January 05, 2010

The Big Black Hole in the Dollar’s Future

SOURCE: Strategic Culture Foundation, Russia

28.12.2009
F. William ENGDAHL (Germany)

"According to well-placed sources in Saudi Arabia, there have been secret meetings in recent months between the major Arab oil producers, including Saudi Arabia, and reportedly also Russia, with the leading
oil consumer countries including two of the three largest oil import
countries―China and Japan. Their project is to quietly create the basis to end a 65-year long “iron rule” of selling oil only in US dollars. That would be catastrophic for the dollar role.
"


For months the US Government has insisted that the worst of the “recession” is nearing an end and that “green shoots” of recovery are at hand. The reality is opposite. The financial crisis that began in August 2007 in the small “sub-prime” or high-risk segment of the $20 trillion mortgage debt market is now spreading, lawfully, to the “prime” or high-quality segment. The economy of the world’s sole Superpower is coming to resemble more than of the Roman Empire in the fourth Century as it collapsed into anarchy, debt and chaos.

Nations of the world are taking steps to move away from dollar dependency. China, Russia, Brazil, Kazakhstan are calling for a new reserve currency. China is quietly making bilateral currency swap agreements with Asian trade partners as well as Latin American and former Soviet Union countries. The major trade currency of the China-ASEAN Free Trade Area will not likely be the dollar. In Latin America the ALBA countries are switching to sucre as a trade currency instead of dollar starting from January 2010. MERCOSUR is going to refuse dollar in foreign trade in 2011.

The worst is yet to come for the world reserve currency.

The US economic reality
The reality of the US economy is opposite the propaganda of Wall Street.

In real economic terms, the US Economy is already in a Depression. The US economy is in its worst economic contraction since the first down wave of the Great Depression in the early 1930s.

As one former Reagan Treasury official recently stated, “There is no economy left to recover. The US manufacturing economy was lost to off-shoring and free trade ideology. It was replaced by a mythical ‘New Economy’ based on services. It was fed by the Federal Reserve's artificially low interest rates, which produced a real estate bubble, and by "free market" financial deregulation, which unleashed financial gangsters to new heights of debt leverage and fraudulent financial products.”

When that “virtual” economy collapsed, Americans' wealth invested in their real estate, pensions, and savings collapsed. The debt economy caused Americans to leverage their assets. They refinanced their homes and spent the equity. They spent their limit on numerous credit cards. They worked as many jobs as they could find. Debt expansion and multiple family incomes kept the US economy going over the past two decades.

Now suddenly Americans can't borrow in order to spend. They are over their heads in debt. Jobs are disappearing. America's consumer economy, approximately 70% of GDP, is dead. Those Americans who still have jobs are saving against the prospect of job loss. Millions are homeless. Fully 14% of all home mortgages are either in default or at least one payment behind, an historic record. Trend is worsening. Some have moved in with family and friends; others are living in tent cities.

The current economic downturn is far from over. This downturn will continue to deteriorate, be extremely protracted, extremely deep and not respond to traditional economic stimulus. The US economy is caught in a classic Third World “debt trap.”

The US economy suffers from severe underlying structural problems tied to consumer debt relative to income. Households cannot keep up with inflation and no longer can rely on excessive debt expansion for meeting short-falls in maintaining living standards. The structural issues are not being addressed by Obama stimulus programs. They cannot be addressed without a significant fundamental change in government economic and trade policies, which under the best of circumstances still would drag out economic depression for many years to come. Since 2007 US consumers have been saving to pay down their huge credit card, auto and home debts. They are not and will not consume for a long time. In the past 12 months they have reduced debt by a staggering $2 trillion. That has reduced the economic growth seriously and is the driver of the depression. There is no choice.

If we calculate data in absence of the official manipulation or “cooking the books”, the real estimate of unemployment is above 22% today, not the official 10%. The GDP is declining at the most severe rate since the Second World War and rapidly nearing levels of the Great Depression.

US manufacturing output is collapsing. Household debt levels are at the highest in US history over 300% of disposable income. Corporate debt is equally high. Government debt is at a record and soon to reach 100% of GDP. The United States economy is caught in a debt trap of its own making.

Prospects for the dollar

Since 1985 when the United States became a net debtor country for the first time since the First World War, the United States has become the world’s largest net debtor country. As of January 2009, America's net international investment position was a negative $3.47 trillion, the Commerce Department reported. That represents the difference between the value of U.S. assets owned by foreigners ($23.36 trillion) and the value of foreign assets owned by Americans ($19.89 trillion). The USA as a single entity, public and private owes the world $3.47 trillion. Much of that is to China as well as Japan and Russia. The USA is a military superpower today but an economic dwarf. During 2008 alone the USA net debt grew by $1.33 trillion, or 62%. The tendency is not getting better as bank bailout and other economic coats soar. Foreigners now hold nearly 50% of the federal government's publicly held debt. If foreign investors significantly reduce their purchase of future US Treasury debt securities, US interest rates will soar and the dollar collapse. America's net debtor status with foreigners is at the highest level in US history.

The major source of dollar support has come from trade surplus countries with the USA whose central banks have little place to invest those dollars as safe as in US Government debt. The largest dollar debt buyers in the recent past for different reasons have been the central banks of Russia, Japan and, far ahead of all others—The Peoples Bank of China.

The United States economic model of trade and current account deficits is not sustainable. No one can say when the dollar will fall further, but it must fall in the months ahead. Only a dramatic and unexpected war might conceivably buy a little more time for the dollar. Even that is not certain so great are the deficits.

The United States today is caught in a deadly debt trap much as Argentina or other Third World countries were during the 1980’s. But that is not all. The prospects for Federal US Government deficits going forward are extremely negative as well.

Conclusion
The US government's budget deficit has jumped from $455 billion in 2008 to $2,000 billion this year, with another $2,000 billion for 2010. Obama has just intensified America's expensive war in Afghanistan and initiated a new war in Pakistan. There is no way for these deficits to be financed except by printing money.

The US government's budget is 50% in deficit. That means half of every dollar the federal government spends must be borrowed or printed. But the world is growing unwilling to lend $2 trillion annually to Washington.

America's largest creditor, China, is warning Washington to protect China's investment in US debt and discussing a new reserve currency to replace the dollar before it collapses. China is spending down its holdings of US dollars by acquiring gold and stocks of raw materials.

According to well-placed sources in Saudi Arabia, there have been secret meetings in recent months between the major Arab oil producers, including Saudi Arabia, and reportedly also Russia, with the leading oil consumer countries including two of the three largest oil import countries―China and Japan. Their project is to quietly create the basis to end a 65-year long “iron rule” of selling oil only in US dollars. That would be catastrophic for the dollar role.

Nothing in Obama's economic policy is directed at saving the US dollar. Obama's policy, like Bush's before him, is controlled by Wall Street and the arms industries. The US economy is going into severe depression and the dollar with it unless there is a new world war, God forbid. ___________________________________________________________________________

F. William Engdahl is author of the best-selling book on oil and geopolitics, A Century of War: Anglo-American Oil Politics and the New World Order, has been published in eight languages. He is one of the more widely discussed analysts of current political and economic developments, and his articles and analyses have appeared in numerous newspapers and magazines and well-known international websites. In addition to discussing oil geopolitics and energy issues, he has written on issues of agriculture, GATT, WTO, IMF, energy, politics and economics for more than 30 years, beginning the first oil shock and world grain crisis in the early 1970's. His book, ‘Seeds of Destruction: The Hidden Agenda of Genetic Manipulation documents the attempt to control world food supply and populations. He is a winner of the ‘Project Censored Award’ for Top Censored Stories for 2007-08.

After a degree in politics from Princeton University (USA), and graduate study in comparative economics at the University of Stockholm, he worked as an independent economist and research journalist in New York and later in Europe. He is a Research Associate of Michel Chossudovsky’s well-respected Centre for Research on Globalization (www.globalresearch.ca), and a Visiting Guest Professor at the Beijing University of Chemical Technology. Engdahl contributes regularly to a number of international publications on economics and political affairs.

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