A
NEW THREAT ON THE HORIZON: THE QUIET GAME<=
/o:p>
by
Chuck Missler
&=
nbsp;
It is difficult - but essential - to gain a
perspective on the predicament facing the <=
st1:place
w:st=3D"on">United States. We need to
understand the precariousness of the dollar, the impossible debt burden we
collectively face, and the emergent storm clouds on our financial horizon.
First, the mountain of debt we are facing.
President Bush and the current Congress have together authorized and borrow=
ed
more money from foreign governments, banks, companies, and citizens than al=
l of
the previous 42 U.S.=
administrations combined. From 1776 to 2000, the first 224 years of U.S. history, 42 U.S. presidents borrowed a co=
mbined
$1.01 trillion from foreign governments and financial institutions.
In the past four years alone, the Bush Administration has borrowed $1.05
trillion. The Federal debt increases $300 billion each year. In addition, o=
ur
''balance'' of trade - or lack thereof - runs an annualized deficit of $800
billion. This means that the Treasury must now borrow $3 billion per day! T=
otal
U.S.
outstanding debt now exceeds a staggering $8 trillion dollars, of which a l=
arge
majority is owed to foreigners.
The Precarious U.S. Dollar
Two-thirds of world trade is conducted in dollars. Over 70% of central bank=
s'
currency reserves are held in the American currency. The U.S. dollar is the
sole currency used by international institutions such as the International
Monetary Fund (IMF).
This confers on the =
U.S.
a major economic advantage: the ability to run a trade deficit year after y=
ear.
It can do this because foreign countries need dollars to repay their debts =
to
the IMF, to conduct international trade, and to build up their currency
reserves. The U.S.
provides the world with these dollars by buying goods and services produced=
by
foreign countries, but since it does not have a corresponding need for fore=
ign currency, it can sell far fewer goods and services in
return. Thus, the U.=
S.
always spends more than it earns, whereas the rest of the world always earns
more than it spends. This U.S.
trade deficit has now reached extraordinary levels, with the U.S. im=
porting
50% more goods and services than it exports: currently $800 billion annuali=
zed.
Getting a share of this economic free lunch has been one of the motivations
behind establishing the euro. Were the euro to become a reserve currency eq=
ual
to, or perhaps even instead of, the dollar, countries could reduce their do=
llar
holdings while building up their euro savings. E.U. countries would be able=
to
reduce their subsidy to American consumption and other countries would then=
be
subsidizing E.U. consumption instead.
A move away from the dollar towards the euro would have a disastrous effect=
on
the U.S. economy as th=
e U.S. wo=
uld no
longer be able to spend beyond its means. Worse still, the U.S. would have to become a net currency i=
mporter
as foreigners would undoubtedly seek to spend back in the U.S. a =
large
proportion of the estimated three trillion dollars which they currently own.
Furthermore, the U.S=
.
would have to run a trade surplus - for the first time in a century - provi=
ding
the rest of the world with more goods and services than it receives in retu=
rn.
A Crash Ahead?
A rapid and wholesale move to the euro might even lead to a dollar crash as
everyone sought to get rid of some, or all, of their dollars at the same ti=
me.
But that is not an outcome that Europe, Rus=
sia,
and China
would be seeking because of the huge effect it would have on the world econ=
omy.
A ''soft landing'' would appear to be in everyone's interest (except, of
course, Islam's). The problem is that when investors see a downward trend in
the making, there tends to be a stampede for the exits.
The Oil Factor
Sales of oil and natural gas on international markets have been exclusively
denominated in dollars, because originally the U.S.
was the world's leading oil producer - up until the early 1950s, the U.S. ac=
counted
for half or more of the world's annual oil production. The tendency to pric=
e in
dollars was additionally reinforced by the Bretton Woods agreement, which
established the IMF and the World Bank and adopted the dollar as the curren=
cy
for international loans. The vast majority of the world's countries are oil
importers and, since oil is such a crucial commodity - and increasingly so -
the need to pay for it in dollars encourages these countries keep the major=
ity
of their foreign currency reserves in dollars, not only to be able to buy o=
il
directly but also to protect the value of their own currencies from falling
against the dollar.
The fact that oil sales, and loans from the IMF, are dollar denominated also
encourages poorer countries to denominate their exports in dollars, as this
minimizes the risk of losses through any fluctuations in the value of the
dollar. Furthermore, since many of these exports are essential raw materials
which richer countries need to import, their denomination in dollars reinfo=
rces
the need for rich countries to keep their own currency reserves in dollars.
Seventy percent of the world's currency reserves are in dollars. At the moment.
The Quiet Game
While the denomination of oil sales is not a subject that is frequently
discussed in the media, its importance is certainly well understood by
governments. For example, in 1971 President Nixon took the U.S. of=
f the
gold standard and OPEC considered moving away from dollar oil pricing, as
dollars no longer had the guaranteed value they once did. The U.S. response was various secret deals wit=
h Saudi Arabia in
the 1970s to ensure that the world's most important oil exporter stuck with=
the
dollar. And since the Saudis did, OPEC followed suit.
The Iranian Oil Bourse
The Iranian Oil Bourse1 is scheduled to commence
operations on March 20, 2006. This bourse will be a trading exchange whereby
the nations of the world will now have the option of selling and purchasing
their oil in euros rather than dollars. This Bourse will directly compete w=
ith
the two American-owned exchanges: The International Petroleum Exchange (IPE=
) in
London,=
and the
NYMEX (New York Mercantile Exchange). This represents a direct threat to the
supremacy of the U.S. dollar as the world's reserve currency. The availabil=
ity
to shift to non-dollar reserves would create a major structural change in t=
he
global monetary environment and could usher in a traumatic effect on the U.S. ec=
onomy.
Numerous economists have expressed alarm about Iran's
ambitions, saying that ''the impact of the Iran Oil Bourse on the American
dollar - and the U.S.
economy - could be worse than Iran
launching a direct nuclear attack.'' (Some pundits have even suggested that
this could be an additional explanation for why the Islamic republic appear=
s to
be the U.S.'s
next target.)
According to a recent report by Federal Reserve Bank of San Francisco, the dollar's position is
already on the decline in many countries. <=
st1:place
w:st=3D"on">China has officially declared=
that
it will diversify a part of its foreign exchange holdings into oil by build=
ing
a strategic petroleum reserve. Construction of the storage tanks has begun =
but
will take several years to complete.
Other Indicators
The new expansive leader of the Federal Reserve,
''Helicopter Ben'' Benanke, has replaced Alan
Greenspan. The only hope in addressing the mountain of debt we all face wil=
l be
to repay it with cheaper dollars: inflation is virtually a certainty. During
Alan Greenspan's tenure at the Fed, the dollar was reduced in value by half.
More to come, but can it be controlled? It is very significant that the Fed
will now no longer be publishing its report card, the M3 liquidity index, w=
hich
economists have traditionally used to monitor the liquidity of the U.S. Hmm=
.
America<=
/st1:country-region>
has become the world's largest debtor. Who's really in charge? The Bible wa=
rns
us:
The rich ruleth over the poor, and the borrower=
is
servant to the lender. - Proverbs 22:7
Your personal stewardship plans need to maintain
surveillance on the likelihood of serious inflation ahead, and perhaps
worse…
Do your own homework! The welfare of your family will depend on it. =
=