Neither the Post nor the Times gave proper attention to the devastating potential consequences
to the U.S. economy should Beijing decide to dump the dollar. In their new book Empire of Debt: The Rise of an Epic Financial
Crisis, Bill Bonner and Addison Wiggin describe the extent of our economic dependency on Beijing.
As Greenspan's tenure as the most powerful man in the financial universe is debated among
investors today and historians tomorrow, his many decisions will be dissected and evaluated. But I fear most of this debate
will overlook the most foundational and crucial issue. Before Greenspan's actions are considered, the very notion of the Fed
itself ought to enter the limelight.
In case the world needs another reminder of the determination of Chinese companies to
become global competitors, economic data released on Wednesday, Jan. 25, confirms that China has become the world’s fourth-largest
economy. Already home to 16 of the world’s 500 largest companies, China has set its sights on creating as many as 50 by the
year 2010, including such rising stars as Shanghai Automotive Industry and appliance-maker Haier.
Deepening concern about US deficits and a possible oil supply shock are weighing on a
world economy that will be driven largely by China during 2006, a panel of leading economists predicted at the World Economic
Forum yesterday.
'This is the year to watch out carefully for the end of the great American spending
binge,' Stephen Roach, chief economist at US bank Morgan Stanley, told the annual meeting of global business and political
leaders.
What a difference a few hours can make! After posting the article "The Great Silver Standoff",
additional research for a new Silver Market update revealed that on the arithmetic chart, silver has in recent days successfully
tested the lower channel line of a fine parallel uptrend channel, and is now in position to break strongly higher, an event
that can be expected to trigger another strong rally in gold.
Timothy Geithner, president of the New York Federal Reserve, on Monday dismissed the view
that the US current account deficit was sustainable, suggesting the risk of a sudden fall in the dollar would grow the longer
the trade gap widened.
In a speech at the Royal Institute of International Affairs in London, Mr Geith-ner
said the problem could not necessarily be expected to solve itself.
"It's the most serious crisis at Ford in modern times," said David Cole, head of the Center for Automotive
Research in Ann Arbor. "I think they view this as a last shot."
The Iranian government has finally developed the ultimate "nuclear" weapon that can swiftly
destroy the financial system underpinning the American Empire. That weapon is the Iranian Oil Bourse slated to open in March
2006. It will be based on a euro-oil-trading mechanism that naturally implies payment for oil in Euro. In economic terms,
this represents a much greater threat to the hegemony of the dollar than Saddam's, because it will allow anyone willing either
to buy or to sell oil for Euro to transact on the exchange, thus circumventing the U.S. dollar altogether. If so, then it
is likely that almost everyone will eagerly adopt this euro oil system:
The U.S. trade deficit is a bigger threat to the domestic economy than either the federal
budget deficit or consumer debt and could lead to “political turmoil,”-billionaire investor Warren Buffett warned.
“Right now, the rest of the world owns $3-trillion more of us than we own of them,” Mr.
Buffett told business students and faculty Tuesday at the University of Nevada, Reno. “In my view, it will create political
turmoil at some point .... Pretty soon, I think there will be a big adjustment,” he said without elaborating.
While the bulk of the Western World's main stream media continues to make pronouncements
about the price of both crude oil and gold continuing to rise as a result of Iran's nuclear aspirations - they have completely
and utterly ignored the stark, dark reality of the currency train wreck [that is empirically only beginning to unfold] right
in front of our eyes.
The New Year has started with a loud bang with global equity markets charging ahead. Investors
worldwide seem to be celebrating the Fed's announcement, which stated that its policy outlook "was becoming considerably less
certain", the number of additional rate hikes to control inflation "probably would not be large" and the future rate decisions
"would depend on the incoming data".
Joseph Schumpeter's 1942 book, Capitalism, Socialism, and Democracy, asked this question in Part 2: "Can Capitalism Survive?" He made this prescient observation regarding the successful
businessman:
A genius in the business office may be, and often
is, unable outside of it to say boo to a goose – both in the drawing room and on the platform.
Also in yesterday's news, Bloomberg reports
that Wall Street will hand out $21.5 billion in bonuses. All that wonderful money! Where does it come from? What does Wall
Street do to earn it? The masters of the universe on Wall Street tell us that they "allocate capital efficiently." They must
be doing a heckuva job allocating capital. We're surprised that there is so much money to be made in "allocating capital."
But we're suspicious. We don't even know what allocating capital is. How is it different from helping the fool part company
with his money? Is it what you do when you entice speculators into Google at 117 times sales and 350 times earnings?
The fundamental reasons gold is rising are numerous and have been discussed over and over
on this site and elsewhere: ultimate store of value, jewelry demand from the Far East, awareness from a new audience due to
the gold ETF, the end of the world, etc. Personally, I subscribe to the theory that gold is still being treated by investors
like any other commodity, which is broadly floating higher on a sea of global liquidity and increasing wealth (while central
banks around the world may serve to undermine it, the world does continue to grow richer).
For the first time since the Great Depression, Americans are spending more than they earn. The savings
rate is negative. This gap has to be filled with "money." The nation's trade deficit was $664 billion in 2004. In 2005, it
rose to $806 billion. And the IMF estimates that it will hit $890 billion this year. These gaps, too, must be filled. Each
deficit ends up in foreigners' hands as purchasing power. In three years time, more dollars are added to the world's supply
than the current price of all the gold ever mined since the beginning of time.
Deflation is a problem that looms over the horizon when the US debt bubble bursts to slow
down the economy. Yet investors are motivated to buy US bonds to lock in current high yields if they expect the Federal Reserve,
the central bank, to cut short-term rates in the near future to stimulate a slowing economy.
I define what I call a "Muddle Through Economy" as an economy that grows below trend.
Note that I used the word growth. I think we are in a Muddle Through Decade. Growth so far this decade has been 2.6%, which
is below the trend of 3.6% since 1950. I think we will be lucky to end the decade with a 2.6% number, as I expect at least
one more recession this decade. I think the following decade could be very strong.
Experience has taught us that if too much money is chasing too few goods, inflation will
be the inevitable result. And as inflation has proven itself to be a costly evil – damaging investment, production and employment
–, great efforts have been taken to design a government controlled money system which shall preserve the value of the currency.
The current method for maintaining the principle of sound money rests on two key factors. Firstly, the conduct of monetary
policy has been transferred to "politically independent" central banks. Politicians' expediency should no longer meddle in
the running of day-to-day's monetary affairs. Secondly, most central banks have been charged with the primary objective of
keeping inflation low; by doing so, low inflation shall not be traded off against growth and employment.
Despite rising inflation in the United States, more accommodative monetary policy in the early months
of 2006 will accelerate US economic growth. This stronger growth will push international oil prices toward US$100 per barrel
by mid-year, causing much higher global inflation and foreign capital flight from the US.
I am pleased to report the inflation monster has been captured and placed in a jar.
This stunning announcement as well as an accompanying video detailing the highlights was
made by the European Central Bank in cooperation with the national central banks of the euro area. Along with the announcement,
the ECB has produced an information kit on inflation entitled "Price stability: why is it important for you?" It is targeted
at young teenagers and teachers in all the official languages of the European Union.
If you read the financial press, and are watching Iraq news, the warnings are quite ominous.
Writes the LATimes: "Iraq's government has sharply raised the price of fuel and other petroleum products this month,
sparking discontent and protests and worrying international observers who say the increases could hurt millions of poor Iraqis
and throw the country into further turmoil."
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.
