[Texgreen] How soon will the dollar crash?

[Roger Baker]

[Its not a matter of if, but when, IMO. There is nothing much holding =20=

up the dollar anymore now that we have outsourced all our industry. =20
The USA can't even win a war in Iraq, and is running $2 billion =20
dollar a day trade deficits. The top article indicates that the day =20
of reckoning may have arrived, or may within the month. The bottom =20
article (Exhibit C) is especially prescient, IMO. Once some of the =20
big players start unloading treasury bonds, its likely to be a free-=20
for-all trying to cash them in and likely hyper-inflation. -- Roger]



<http://business.guardian.co.uk/story/0,,1956683,00.html>

Frantic day's trading sends dollar into freefall

... Derek Halpenny, currency economist at the far eastern bank BTM-
UFJ, said the market was sensing the potential for a big move in the
dollar before the end of the year. "I think the market is happy to
build or extend dollar short positions with the potential for a big
move ... We could easily see the market not really looking at
fundamentals and just pushing the dollar weaker now that we've broken
$1.30."

Julian Jessop, analyst at consultancy Capital Economics, said the
dollar may also have been undermined by a report that the Chinese,
who have kept the yuan artificially low by buying dollars, could be
considering selling them instead. But he added: "The fact that the
dollar appears to have been undermined by such flimsy arguments is an
indication of a much more fundamental lack of support for the
currency. The bottom line is that the US's huge current account
deficit leaves the dollar vulnerable to all sorts of scare stories,"
he said....


               ******************************************

[Exhibit A]

<http://www.guardian.co.uk/usa/story/0,12271,1641984,00.html>


The US rope trick, or how to keep the dollar up


The deficit is at a new high but the greenback defies gravity. =20
Where's the logic?

Larry Elliott, economics editor
Monday November 14, 2005
The Guardian

Burn the textbooks. Forget that fuddy-duddy stuff about demand and =20
supply. Blow a raspberry at economic theory. That, apparently, is the =20=

message being sent out by the foreign exchange markets, where the =20
dollar reached a two-year high against the euro and the yen last week.

But isn't it the case, I hear you ask, that the United States notched =20=

up a record trade deficit of $66.1bn last week - equivalent to 6% or =20
so of its gross domestic product? Yes it is. And isn't the US =20
financing that trade deficit by flooding the global markets with =20
dollar-denominated assets that are snapped up by its creditors? Right =20=

again. And when the supply of something goes up, isn't it customary =20
for the price to come down? Full marks for impeccable logic.

Even so, if you were using logic to play the forex markets in the =20
past few weeks, you would have lost money. All sorts of reasons have =20
been trotted out to explain why the dollar has been going up -none =20
convincing. One of the more absurd theories was that investors have =20
been dumping euros owing to to the low-level civil war in France; =20
this doesn't explain why sterling fell against the greenback by a =20
similar amount.

Nor is it convincing to argue that higher interest rates in the US =20
than in the eurozone or Japan explain the appetite for dollars. To be =20=

sure, investors take into account prospective yields but they also =20
have to factor in the risk of currency depreciation. And there has to =20=

be a risk - a whopping big risk, in fact - that at some point the =20
world will have had a bellyful of a currency which, after all, =20
stopped being backed by anything tangible back in 1971. It is worth =20
noting that the recent strength of the dollar has been accompanied by =20=

a sharp rise in the price of gold; some investors, at least, are =20
taking precautions, and they are quite right to do so.

When you get down to it, there are only two reasons for an =20
appreciating dollar. One is that it is going up because it is going =20
up; the herd mentality of markets means that you do what everybody =20
else is doing even if you think they are wrong. The second is that =20
the markets have deluded themselves into thinking that a country that =20=

is spending one dollar and six cents for every dollar that it is =20
earning doesn't have a problem.

The fact that the Chinese, the Japanese and the other big exporting =20
nations of Asia are colluding in this financial fantasy should come =20
as no surprise. A strong dollar is wonderful for these countries =20
since it helps them to build up their industrial - and, in China's =20
case, political -power even as American manufacturing is hollowed out.

It would be misguided of the US to believe that all sides gain =20
equally from this arrangement; the Asians are getting by far the =20
better of the deal, owning enough US dollar assets to buy a =20
controlling interest in every company listed on the Dow Jones Index. =20
As a new book by Bill Bonner and Addison Wiggin (Empire of Debt: The =20
Rise of an Epic Financial Crisis; published by John Wiley) notes: =20
"They [the Asians] have enough Treasury bonds to destroy the US =20
economy on a whim."

Imperial people

One day China may want to do just that, but not yet. For the time =20
being, it does not have any incentive to halt a process that allows =20
it to grow at three times the pace of the US economy, and is prepared =20=

to take the risk that the symbiotic relationship will fall apart. =20
Whether it is in the interests of Americans to sit back and do =20
nothing is another matter.

Bonner and Wiggins argue that the US can't stop itself. Drawing =20
parallels with the last days of Rome, they argue that Americans =20
believe they can go on spending more than they make indefinitely. =20
"They go deeper and deeper in debt, believing they will never have to =20=

settle up. They buy houses and then mortgage them out, room by room, =20
until they have almost nothing left. They invade foreign countries in =20=

the belief that they are spreading freedom and democracy, and depend =20
on lending from communist China to pay for it. The imperial people =20
choose to spend rather than to save, and to hallucinate, rather than =20
think hard. They demand bread and circuses at home; let the Asians =20
sweat abroad."

The question of whether Americans are now living on a far-flung =20
outpost of cloud cuckoo land is explored a little less colourfully =20
but with equal clout in a paper* written by Wynne Godley and three =20
colleagues for the Levy Institute in upstate New York. This charts =20
with brutal clarity the deterioration in the US trade balance and =20
current account over the past 15 years, and projects that on current =20
trends the trade deficit will be 7.5% of GDP by 2010.

When a country imports more than it exports, there is a hit to its =20
growth rates. Between 1992 and 2001, the US managed to offset the =20
impact of a widening trade gap on demand by a credit-financed =20
consumer binge. Between 2001 and 2003, when the consumer briefly =20
retrenched, the government stepped up to the plate with a huge fiscal =20=

stimulus that kept the economy going but only at the expense of a =20
hefty budget deficit. =46rom 2003 to now, consumers have again =20
discovered the joys of borrowing as if there is no tomorrow, this =20
time on the back of a housing market bubble.

With interest rates rising, and house prices in some parts of the US =20
at unsustainable levels, Godley et al are right to bet on a period in =20=

which individuals will borrow less and save more. But in those =20
circumstances, consumer retrenchment coupled with a whopping trade =20
deficit would spell deep recession unless one of three things happened.

Firstly, the US government could take the strain again, widening the =20
budget deficit to maintain demand. The Levy paper suggests the =20
deficit would need to go to 8% of GDP to achieve this. Option one is =20
therefore not likely.

Secondly, the Americans could take tough protectionist action to =20
limit imports into the US, which would bring down the trade deficit =20
even if - as would be likely - other countries retaliated.

Protectionism

This is the nuclear option, make no mistake, and Washington would =20
undoubtedly prefer to see the trade deficit cut by rejigging =20
currencies and rebalancing global demand. Indeed, it may use the =20
threat of protectionism to seek a third way out of the current =20
predicament. A longer-term solution to global imbalances through an =20
international agreement in the spirit of the Bretton Woods post-war =20
settlement seems just the ticket, with the Asians agreeing to boost =20
domestic demand and revalue their currencies and the Americans =20
agreeing to export more and consume less.

Let's not delude ourselves, it's not going to happen this side of an =20
almighty crisis that brings everyone to their senses. At some point, =20
as Bonner and Wiggin note, the shopkeeper who keeps extending credit =20
to a customer having problems paying the bills in the hope that he =20
will eventually straighten himself out can end up sharing the pain. =20
Until the crunch comes, however, it's easy to keep believing the =20
fantasy.

Dice don't cheat

Clearly, as the strength of the dollar shows, economic theory has its =20=

limitations, especially when human emotions get in the way.

One example is the experiment where one person makes a proposal to =20
split a sum of money - say =A310 - with a stranger. The stranger can be =20=

offered anything from 10 pence to =A39.90: if he or she accepts, the =20
pair split the money as agreed; if not, they both get nothing.

Simple economic theory says the person making the offer should =20
suggest keeping =A39.90, leaving 10 pence for the other guy. That way =20=

the person making the split "maximises his utility" but both parties =20
are better off. In reality, it doesn't work like that. Many real =20
people would rather walk away with nothing than be treated =20
inequitably. They would think it well worth giving up 10p to deprive =20
some greedball of =A39.90.

A study in this month's Economic Journal shows that people are much =20
more prepared to accept inequitable outcomes when the means of =20
arriving at them is seen as fair. Researchers from Germany, Spain and =20=

the US took away the right of one of the participants to name the =20
terms of the bargain, substituting a roll of the dice. Support for an =20=

inequitable split rose from 19% to 41%.

According to the researchers, this has wider implications: it =20
suggests that even the losers from economic policies that promote =20
efficiency at the expense of equity will come to accept the outcome =20
provided they were given an equal chance.

larry.elliott@guardian.co.uk

                                        =20
*********************************

[Exhibit B]


 =46rom SF Chronicle

Nation's spending out of line
- David Lazarus
Sunday, November 27, 2005

I wrote Friday about consumers living beyond their means as the =20
holiday season kicks into high gear. But let's not overlook our =20
friends in Washington.

Last month, the national debt reached yet another miserable =20
milestone, passing the $8 trillion mark for the first time. As of =20
last week, the United States was $8,084,858,891,735.31 in the hole, =20
according to the Treasury Department.

And it'll only get worse. Brian Riedl, chief budget analyst at the =20
conservative Heritage Foundation, said the Bush administration is =20
expected to return to Congress within the next few months to ask =20
lawmakers -- once again -- to raise the nation's debt ceiling so we =20
can borrow even more.
"A debt of $8 trillion is certainly a daunting number," Riedl told =20
me. "I'm not sure we'll ever pay it off."
You heard right. The top number cruncher at the Washington think tank =20=

that's arguably friendliest to the Bush administration has come to =20
the conclusion that our debt has gotten so out of hand, it may never =20
go away.

At best, Riedl said, the national debt will be held to "a manageable =20
level" as a percentage of the overall economy and thus won't =20
completely ruin us.

But that too might be wishful thinking.

The federal budget deficit is now $319 billion. In other words, we =20
had to borrow an additional $319 billion this year just to make ends =20
meet, which is why the total amount owed by the government is higher =20
than ever.

Riedl estimates that the annual budget shortfall will reach $873 =20
billion 10 years from now. Two years after that, he predicts, the =20
annual deficit will hit $1 trillion.

By the time that happens, Riedl's calculations show the national debt =20=

doubling to about $16 trillion, or a staggering 74 percent of the =20
country's projected gross domestic product of $21.5 trillion.
"And it continues to worsen after that," Riedl said as he scrutinized =20=

his spreadsheet. "After 2017, we'll be looking at deficits of $2 =20
trillion a year."

Imagine if your family carried a credit card balance from month to =20
month and let it get bigger and bigger. That's what our government is =20=

doing.

"Long term, the deficit and debt projections are completely =20
unsustainable," Riedl said. "Eventually, taxes will have to go =20
through the roof or spending will be cut."

There's the rub. The fiscal recklessness of the Republican-controlled =20=

White House and Congress can't go on forever. At some point, the =20
credit card bill comes due. And when that happens, we'll have to find =20=

some way to pay for this mess.

So what's President Bush doing (aside from, perversely, cutting =20
taxes)? According to Treasury Department figures, the Bush =20
administration has been aggressively passing out IOUs to foreign =20
interests.

In fact, Bush has borrowed more money -- $1.05 trillion -- from =20
foreign governments and banks since taking office than all other =20
presidents combined.

 =46rom 1776 to 2000, the nation's first 42 presidents borrowed a =20
combined $1.01 trillion from foreign interests, official statistics =20
show. In just five years, Bush has out-borrowed them all.

A Treasury spokeswoman confirmed that the numbers are indeed correct. =20=

She declined to comment on the ramifications of the administration's =20
overseas borrowing.

"It's a big red flag," said Robert Bixby, executive director of the =20
Concord Coalition, a bipartisan budget watchdog group. "We're turning =20=

to the rest of the world to finance us on a massive scale."
The danger, of course, is that if foreign governments and banks =20
decide that they're tired of holding our IOUs, interest rates would =20
skyrocket as the nation is forced to beg for high-priced handouts =20
elsewhere.

"We're creating a huge vulnerability," Bixby said. "It's mortgaging =20
our future to someone else."
This has become a core issue for the Blue Dog Coalition, a group of =20
35 economically conservative Democrats who form a voting bloc in =20
Congress.

"The seriousness of this rapid and increasing financial vulnerability =20=

of our country can hardly be overstated," Tennessee Rep. John Tanner, =20=

a Blue Dog leader and member of the House Ways and Means Committee, =20
said in a statement.

"The financial mismanagement of our country by the Bush =20
administration should be of concern to all Americans, regardless of =20
political persuasion," he said.

The Bush administration, which has not vetoed a single spending bill =20
(or any other bill) since taking power, has repeatedly countered such =20=

criticism by blaming Congress for unchecked spending.
"Our problem with the deficit is not that we're under-taxed," =20
Treasury Secretary John Snow told an interviewer earlier this year. =20
"Our problem is we spend too much. And the focus has to be on =20
controlling spending and getting the spending growth under control.

"We're going to continue to be tight and disciplined on spending, and =20=

we're going to continue to keep the American economy going the right =20
way," he said. "So the revenue side, the government's revenues, =20
continues to grow."

When Bush took office, the debt ceiling for federal borrowing was =20
less than $6 trillion and hadn't been raised since 1997.

Last year, Bush signed into a law an $800 billion increase in the =20
debt ceiling to $8.2 trillion -- the third time in as many years that =20=

a higher credit limit has been required by the free-spending =20
administration.

A senior administration official told reporters in September that =20
$8.2 trillion soon won't be enough either.

"We think the first quarter next year is when we expect to hit the =20
existing debt limit," Treasury Undersecretary Randal Quarles said.

He quickly added: "The administration remains committed to reducing =20
the deficit."
All appearances to the contrary notwithstanding.

David Lazarus' column appears Wednesdays, Fridays and Sundays. Send =20
tips or feedback to dlazarus@sfchronicle.com.

                             =20
********************************************

[Exhibit C]

<http://www.chinadaily.com.cn/english/doc/2005-10/06/content_482807.htm>


It's time to take seriously a US-led global recession Lau Nai-keung

2005-10-06 07:37


I think it is time that we should take a serious look at the =20
possibility that the US is going to take us down towards a worldwide =20
recession in one or two year's time.

It is well known that the US is the world's biggest economy, taking =20
up about 30 per cent of global GDP, but it is now also the world's =20
biggest debtor country. According to the most authoritative person on =20=

this subject, the US Comptroller General David Walker, who audits the =20=

federal government's books, the tab for the long-term promises the US =20=

Government has made to creditors, retirees, veterans and the poor =20
amounts to US$43,000 billion, US$145,000 per US citizen, or US=20
$350,000 for every full-time worker.

And this figure does not even take into account all the personal =20
debts such as credit card bills and mortgages. With a low interest =20
rate of 1 per cent running for the past three years in a row, savings =20=

plummeted to just 1.8 per cent last year, below 1 per cent since =20
January and at zero in the latest estimate from the Bureau of =20
Economic Analysis. In 2000, household debt broke 18 per cent of =20
disposable income for the first time in 20 years. Credit card debt =20
alone averages US$7,200 per household.

The US Government indebtedness is financed this way: The US now runs =20
a trade deficit roughly 6.5 per cent of its GDP and the gap is =20
widened every day. Its citizens are spending ever more on foreign =20
goods, and with the US dollar as the international currency, the US =20
Government just prints money to finance the deficit. And with this =20
money, central banks in the surplus countries purchase most of the US =20=

Treasury bonds as currency reserve.

By now, Japan is the largest creditor of the US Government, and the =20
Chinese mainland has been a fervent buyer for the last few years. As =20
for Hong Kong, most if not all of our reserves are in US dollar =20
denominated assets. The US Government in turn uses this foreign =20
borrowed money to finance as much as 90 per cent of the federal =20
deficit which stood at US$412 billion last year. The federal deficit =20
is expected to be running at about US$2 billion a day at the moment.

Put it simply, the Americans have been living way beyond their means =20
for much too long. On top of this, the Bush Administration is cutting =20=

tax at least three times while fighting an expensive war in Iraq, =20
which has already cost the country US$700 billion, and currently =20
progressing at US$5.6 billion per month. Now the US economy is =20
dependent on the central banks of Japan, China and other nations to =20
invest in US Treasuries and keep American interest rates down. The =20
low rates keep American consumers snapping up imported goods.

Any economist worth his salt knows that this situation is =20
unsustainable. This includes the country's economic guru driver Alan =20
Greenspan, who recently warned his countrymen that the federal budget =20=

deficit would hamper the nation's ability to absorb possible shocks =20
from the soaring trade deficit and the housing boom. Now he may have =20
to add two more worries: soaring oil prices and cyclones.

The US is now clearly in huge trouble, economically, socially, =20
politically, and internationally. The Bush Administration bungled big =20=

in cyclone Katrina's aftermath in New Orleans, and then a minor rerun =20=

from Rita in Houston, and this will trigger the general outburst of =20
people's dissatisfaction with the government, leading to great =20
internal turmoil lasting for many years. In all likelihood, long-term =20=

interest rates are going to rise, and the greatest property bubble =20
the world has witnessed is going to burst in the next one to two years.

The countdown is in progress, and there is no way that anybody can do =20=

anything to reverse it either by short-term measures such as fiscal =20
and monetary policy, or through long-term reform of tax policy, =20
entitlement programmes and even the entire federal budget. This is as =20=

inevitable as gravity, and it will take place under a new and =20
inexperienced chairman of the Federal Reserve Board. I do not want to =20=

sound alarmist, but I see very bad omens.

To make things simple, let us just examine some key economic issues =20
raised by some economists:

What if the dollar plummets? Do stocks follow? How about pensions?

What if interest rates soar? How would all the new homeowners, who =20
stretched to buy with adjustable and interest-only loans, cover their =20=

mortgages?

How would consumers with record credit-card debt make their payments? =20=

Would they stop buying? Stop taking vacations? What will happen if =20
they go bankrupt? New rules going into effect later this year make it =20=

harder on such debtors.

How would a government, which depends on the taxes of a strong =20
economy to operate, keep all its promises?

To us, the good news is that when the country is in deep trouble, the =20=

US will not have the energy to pick on China. Even when it is =20
necessary to start another war to divert people's attention, it would =20=

pick one much smaller in size and weaker in strength, like Iran. This =20=

will provide a much more amicable environment for China to make good =20
use of its "period of strategic opportunity" till 2020 for the =20
country to pass through a turbulent zone between per capita income of =20=

US$1,000-3,000.

But in the short term, now the US not only sneezes, and all symptoms =20
indicate that it is going to suffer from a SARS-like trouble, the =20
whole world should take extra precaution not to get infected. One =20
thing is for sure, some time in the not too distant future, every =20
central bank and institutional investor is going to dump US dollar =20
and US Treasury bonds. Once, when a country like South Korea dumps =20
the dollar, the still unsold US Treasuries in the asset column of =20
Asian central banks - US$2,000 billion according to some estimates - =20
will collapse. The cheapened dollar will cause a sudden jump in the =20
US inflation, which forces the Fed to jack up interest rates. A giant =20=

leap in inflation will cause a severe recession, or perhaps a =20
depression, in the US. These countries' exports to America will dry =20
up, which in turn will spread the global economic downturn like =20
wildfire.

After the stampede, everybody is going to get hurt, not least the =20
central bank of China, and the Hong Kong Monetary Authority, which =20
are major US creditors and with the US as their number one export =20
market. The recent currency reform of the RMB is most timely, and it =20
is about time we should do something about the Hong Kong dollar. At =20
the same time, China should make extra efforts to rekindle internal =20
consumption, and diversify its market really fast before the great US =20=

bubble bursts.

(HK Edition 10/06/2005 page2)