U.S. dollar facing imminent collapse?

U.S. dollar facing imminent collapse?
Fed in bind as Paulsen, Bernanke head to China

http://www.worldnetdaily.com/news/artic ... E_ID=53311

Posted: December 10, 2006
5:38 p.m. Eastern

Jerome R. Corsi
© 2006 WorldNetDaily.com


Even as the stock market is hitting new record highs almost every day, the Federal Reserve and Treasury Department are quietly coordinating a devaluation of the dollar that the Bush administration hopes will be a slow decline rather than a dollar collapse.

This week, in an unusual move, the Bush administration is sending virtually the entire economic "A-team" to visit China for a "strategic economic dialogue" in Beijing Dec. 14 and 15.

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are leading the delegation, along with five other cabinet-level officials, including Secretary of Commerce Carlos Gutierrez. Also in the delegation will be Labor Secretary Elaine Chao, Health and Human Services Secretary Mike Leavitt, Energy Secretary Sam Bodman, and U.S. Trade Representative Susan Schwab.

The Bush administration wants to get China's cooperation in preventing a dollar collapse. That's the conclusion of John Williams, an experienced professional econometrician, who writes the "Shadow Government Statistics" blog.

Williams has re-created M3, a money-supply measure whose data the Federal Reserve simply stopped publishing after issuing a technically worded March 2006 announcement.

Williams reports M3 is currently growing at close to a 9.6 percent rate and trending higher, compared with an 8 percent rate early this year, when the Fed quit reporting the measure.

"The Fed is pumping liquidity into the U.S. economy," Williams told WND, "and the Fed evidently did not want the markets to follow too closely what the Fed was doing with the money supply."

China today now is holding a historically unprecedented $1 trillion in foreign exchange reserves. During the Thanksgiving holiday, an announcement by China that their central bank planned to diversify foreign-exchange holding away from the dollar caused the dollar to drop in value on international currency markets. Since then, the dollar has hit a 20-month low against the euro.

"This was almost an orchestrated announcement," Williams claimed. "Around Thanksgiving the markets were thinly traded. I'm not sure who was playing games there, but the signal was clearly heard."

"You're dealing with mass psychology here," Williams argued. "The central bankers around the world know they are going to take a hit on their dollar holdings. None of the central bankers want to start a dollar panic, but none of the central bankers want to be the last out of the dollar, either."

Williams explained that the Federal Reserve is in a bind.

"Raising rates would kill any chance of avoiding a recession, but in terms of the dollar, we can't raise the rates fast enough when the dollar starts to slip quickly."

Are we experiencing a dollar collapse?

"Not yet," Williams answered. "I believe we're going to have a dollar collapse, but the Fed is going to do its best to slow play the dollar's decline in value, so that it takes a year or two for the dollar value to reach its low point."

Williams explained the risk of collapse the dollar faces:

"There will be a central bank, most probably in Asia, who will start the move away from the dollar and when it happens, you're going to see other central bankers covertly trying to follow. The move will magnify very quickly and it could become a full-fledged panic and a dollar collapse."

The Fed is struggling right now to contain inflation and stimulate economic growth. All the Fed is doing right now with all their grand policy shifts is using a lot of propaganda and market massaging to try to prevent a financial panic."

Recent reports have shown that U.S. gross domestic product growth slowed to 1.6% in the third quarter, the lowest in more than 3 years.

Will a declining dollar help narrow the U.S. trade deficit with China?

"You could take a 30 percent decline in the value of the dollar," Williams argued, "and it wouldn't make much of a dent in our trade deficit with China, not as long as Bush administration trade policy continues to be one-sided in favor of China."

"The Fed is faced with an impossible circumstance with the trade and budget deficits being run by the Bush administration," Williams told WND, "and they are just playing games with the markets and the public by not publishing M3, the broadest measure of money supply and the best indicator we have of long-term activity."

M3 is the broadest measure of the total money in the economy, including checking and savings accounts, cash, time deposits, and money-market funds. Economist Milton Friedman, one of the key economists contributing to the conservative theories that led to the development of "Reaganomics," argued that money supply is a key measure correlated both with economic growth and inflation.

On the bright side, the dollar's strength against the rupee is what's keeping India, Inc. in business and competing successfully against our workers. I read somewhere that if the dollar falls to around 35 rupees, they are out of business. Our detractors have tried to portray American workers as greedy and rich, but the exchange rate and relative buying power is what's really behind much of the contrast between our work forces.

As I have explained before, this is simple math. The dollar is a debt note, not a positive value note. The more debt there is, the more dollars there are. Because the increase in dollars is tied to debt and not positive value, an increase in the number of dollars is necessarily inflationary...

Q: What has happened to the federal debt over the last five years?

A: Just after the 9/11 attacks, the debt stood at a tick over $5.8 trillion. Today it stands at well over $8.6 trillion. That's an increase of almost 50% in five years.

Q: What has happened to the cost of dollar-denominated commodities over that period?

A: Gold was at $295/oz. just after 9/11. Today it's at $627/oz. Silver jumped to $4.60/oz. just after 9/11 and today is at about $13.70. Oil price per barrel was about $27 in Sept. '01 and is over $60 today. What we are seeing is an increase in commodities of between 110% and 150%.

Q: What has happened to the Dow Jones Industrials over that period?

A: The Dow had fallen to just over 8000 immediately following 9/11. Today it stands around 12,300, and increase in value of about 53%. However, that low is artificial because of 9/11. The actual value of the market is better determined by prices just before 9/11, which had dropped to about 9300. That would make for an increase in value of about 32%

Q: How has the dollar fared against the Euro during that period?

A: The dollar was worth 1.08 Euros in late Sept. '01. Today it is worth only .76 Euros, which is a decline of almost 30%. It went from .68 British Pounds to .51 in that same period, a decline of 25%.

So what can we learn from this?

First off, we should see inflation in commodities commensurate with the increase in debt (allowing for some free market issues to drive the price within that general range). It appears that oil, gold and silver are all high (by about a 3:1 margin) relative to the change in dollar value.

We see a stock market that has lost value or at best broken even when adjusted for monetary inflation.

The dollar has actually held up fairly well against the Euro and the Pound Sterling relative to its inflationary devaluation. Of course, this may be due to inflationary issues with those currencies as well.

What this means is that the dollar is just about where it should be on the currency market, but perhaps has a bit more ground to lose (depending on the debt issues of the nations attached to the various competing currencies). We should expect to see the dollar hold steady and begin to improve IF the new Congress holds the line on debt. That's a big if given the makeup of this Congress.

The comparison tells us that commodities are quite high at the moment. Much of this is due to emerging competition in the form of China, which is consuming huge quantities of raw materials and increasing its appetite daily. Even so, the prices seem high by a good 2:1 margin.

Lastly, our stock markets are quite moribund by any measure. The apparent recovery since 9/11 is as much a smoke and mirrors act as was the alleged market boom under Clinton, which turned out to be nothing more than an inflationary bubble that went unrecognized as such due to the masked inflationary cycle cause by rapidly falling consumer prices arising from decreased manufacturing costs and associated tariffs under NAFTA and GATT.

In the final analysis, the sinking dollar is a long overdue reaction to a rapid increase in federal debt due to the costs of the War on Terror and other spending increases. Now that the spending levels appear to have somewhat stabilized, we can expect to see the dollar increase in value over the next several years, though we may yet have a "panic trough" in the immediate future. I would be bullish on the dollar long term, and I would certainly look to pick up dollars in the event of any collapse greater than another 10-15%. I would keep an eye on the stock market. The fact that there has been no real value increase over the last five years probably means that there is hidden value in the safer industrials, and particularly in things like utilities. I would cautiously buy commodities as a short-term hedge against a dollar trough, but I would dump them quickly in the event that the dollar tanks, which will be a short-lived scare rather than a permanent reality.

One last caveat: The dollar is actually quite sound relative to the debt load, but that doesn't mean that everyone perceives it in the correct manner. A perception of weakness or geopolitical machinations could possibly lead to an abandonment of the dollar by foreign governments, such as the oil-rich Arab countries. A wholesale abandonment of the dollar could lead to a glut that would depress the dollar value for a considerable period of time. As always, be prepared to modify the results of your mathematical models with a healthy comprehension of the impact of geopolitical events.

A short term panic trough would be enough for me as long as the rupee is involved (can you guess I'm an IT person?).