrink. Also, Spain, Ireland and England are undergoing the biggest housing meltdown in history after indulging in the same mortgage hanky-panky that took place in the US. Billions of dollars of low interest loans, that were issued to unqualified mortgage applicants, are gumming up the whole system and sending foreclosures skyrocketing. Now the losses have to be written down and thousands of unoccupied houses sold at auction.

The perception that the dollar is getting stronger is mostly an illusion. Deflation is “dollar positive” because investors who flee from toxic assets naturally move into cash. But that doesn’t mean they have faith in the dollar; far from it. The fundamentals for the greenback get worse by the day. Fiscal and trade deficits are out of control, the national debt is tipping $10 trillion, foreign investment is drying up, and confidence in US leadership has never been lower. Paper currency is a country’s IOU; and foreign central banks are wary of taking checks from a country that no longer wins wars or has the capacity to pay off its debts. That’s why, for the first time, there’s serious talk about the US losing its triple A rating on government debt. And it could happen sooner than anyone thinks. Every time the Fed uses the dollar to prop up the faltering banking system or provide limitless capital for defunct GSEs like Fannie Mae and Freddie Mac, the dollar comes under greater and greater pressure.

As the US housing market continues to collapse, trillions of dollars in equity and credit are disappearing in a deflationary bonfire. When a $400,000 home–with no down payment and negative equity–goes into foreclosure; $400,000 vanishes from the digital-pool of credit and has to be written down as a loss. So far, much of the losses have not yet been accounted for because the banks are using their own internal models for determining the value of their downgraded assets. Two weeks ago, Merrill Lynch sold $30 billion of mortgage-backed junk for 20 cents on the dollar. But they also financed the deal, which means that they really only got 5 cents on the dollar! This reflects the true “market value” of these assets. They are virtually worthless. Naturally, Merrill’s sale sent tremors through Wall Street where banks and other financial institutions are sitting on trillions of dollars of this garbage marking it down at a few percentage points every reporting period rather than doing what Merrill did and putting it all behind them. As a result, the banks have less capital to lend, which means economic activity will continue to slow and the country will go into a deep recession. The point is, that the Federal Reserve now holds about $400 billion of this junk-paper on their balance sheets and the US Treasury is planning to take on hundreds of billions more (perhaps as mush as $800 billion more under the new legislation!) to prop up Fannie Mae and Freddie Mac. The Bush administration is using the credibility of the dollar as collateral in its plan to bail out the most reckless, high-stakes Wall Street gamblers.

So, how does this affect the dollar?

The nation’s debts are entirely balanced atop its currency. The greenback is like a circus strongman holding a barbell precariously over his head; as the weight is increased, the sweat begins to appear on his brow while the veins in his neck and forehead begin to bulge. Finally, the knees buckle and the and the over-matched weightlifter crashes to the canvas in a heap. That’s the future of the dollar in a nutshell.

But how does that explain the sudden fall in gold prices; after all, gold is the logical alternative to paper money, right?

Wrong. Gold is “real money” alright, but it’s also a commodity. And when commodities are smashed by a deflationary tidal wave–as they have been the last few weeks– gold will follow them into the basement.  In truth, gold has taken an even worse pasting than the euro; free-falling from $980 per ounce in mid-July to $786 at Friday’s market close. $194 in a month.

When the economy is in the grips of deflation; all asset-classes get dragged down, gold included. Many of the hedge funds and other big market players are selling their gold positions recognizing that the commodities boom is over and it’s time to move on. That doesn’t mean that gold won’t rebound sharply when Bernanke slashes rates or if Bush blows up some new part of the globe. It simply means that in the short term, “cash is king”. Pension funds and hedge funds will continue to deleverage to reduce their credit exposure to put themselves in a better position to roll over their debt. That means that gold’s slide could last a while. This doesn’t look like a conspiracy to me, but I have my tin-foil hat in hand just in case.

No one knows where the bottom is for gold, but one thing is certain; its future prospects are a lot brighter than the dollar’s. The Bush administration has yet to demonstrate that it can enforce Dollar Hegemony via military intervention. That is a very big deal indeed. If the dollar isn’t backed by Middle East oil, then the $6 trillion stockpile of dollars and dollar-denominated assets that are languishing in foreign central banks and sovereign wealth funds, will continue to dwindle until the dollar’s position as “reserve currency” comes to an end.

That’s one doomsday scenario, but there is another one, too. If Bernanke and Paulson continue to pile all of the nation’s credit problems (bad paper) on top of the greenback; foreign capital will head for the exits and the dollar will crash. Either way, the dollar’s troubles are mounting and something’s got to give.

MIKE WHITNEY lives in Washington state. He can be reached at: fergiewhitney@msn.com

 

 

 

 

Your Ad Here

 

 

 

 

 

More articles by:

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

Weekend Edition
December 14, 2018
Friday - Sunday
Andrew Levine
A Tale of Two Cities
Peter Linebaugh
The Significance of The Common Wind
Bruce E. Levine
The Ketamine Chorus: NYT Trumpets New Anti-Suicide Drug
Jeffrey St. Clair
Roaming Charges: Fathers and Sons, Bushes and Bin Ladens
Kathy Deacon
Coffee, Social Stratification and the Retail Sector in a Small Maritime Village
Nick Pemberton
Praise For America’s Second Leading Intellectual
Robert Hunziker
The Yellow Vest Insurgency – What’s Next?
Patrick Cockburn
The Yemeni Dead: Six Times Higher Than Previously Reported
Nick Alexandrov
George H. W. Bush: Another Eulogy
Brian Cloughley
Principles and Morality Versus Cash and Profit? No Contest
Michael F. Duggan
Climate Change and the Limits of Reason
Victor Grossman
Sighs of Relief in Germany
Ron Jacobs
A Propagandist of Privatization
Robert Fantina
What Does Beto Have Against the Palestinians?
Richard Falk – Daniel Falcone
Sartre, Said, Chomsky and the Meaning of the Public Intellectual
Andrew Glikson
Crimes Against the Earth
Robert Fisk
The Parasitic Relationship Between Power and the American Media
Stephen Cooper
When Will Journalism Grapple With the Ethics of Interviewing Mentally Ill Arrestees?
Jill Richardson
A War on Science, Morals and Law
Ron Jacobs
A Propagandist of Privatization
Evaggelos Vallianatos
It’s Not Easy Being Greek
Nomi Prins 
The Inequality Gap on a Planet Growing More Extreme
John W. Whitehead
Know Your Rights or You Will Lose Them
David Swanson
The Abolition of War Requires New Thoughts, Words, and Actions
J.P. Linstroth
Primates Are Us
Bill Willers
The War Against Cash
Jonah Raskin
Doris Lessing: What’s There to Celebrate?
Ralph Nader
Are the New Congressional Progressives Real? Use These Yardsticks to Find Out
Binoy Kampmark
William Blum: Anti-Imperial Advocate
Medea Benjamin – Alice Slater
Green New Deal Advocates Should Address Militarism
John Feffer
Review: Season 2 of Trump Presidency
Rich Whitney
General Motors’ Factories Should Not Be Closed. They Should Be Turned Over to the Workers
Christopher Brauchli
Deported for Christmas
Kerri Kennedy
This Holiday Season, I’m Standing With Migrants
Mel Gurtov
Weaponizing Humanitarian Aid
Thomas Knapp
Lame Duck Shutdown Theater Time: Pride Goeth Before a Wall?
George Wuerthner
The Thrill Bike Threat to the Elkhorn Mountains
Nyla Ali Khan
A Woman’s Selfhood and Her Ability to Act in the Public Domain: Resilience of Nadia Murad
Kollibri terre Sonnenblume
On the Killing of an Ash Tree
Graham Peebles
Britain’s Homeless Crisis
Louis Proyect
America: a Breeding Ground for Maladjustment
Steve Carlson
A Hell of a Time
Dan Corjescu
America and The Last Ship
Jeffrey St. Clair
Booked Up: the 25 Best Books of 2018
David Yearsley
Bikini by Rita, Voice by Anita
FacebookTwitterGoogle+RedditEmail