And if that wasn't enough, in the last week foreigners have suddenly stopped buying our
debt through their accounts at the Fed. And the banks have suddenly divested themselves of $74 billion in government debt.
In one week! One! And the banks got rid of another $11.5 billion in "other securities," to boot!
For us, it is a compelling conclusion that this debt explosion overwhelmingly mirrors
Ponzi finance, meaning that debt service is paid with new debt. Assuming an average interest rate of 5% on outstanding debts
of $36.2 trillion in the United States, current overall debt service is running at an annual rate of about $1.8 trillion.
The Chinese government’s coddling
of its state-owned firms is another force behind the current wave of overseas expansion. While officials want to see markets
develop at home, up to a point, they fear the fallout from the collapse of hundreds of large, communist-era basket-cases.
So the government props these enterprises up with ultra-cheap loans through the banking system and other favours, which have
the effect of creating overcapacity and nurturing unfair competition. This, in turn, pushes the more successful state firms,
and private companies like Haier, to seek opportunities in markets abroad.
The difference with the state is that its power to levy taxes exempts it from having to
back its creation of fiat money with any other assets of value. The state when issuing fiat money is acting as a sovereign
creditor. Those who take the fiat money without exchanging it with things of value are indebted to the state; and because
taxes are not always based only on income, a taxpayer is a recurring debtor to the state by virtue of his citizenship, even
those with no income.
Elliott Wave's Bob Prechter, one of the most well known deflationists, once produced a
chart comparing the financial markets to the trends within popular culture. At the top of a bull market, a sense of optimism
& giddiness prevails with popular culture spitting out bubblegum music, short dresses and boybands. At market bottoms,
the chart-topping music turns depressing, dresses are longer and cultural optimism cannot be found.
The nub of von Mises' theory was as follows: the complexity of human behavior required that you could
only develop a rational and objective economic theory based upon fundamental logical principles (deduction) of human action
as opposed to the monetarists' and Keynesians' selected observation followed by attempted mathematical modeling (induction).
(The latter method being the source of endless frustration of those who rely on economist's predictions as mathematical forecasting
models have shown their failure.
Last year, the Wall Street Journalobserved that a sell off
of U.S. treasuries from a large debt holder like China would put the U.S. economy into a tail spin. Long term interest rates
would climb and bond yields would sky rocket. This could start a stampede of selling which would devastate the stock market.
This is the treasury trap America is in.
“The bottleneck that is pushing prices up again this month is not a lack of crude supply
but a shortage or refining capacity to process,” according to a report by the Centre for Global Energy Studies, the London-based
oil consultancy founded by the former Saudi oil minister Sheikh Yamani. “Demand for middle distillates - jet fuel, diesel
and heating oil - is oustripping the ability of the refining system to produce it,” the report said.
For several years there have been calls for reform of Fannie Mae and Freddie Mac, the
quasi-governmental mortgage giants. Because of their implied Federal guarantees, these companies seem to take much more risk
than any similar independent company would, taking huge positions in mortgages with less reserve capital than is required
for similar organizations.
The undervalued yuan is also drawing speculative capital into China, causing the Chinese
economy to overheat. ``Given the current state of the Chinese economy, I don't think it will be too long'' before more flexibility
is introduced, Japanese Finance Minister Sadakazu Tanigaki said recently.
When monetary matters have been left to the voluntary choices of market participants,
we’ve had a gold standard, little or no inflation, and a thriving economy. Even a gold standard corrupted by the government
and fractional reserve banking, as we had in the 19th Century, promoted vibrant economic growth while maintaining the purchasing
power of the dollar.
A wise acquaintance of mine, Clyde Harrison, is fond of saying that fiat currencies
do not float; they just sink at different rates. How can all fiat currencies sink? If dollar is appreciating vs. the euro,
the euro is sinking, but the dollar is floating higher, isn't it? Yes, it is floating higher vs. the euro, but they both might
be sinking. How's that?
The North American Free Trade Agreement's tarnished reputation has become one of the biggest
impediments to President George W. Bush as he starts his final push to win approval of a similar accord with Central America.
"The effects of the housing bubble bursting, along with today's lack of economic growth,
can be similar to those of the crash of 1929 and the Great Depression. While the tech stock disaster affected only those individuals
who happened to be invested at that time, more people and entire areas that attempted to profit from the "housing boom" will
be caught in this mess. The Roosevelt administration could not have grown to its size and strength without the Great Depression.
It remains to be seen what effects the bursting housing bubble will have."
This Friday on June 10th, the April trade balance will be released. Expectations are for
US$58 billion, up from $55 billion in March. In March, the trade deficit had “unexpectedly” narrowed, mostly due to a slowdown
of US economic activity.
The Euro is now the largest national money brand in the world. Nations have been pushing
to join. Their citizens already use the Euro in their daily lives. Russia is likely to move to the Euro, and may some day
price Russian oil in Euros rather dollars. What nations are lining up to join the dollar? Answer is none. Are Chavez and Lopez
likely to push their nations to drop their national monies and convert to the dollar?
The debate within and around the SEC is generally about whether
or not this or that regulation should be added. It's all tinkering around the edges of laws passed three generations ago.
There should be free market principles at work, but not just the provision of incentives to issue securities. The same principles
should be used to guarantee that the securities issued are based on honest accounts.
U.S. politicians and business executives don't seem to realize the extent to which many
overseas investors (a) doubt that the U.S. can avoid a dollar crisis and (b) think leadership of the global system will soon
shift elsewhere --to China and India.
With the euro-zone countries holding over $200 billion in US securities and Asia with $1 trillion
or more, the stage is now set for another change in the dollar. If the 20/40-year cycle follows its past pattern, the next
change will occur sometime around 2011-2016 and it will be a big one since it will be on the 40-year cycle. We have already
seen three instances where the US has had a "two-tiered" dollar, where, in two of those instances, the domestic dollar was
not the same as the dollar outside the US.
The US avoided a serious recession in 2001 by letting the consumer expand his spending
by borrowing. We now have more debt than ever, not only internationally as described above, but also for government, and for
mortgages. If foreigners were to consider other options for holding these dollars, there could be a glut of dollars in the
world that would drive the exchange rate downward and prices in the US upward. If inflation rises, US interest rates could
rise, and many parts of the economy could turn down, like housing, stocks and consumer spending. Because of the size of the
amounts involved, and the speed of today's currency and interest rate markets, the shift could move very fast in a downward
spiral.
Anyone who knows anything about hedge funds is aware that these private investment pools
don't come cheaply. But the typical management fees of 1% to 2% of net assets -- plus 20% of the profits -- are often only
part of the total tab.
If you ask me to name the proudest distinction
of Americans, I would choose- because it contains all the others . . . the fact that they were the people who created
the phrase "to make money." No other language or nation had ever used these words before; men had always thought of
wealth as a static quantity . . . to be seized, begged, inherited, shared, looted or obtained as a favor. Americans were
the first to understand that wealth has to be created.
