Sour Grapes
Of course we're Fair and Balanced!


Economic gloom and doom

I've been reading more and more and hearing more and more expressions of concern over the possibility of an economic disaster in the short term in the US. I'm no economist and know next to nothing about the credentials of W Joseph Stroupe, but I found his opinion piece in Asia Times on 26 November to be quite an interesting read. His heavy reliance on the metaphor of the collapse of the World Trade Center towers doesn't strike me as particularly appropriate or enlightening, but he's still worth reading, I think [via Dave Farber's IP list].

... [T]raditional international support for the dollar and the US government's foreign and economic policies is beginning to waver. Why? Because al-Qaeda has lighted a fire of sorts in the vicinity of the dollar framework. It has succeeded in instigating the US to take economic and foreign policy measures that have resulted in a loosening of the firm "girders" of international support for dollar and US policies. Al-Qaeda has indirectly lit the fires of controversy over the rightfulness and permanence, and even the desirability, of continued US global dominance in the diplomatic, economic and military spheres.

Now that fire is raging, and ferociously eating into the girders. Controversial and ill-advised unilateral US economic and foreign policies since September 11 are only fueling that fire. In the immediate aftermath of the re-election of President George W Bush, international support for the dollar and for related US economic and foreign policies is noticeably weakening, at a time when it is most needed to support an unprecedented and mushrooming mountain load of debt. Recently, voices from within the government of Norway have called for a switch from the dollar toward the euro for international petro-transactions. The governor of the Bank of Japan has recently stated that having the dollar as the sole global currency is a marked disadvantage and danger, and recommended moving toward adopting the euro as a global currency alongside the dollar. The appetite of the big Asian economies to continue buying dollar assets is waning — last month the US barely achieved the $60 billion of foreign cash inflow required each month to keep it afloat. Hence the possibility of a Twin Towers-like vertical collapse of the US economy is becoming greater, not lesser.

The following highlight the extent of the mounting debt and the risk involved:

  • The total US public national debt now exceeds $7 trillion.
  • When Social Security, Medicare, Medicaid, military and government pensions are added in, the total national debt exceeds $51 trillion, according to Fortune magazine - that's nearly five times the gross domestic product (GDP) .
  • The current year's deficit alone approaches $1 trillion when you add the off-budget items.
  • Derivatives (highly leveraged and enormously risky instruments such as interest-rate futures, options and swaps) now total $180 trillion, 17 times the GDP. Warren Buffet calls derivatives "instruments of mass destruction". Many financial institutions have become highly invested in derivatives. Government-sponsored enterprises such as Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corp) use derivatives heavily. Because of the inherent nature of derivatives, these instruments and those using them are extremely sensitive even to small and moderate interest-rate increases.
  • The total US consumer debt is more than $8 trillion....

Is international support for the dollar and for US policies eroding? Yes, it most certainly is. A powerful case can be made that it has been US policies and actions since September 11 that have resulted in a powerful upswing in terrorism worldwide along with an equally powerful elevation in Middle East instability resulting in sustained crude oil price hike and a resulting dollar decline, both of which are threatening to render serious damage to the big Asian economies. Firm international support for the dollar is certainly flagging. The largest Asian central banks have gone on record that they are curbing their purchases of US debt. And they are also diversifying their huge reserves, steadily moving away from the dollar. The risks have simply become too many and too serious.

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