[A-List] Fwd: Mike Whitney: Doomsday for the US Dollar - Post Mortem for the World's "Reserve Currency"

Suzanne de Kuyper suzannedk at gmail.com
Sat Dec 18 05:52:23 MST 2010

It is past time for the dollar to lose it's reserve status, but I foresee
military and bloody posturing world wide that tries to force the compliance
the United States took so long for granted.   The set up of the fiscal
crisis was carefully timed.  Rising seas and sinking dollar  with religious
wars to keep eyes off what is really going on. Time to takover all that is
nailed down and all that is not nailed down. Time to amass the priceless
paintings like Rembrants, Van Goghs, the whole banana...all of them.   Being
planned.  As is ehtnic cleansing.  Hitler was a piker.  Suzanne

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Subject: Mike Whitney: Doomsday for the US Dollar - Post Mortem for the
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Doomsday for the US Dollar: Post Mortem for the World's "Reserve Currency"

By Mike Whitney

URL of this article: www.globalresearch.ca/index.php?context=va&aid=22402

Global Research, December 14, 2010

Paul Volcker is worried about the future of the dollar and for good reason.
The Fed has initiated a program (Quantitative Easing) that presages an end
to Bretton Woods 2 and replaces it with different system altogether.
Naturally, that's made trading partners pretty nervous. Despite the
unfairness of the present system--where export-dependent countries recycle
capital to US markets to sustain demand---most nations would rather stick
with the "devil they know", then venture into the unknown.  But US allies
weren't consulted on the matter.  The Fed unilaterally decided that the only
way to fight deflation and high unemployment in the US, was by weakening the
dollar and making US exports more competitive. Hence--QE2.

But that means that the US will be battling for the same export market as
everyone else, which will inevitably shrink global demand for goods and
services.  This is a major change in the Fed's policy and there's a good
chance it will backfire. Here's the deal: If US markets no longer provide
sufficient demand for foreign exports, then there will be less incentive to
trade in dollars. Thus, QE poses a real threat to the dollar's position as
the world's reserve currency.

 Here's what Volcker said:  “The growing sense around much of the world  is
that we have lost both relative economic strength and more important, we
have lost a coherent successful governing model to be emulated by the rest
of the world. Instead, we’re faced with broken financial markets,
underperformance of our economy and a fractious political climate.....The
 question is whether the exceptional role of the dollar can be maintained."

This is a good summary of the problems facing the dollar. And, notice that
Volcker did not invoke the doomsday scenario that one hears so often on the
Internet,  that China--which has more than $1 trillion in US Treasuries and
dollar-backed assets--will one day pull the plug on the USA and send the
dollar plunging.  While that's technically true, it's not going to happen.
China has no intention of crashing the dollar and thrusting its own economy
into a long-term slump.  In fact, China has been adding to its cache of USTs
because it wants to keep its own currency weak and maintain its hefty share
of the global export market.  Besides, China didn't become the second
biggest economy in the world by carrying out counterproductive vendettas
against its rivals.  It's going to stick with the strategy that got it to
where it is today.

Still, as Volcker points out, there are real threats to the dollar, and
they're getting more serious all the time. For example, if the deficits
continue to balloon as they have recently ($1.3 trillion in 2010) or if Fed
chairman Ben Bernanke follows QE2 with QE3, QE4, QE5 ad infinitum, then
foreign investors and central banks will begin to lose confidence in the
US's ability to manage its finances and they will begin to ditch the dollar.
That will increase the cost of funding government operations by many orders
of magnitude. In fact, it looked like something like that was happening just
last week when President  Obama announced his approval for extending the
Bush tax cuts. The markets figured that extending the cuts would swell the
deficits which would force the Treasury to issue more debt. That triggered a
flight out of USTs that sent yields up sharply.  The bond market suffered
its biggest 2-day selloff since 2009. The incident provided a snapshot of
what's in store when the economy begins to recover and the government has to
pay higher rates to service the debt.

In any event, the one-two punch of bigger deficits and QE cannot help but
push the dollar lower, but that does not necessarily imply that the dollar
will lose its top-spot as reserve currency. It's more complicated than that.

Here's how  economist Menzie Chinn summed it up when he was asked how it
would effect the US economy if the dollar lost its position as the world's
reserve currency:

  "If the dollar does indeed lose its role as leading international
currency, the cost to the United States would probably extend beyond the
simple loss of seigniorage narrowly defined. We would lose the privilege of
playing banker to the world, accepting short-term deposits at low interest
rates in return for long-term investments at high average rates of return.
When combined with other political developments, it might even spell the end
of economic and political hegemony."

Maintaining reserve status is the great imperative, because reserve status
is the cornerstone upon which the empire rests. Lose that, and the whole
superpower phenom begins to teeter. So, quirky, untested policies, like QE,
are not initiated without a great deal of thought. (and apprehension) The
Fed tries to anticipate what could go wrong and work out an exit strategy.
Kevin Warsh, who is a member of the Board of Governors at the Fed, gave a
good rundown of the potential problems with QE in an article in the Wall
Street Journal. Here's an excerpt:

 "The Fed's increased presence in the market for long-term Treasury
securities also poses nontrivial risks. The Treasury market is special. It
plays a unique role in the global financial system. It is a corollary to the
dollar's role as the world's reserve currency. The prices assigned to
Treasury securities--the risk-free rate--are the foundation from which the
price of virtually every asset in the world is calculated. As the Fed's
balance sheet expands, it becomes more of a price maker than a price taker
in the Treasury market. And if market participants come to doubt these
prices--or their reliance on these prices proves fleeting--risk premiums
across asset classes and geographies could move unexpectedly. The shock that
hit the financial markets in 2008 upon the imminent failures of Fannie Mae
and Freddie Mac gives some indication of the harm that can be done when
assets perceived to be relatively riskless turn out not to be." ("The New
Malaise", Kevin Warsh, Wall Street Journal)

This is an astonishing admission for an acting member of the Fed.   Warsh is
basically conceding that the Fed is price-fixing on a global scale ("more of
a price maker than a price taker") and he worries that this could undermine
confidence in the bond market.  The danger, as he sees it, is that investors
will see through the ruse of government guarantees (like those for Fannie
and Freddie) and exit the asset class altogether sinking the dollar on their
way out. This is the grimmest scenario I've seen yet, but it seems much more
plausible than the "China will dump its Treasuries all at once" theory.

The administration's support for Bernanke's "weak dollar" policy  is evident
in the way that Obama keeps reiterating his promise to double exports in 5
years. This simply can't be done without ripping the dollar to shreds, which
appears to be Obama's intention. QE will lower the dollar's value against a
basket of currencies which will make US exports cheaper than the
competition. Bernanke sees it as a way to narrow the output gap and lower
unemployment by cranking up the printing presses.

Foreign trading partners see it as beggar-thy-neighbor monetary policy at
its worst, and they are deeply resentful. They'd rather see Congress do what
it's done in the past, and push through a second round of fiscal stimulus to
boost  demand. They don't care about how big the US deficits are as long as
they are used for a good purpose. And pulling the world out of a global
slump is a good purpose. But that's not going to happen because the new GOP
majority wants to implement their madcap "austerity" scheme which will
bankrupt the states and dismantle popular social programs. They're as
committed to  "starve the beast" as ever, and they're convinced it's a
winning strategy for retaking the White House in 2012.  But belt-tightening
reduces demand which makes American markets less attractive for foreign
products. If the US economy continues to  underperform, there will be less
reason for foreign investors and central banks to stockpile dollars. The
Fed's QE, Obama's export strategy, and the GOP's plan for debt consolidation
are creating ideal conditions for an unexpected plunge in the dollar.

But there are other problems facing the dollar besides falling value and
droopy demand. As Volcker says, "We have lost a coherent successful
governing model to be emulated by the rest of the world. Instead, we’re
faced with broken financial markets, underperformance of our economy and a
fractious political climate."

Indeed. Public confidence in US markets has steadily eroded as one scandal
follows the other and the people involved are never held accountable. So
far, not one CEO or CFO of a major investment bank or financial institution
has been charged, arrested, prosecuted, or convicted in what amounts to the
largest incident of securities fraud in history. In the much-smaller Savings
and Loan investigation, more than 1,000 people were charged and convicted.
As Volcker points out, the system is broken and the old rules no longer
apply. The small gains that were  recently made in Dodd-Frank financial
regulation, are now under attack by the new majority in congress. The GOP
has pledged to either roll back entire provisions of the bill or do what
they can to make the law unenforceable. Here's a quick look at two of the
Republican leaders who will be leading the effort to "defang" Fin-Reg:

 "A heated battle is underway between Rep. Spencer Bachus, R-Ala., who is in
line to become the next chairman of the House Financial Services Committee,
and Rep. Ed Royce, R-Calif., who is challenging him for the post currently
held by Democrat Barney Frank of Massachusetts....More than half the $1.25
million donated to Royce’s Road to Freedom political action committee (PAC)
over the last two election cycles came from banks, auditors and insurance
companies, according to the Center for Public Integrity.

Bachus... too, has deep financial ties to the industry, which contributed
more than half the $2.7 million in PAC money he received in the past four
years.   ("Defang and Delay—Wall Street Plans to Neuter FinReg", Merrill
Goozner, The Fiscal Times)

 There's no doubt that Royce and Bachus are in Wall Street's pocket and are
ready to do their bidding.  Whatever inroads were made on the main issues--
Too Big To Fail, resolution authority, central clearinghouses and capital
standards for derivatives, securitization, funding for the Consumers
Financial Protection Agency (CFPA) etc.---will either be  sabotaged or
challenged by financial industry agents working from within the congress and

Here's a blurp from a post by Zach Carter who hangs some big numbers on
congressional influence peddling:

"A full 90 members of Congress who voted to bailout Wall Street in 2008
failed to support financial reform reining in the banks that drove our
economy off a cliff. But when you examine campaign contribution data, it's
really no surprise that these particular lawmakers voted to mortgage our
economic future to Big Finance: This election cycle, they've raked in over
$48.8 million from the financial establishment. Over the course of their
Congressional careers, the figure swells to a massive $176.9 million....
When it comes to dealing out economic damage, no special interest group has
been able to wreak more havoc that Big Finance...("Crony Capitalism: Wall
Street's Favorite Politicians", Zach Carter, ourfuture.org)

Wall Street is the epicenter of global corruption; the world's biggest
sewer. It's multi-trillion dollar Ponzi-mortgage scheme brought down the
global financial system which was hastily resurrected by blanket Fed
guarantees on fraudulent bonds and securities generated by undercapitalized
financial institutions. But as bad as the bailout was, the Fed's ongoing
meddling in the equities markets is even worse because shows to what extent
the markets are being juiced. Consider this excerpt from an article on
Bloomberg on Monday that shows the connection between the Fed's purchases of
US Treasuries (QE) and the predictable surge in stock prices:

 "Nine of the S&P 500’s 10 main industry groups, led by shares of financial
companies, rose more on days when the Fed opened its checkbook for, or
announced results of, what it calls Permanent Open Market Operations. The
group of 81 banks, insurers and investment firms, including New York-based
JPMorgan Chase & Co. and Wells Fargo & Co. of San Francisco, climbed an
average 0.32 percent, compared with a 0.04 percent drop on non- POMO

FX Concepts LLC, the world’s largest currency hedge fund, buys
higher-yielding assets such as stocks and the Australian dollar when the Fed
is purchasing bonds, said John R. Taylor, who manages about $8 billion as
chairman of the New York-based firm. The days have become “incredibly
important for the market,” Taylor said." ("Stocks Rally With Bernanke Bond
Purchases as QE Buoys S&P 500", Bloomberg)

This phenomenon has long been a topic of debate on economics blogs, but now
that it's in the mainstream,  people are likely to sit up and take notice.
 Bernanke's money is going in one end and coming out the other in the form
of "frothy" stocks.  Just like high-frequency trading, dark pools,
off-balance sheets operations, shadow banking, securitization, and the
billions in unreported mark-to-fantasy toxic assets; this latest discovery
by Bloomberg will further confirm that Wall Street is a murky underworld of
insider trading, criminal activity and Fed-sanctioned grand larceny.


The dollar's days as reserve currency may be coming to an end, but it won't
be because China decided to jettison its pile of US Treasuries. Oh, no. It
will be because austerity measures in the US reduced demand for imports
making it less necessary to trade in dollars. And, it will be because
Obama's "weak dollar" policy led to the demise of Bretton Woods 2 which kept
interest rates low by recycling capital into the US. And, it will be because
Congress and the White House were incapable of fixing the financial system,
reigning in Wall Street, or restoring credibility to the markets. These are
the real reasons the greenback is toast.

As Volcker opines, "We’re faced with broken financial markets,
underperformance of our economy and a fractious political climate" because
we no longer have "a successful governing model" that the rest of the world
admires.  Absent radical restructuring and a new regulatory regime, the
dollar will be unable to maintain its "exceptional role" as the world's
reserve currency.  It's only a matter of time.
The Global Economic Crisis

Michel Chossudovsky
Andrew G. Marshall (editors)
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