American Ecconomic Crash NOW?

Robert Romano 11-10-2010
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The global revolt against U.S. dollar devaluation continues.  Now China is calling for the G20 to have a role in Federal Reserve policy.  So is Russia.  Adding to the escalation, China's credit rating agency has once again downgraded the U.S. credit rating, as reported by Reuters

While the Fed and Obama prattle on about targeting unemployment and trying to restore economic growth, the whole world sees the Fed's decision to print $600 billion to buy treasuries for what it is: Papering over the debt.

 Interestingly, in the Reuters report, they quote Herbert Kaufman, professor emeritus of the W.P. Carey School of Business at Arizona State University as saying, "Since they are a large holder of U.S. Treasuries. it is not to their advantage to downgrade."

Except it was not a hypothetical.  They have downgraded us, because they understand that printing hundreds of billions of monopoly money is nothing more than the "pretended payment" of debt Adam Smith warned against in The Wealth of Nations.

This is getting bad.  If tough decisions are not made to balance the budget, pay down the debt, and stabilize the dollar, we are likely in just a few years to lose our status as the world's global reserve currency.  Our creditors are getting ready to pull the plug.  They are reaching the tipping point.

 What is the tipping point? Nobody knows for certain.But the numbers speak for themselves. The Chinese hold $868 billion of treasuries. The Fed will print about $600 billion every year for the next three years to buy treasuries, increasing its own balance sheet from $2.34 trillion to $4.14 trillion if all other things remain constant. That will increase the Fed's treasuries holdings to $2.6 trillion.

That's a 76 percent increase in the Fed's balance sheet, which when you factor in leveraging and the central bank's lending capacity throughout the banking system, could in theory result in about a 38 percent depreciation of the dollar. But it could be worse, when you consider that the Fed's purchases will constitute a 214 percent increase in the central bank's treasuries holdings.

So, if you're China, you either 1) hold onto your assets (and keep buying) and eat the 38 percent loss; 2) slow down purchases and still take a 38 percent loss; 3) stop purchases and accept the 38 percent loss on remaining assets; or 4) stop buying and actively dump the assets as fast as possible for whatever you can get because the dollar depreciation will actually be much larger than 38 percent.

The tipping point is fear. It is panic. It is when the Chinese and others believe they will get less money in return for holding the assets than by selling them for whatever the market will fetch.

The dynamic where countries keep pouring money into U.S. debt is definitely subject to change because it is based on market variables. In this case, the variables are rather predictable. The more treasuries the Fed buys, the less marketable they become, the less China and others buy, and therefore the more the Fed needs to buy to finance the U.S. spending obligations which are unsustainable.

That is the dollar run.

 It'll be like a tsunami once it gets going fast and merciless.  Keep your eyes on this.  Both our monetary and fiscal authorities are playing with fire.  They are assuming that the current monetary system with the dollar being the world's peg will not change, when everything changes.  We're staring a global currency crisis right in the eyes.

 In today's Liberty Action Report, Fred Upton has not earned a promotion, a tree falls in the woods, the death tax is about to rise from the grave, and Republicans must heed voters' concerns to avoid extinction.  Plus, Sarah Palin makes the case for a stable dollar.

Please send your letters to the editor to Robert@getliberty.org. We publish all points of view! Today, Sanna Huebschmann of Wisconsin writes to our action alert to incoming members of Congress and returning members to urge them to tie any increases in the national debt ceiling to sharp spending reductions:

 

"Why are we advocating raising the debt limit, AT ALL?"

Great question.

Ideally, ALG supports freezing the debt ceiling at about $15 trillion (to account for the $1.3 trillion or so budget deficit Pelosi and Reid are handing off to the new majority), and then balancing the budget from here on in and paying down the debt. We advocated for that position here:

http://blog.getliberty.org/default.asp?display=2649

And here:

blog.getliberty.org/default.asp?Display=2728

But even that contemplates raising the ceiling by another $700 billion or so from its current $14.3 trillion level. What we're saying with the action alert is that the least Republicans can do is tie any future increases in the debt ceiling to gargantuan spending cuts.

Ultimately, we'd like to prevent the nation from ever defaulting. But that's the trajectory we're on. If the dollar loses its status as the global reserve currency, we will not be able to meet our obligations. And if we continue destroying the value of the dollar, we will certainly lose that status. So, step one is to stop devaluing the dollar. And that has to mean balancing the budget and paying down the debt.

How far along we get will largely be up to House Republicans.

For Liberty,

Robert Romano
Senior Editor of ALG News
www.getliberty.org
"We want a stable dollar"

 

By Sarah Palin

I'm deeply concerned about the Federal Reserve's plans to buy up anywhere from $600 billion to as much as $1 trillion of government securities. The technical term for it is "quantitative easing." It means our government is pumping money into the banking system by buying up treasury bonds. And where, you may ask, are we getting the money to pay for all this? We're printing it out of thin air.

The Fed hopes doing this may buy us a little temporary economic growth by supplying banks with extra cash which they could then lend out to businesses. But it's far from certain this will even work. After all, the problem isn't that banks don't have enough cash on hand it's that they don't want to lend it out, because they don't trust the current economic climate.

And if it doesn't work, what do we do then? Print even more money? What's the end game here? Where will all this money printing on an unprecedented scale take us? Do we have any guarantees that QE2 won't be followed by QE3, 4, and 5, until eventually inevitably no one will want to buy our debt anymore? What happens if the Fed becomes not just the buyer of last resort, but the buyer of only resort?

All this pump priming will come at a serious price. And I mean that literally: everyone who ever goes out shopping for groceries knows that prices have risen significantly over the past year or so. Pump priming would push them even higher. And it's not just groceries. Oil recently hit a six month high, at more than $87 a barrel. The weak dollar a direct result of the Fed's decision to dump more dollars onto the market is pushing oil prices upwards. That's like an extra tax on earnings. And the worst part of it: because the Obama White House refuses to open up our offshore and onshore oil reserves for exploration, most of that money will go directly to foreign regimes who don't have America's best interests at heart.

We shouldn't be playing around with inflation. It's not for nothing Reagan called it "as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man." The Fed's pump priming addiction has got our small businesses running scared, and our allies worried. The German finance minister called the Fed's proposals "clueless." When Germany, a country that knows a thing or two about the dangers of inflation, warns us to think again, maybe it's time for Chairman Bernanke to cease and desist. We don't want temporary, artificial economic growth bought at the expense of permanently higher inflation which will erode the value of our incomes and our savings. We want a stable dollar combined with real economic reform. It's the only way we can get our economy back on the right track.


Second Chance or Last Chance?

 By David Bozeman

Senator-elect Marco Rubio, in one of the most rousing speeches on election night (is anyone really inspired by calls for bi-partisanship and compromise?) declared that the Republican Party was given a second chance to do what it had promised before.  Last chance may be closer to the truth.

Indeed, the sweep of 2010 is wider than has been reported.  North Carolina, for instance, is an anomaly, a conservative state that favors Democrats, but its legislature, for the first time since the late 1800s, is now under Republican rule.  Yet Rubio is correct, 2010 was not a validation of a still highly-disfavored Republican Party but an opportunity to build a greater conservative movement for the next generation.

Right-wing pundits and intellectuals will generally speak the truth as they see it, but will Republican leaders in Washington succumb to the culturally ingrained notions of civility and bi-partisanship that typically undercut conservative values?  That is a danger, because liberalism advances in increments, even small ones, while conservatism deals more in absolutes.

 The notion that we are a centrist nation, that presidents of both parties must abandon their bases and appeal to moderates belies the fact that it is usually Democrats who win big by moving to the center.  Bill Clinton, despite impeachment, left office on a high note after reading the writing on the wall in the '94 midterms. 

How many Democrats this year won without mentioning stimulus packages or health care reform? Congressman Mike McIntyre won re-election to North Carolina's seventh congressional district by distancing himself from Speaker Pelosi, calling himself his own man. Republicans, by contrast, generally win by sticking to their conservative guns.  Who are the brightest stars in the conservative galaxy, Jim DeMint or the unpredictable Lindsay Graham, Marco Rubio or that lamentable has-been Charlie Crist?

To the Class of 2010, stay your course.  Do not mold your convictions to the leftist/mainstream media standards of civility and expectations of "bipartisanship".  You will routinely be called extremists and bigots on the editorial and even the news pages.  But stand your ground.  It is not enough to answer your critics, turn the loaded questions back on them.  Make them show the compassion and justice in economic policies that transfer trillions of dollars out of main street and inner city America to the wealthy suburbs of Washington, DC

2010 has offered a golden opportunity to not just act on popular will but to mold it, to connect with and educate the voters.  And to the policy wonks and foot soldiers, take it to the blue states, to the minority communities and to college campuses.  Set the agenda, never ceding education, social security reform and other "failed" issues to the liberals.  And again to the incoming class, you will not win every election or legislative battle, but if you stick with the people, they will stick with you. 

Now is not the time to coast on merely reflecting public opinion, get out there and shape it!  And never forget, you were not elected to get along with freedom's enemies (of either party), you were elected to defeat them.  Your adherence to your campaign promises could well determine the future of the conservative movement and solidify freedom's last bastion for the rest of the 21st Century.

 

David Bozeman, former Libertarian Party Chairman, is a Liberty Features Syndicated writer.