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Crafty_Dog:
My doggy nose tells me it is time for the US dollar to have its own thread:

This from today's WSJ

y JUDY SHELTON
Unprecedented spending, unending fiscal deficits, unconscionable accumulations of government debt: These are the trends that are shaping America's financial future. And since loose monetary policy and a weak U.S. dollar are part of the mix, apparently, it's no wonder people around the world are searching for an alternative form of money in which to calculate and preserve their own wealth.

It may be too soon to dismiss the dollar as an utterly debauched currency. It still is the most used for international transactions and constitutes over 60% of other countries' official foreign-exchange reserves. But the reputation of our nation's money is being severely compromised.

Funny how words normally used to address issues of morality come to the fore when judging the qualities of the dollar. Perhaps it's because the U.S. has long represented the virtues of democratic capitalism. To be "sound as a dollar" is to be deemed trustworthy, dependable, and in good working condition.

It used to mean all that, anyway. But as the dollar is increasingly perceived as the default mechanism for out-of-control government spending, its role as a reliable standard of value is destined to fade. Who wants to accumulate assets denominated in a shrinking unit of account? Excess government spending leads to inflation, and inflation plays dollar savers for patsies—both at home and abroad.

A return to sound financial principles in Washington, D.C., would signal that America still believes it can restore the integrity of the dollar and provide leadership for the global economy. But for all the talk from the Obama administration about the need to exert fiscal discipline—the president's 10-year federal budget is subtitled "A New Era of Responsibility: Renewing America's Promise"—the projected budget numbers anticipate a permanent pattern of deficit spending and vastly higher levels of outstanding federal debt.

Even with the optimistic economic assumptions implicit in the Obama administration's budget, it's a mathematical impossibility to reduce debt if you continue to spend more than you take in. Mr. Obama promises to lower the deficit from its current 9.9% of gross domestic product to an average 4.8% of GDP for the years 2010-2014, and an average 4% of GDP for the years 2015-2019. All of this presupposes no unforeseen expenditures such as a second "stimulus" package or additional costs related to health-care reform. But even if the deficit shrinks as a percentage of GDP, it's still a deficit. It adds to the amount of our nation's outstanding indebtedness, which reflects the cumulative total of annual budget deficits.

By the end of 2019, according to the administration's budget numbers, our federal debt will reach $23.3 trillion—as compared to $11.9 trillion today. To put it in perspective: U.S. federal debt was equal to 61.4% of GDP in 1999; it grew to 70.2% of GDP in 2008 (under the Bush administration); it will climb to an estimated 90.4% this year and touch the 100% mark in 2011, after which the projected federal debt will continue to equal or exceed our nation's entire annual economic output through 2019.

The U.S. is thus slated to enter the ranks of those countries—Zimbabwe, Japan, Lebanon, Singapore, Jamaica, Italy—with the highest government debt-to-GDP ratio (which measures the debt burden against a nation's capacity to generate sufficient wealth to repay its creditors). In 2008, the U.S. ranked 23rd on the list—crossing the 100% threshold vaults our nation into seventh place.

If you were a foreign government, would you want to increase your holdings of Treasury securities knowing the U.S. government has no plans to balance its budget during the next decade, let alone achieve a surplus?

In the European Union, countries wishing to adopt the euro must first limit government debt to 60% of GDP. It's the reference criterion for demonstrating "soundness and sustainability of public finances." Politicians find it all too tempting to print money—something the Europeans have understood since the days of the Weimar Republic—and excessive government borrowing poses a threat to monetary stability.

Valuable lessons can also be drawn from Japan's unsuccessful experiment with quantitative easing in the aftermath of its ruptured 1980s bubble economy. The Bank of Japan's desperate efforts to fight deflation through a zero-interest rate policy aimed at bailing out zombie companies, along with massive budget deficit spending, only contributed to a lost decade of stagnant growth. Japan's government debt-to-GDP ratio escalated to more than 170% now from 65% in 1990. Over the same period, the yen's use as an international reserve currency—it clings to fourth place behind the dollar, euro and pound sterling—declined from comprising 10.2% of official foreign-exchange reserves to 3.3% today.

The U.S. has long served as the world's "indispensable nation" and the dollar's primary role in the global economy has likewise seemed to testify to American exceptionalism. But the passivity in Washington toward our dismal fiscal future, and its inevitable toll on U.S. economic influence, suggests that American global leadership is no longer a priority and that America's money cannot be trusted.

If money is a moral contract between government and its citizens, we are being violated. The rest of the world, meanwhile, simply wants to avoid being duped. That is why China and Russia—large holders of dollars—are angling to invent some new kind of global currency for denominating reserve assets. It's why oil-producing Gulf States are fretting over whether to continue pricing energy exports in depreciated dollars. It's why central banks around the world are dumping dollars in favor of alternative currencies, even as reduced global demand exacerbates the dollar's decline. Until the U.S. sends convincing signals that it believes in a strong dollar—mere rhetorical assertions ring hollow—the world has little reason to hold dollar-denominated securities.

Sadly, due to our fiscal quagmire, the Federal Reserve may be forced to raise interest rates as a sop to attract foreign capital even if it hurts our domestic economy. Unfortunately, that's the price of having already succumbed to symbiotic fiscal and monetary policy. If we could forge a genuine commitment to private-sector economic growth by reducing taxes, and at the same time significantly cut future spending, it might be possible to turn things around. Under President Reagan in the 1980s, Fed Chairman Paul Volcker slashed inflation and strengthened the dollar by dramatically tightening credit. Though it was a painful process, the economy ultimately boomed.

Whether the U.S. can once more summon the resolve to address its problems is an open question. But the world's growing dollar disdain conveys a message: Issuing more promissory notes is not the way to renew America's promise.

Ms. Shelton, an economist, is author of "Money Meltdown: Restoring Order to the Global Currency System" (Free Press, 1994).

G M:
http://www.nypost.com/f/print/news/business/dollar_loses_reserve_status_to_yen_hFyfwvpBW1YYLykSJwTTEL

Updated: Tue., Oct. 13, 2009, 3:16 AM 
Dollar loses reserve status to yen & euro
By PAUL THARP

Last Updated: 3:16 AM, October 13, 2009

Posted: 1:44 AM, October 13, 2009

Ben Bernanke's dollar crisis went into a wider mode yesterday as the greenback was shockingly upstaged by the euro and yen, both of which can lay claim to the world title as the currency favored by central banks as their reserve currency.

Over the last three months, banks put 63 percent of their new cash into euros and yen -- not the greenbacks -- a nearly complete reversal of the dollar's onetime dominance for reserves, according to Barclays Capital. The dollar's share of new cash in the central banks was down to 37 percent -- compared with two-thirds a decade ago.

Currently, dollars account for about 62 percent of the currency reserve at central banks -- the lowest on record, said the International Monetary Fund.

Bernanke could go down in economic history as the man who killed the greenback on the operating table.

After printing up trillions of new dollars and new bonds to stimulate the US economy, the Federal Reserve chief is now boxed into a corner battling two separate monsters that could devour the economy -- ravenous inflation on one hand, and a perilous recession on the other.

"He's in a crisis worse than the meltdown ever was," said Peter Schiff, president of Euro Pacific Capital. "I fear that he could be the Fed chairman who brought down the whole thing."

Investors and central banks are snubbing dollars because the greenback is kept too weak by zero interest rates and a flood of greenbacks in the global economy.

They grumble that they've loaned the US record amounts to cover its mounting debt, but are getting paid back by a currency that's worth 10 percent less in the past three months alone. In a decade, it's down nearly one-third.

Yesterday, the dollar had a mixed performance, falling slightly against the British pound to $1.5801 from $1.5846 Friday, but rising against the euro to $1.4779 from $1.4709 and against the yen to 89.85 yen from 89.78.

Economists believe the market rebellion against the dollar will spread until Bernanke starts raising interest rates from around zero to the high single digits, and pulls back the flood of currency spewed from US printing presses.

"That's a cure, but it's also going to stifle any US economic growth," said Schiff. "The economy is addicted to the cheap interest and liquidity."

Economists warn that a jump in rates will clobber stocks and cripple the already stalled housing market.

"Bernanke's other choice is to keep rates at zero, print even more money and sell more debt, but we'll see triple-digit inflation that could collapse the economy as we know it.

"The stimulus is what's toxic -- we're poisoning ourselves and the global economy with it."

DougMacG:
Luskin:  "obviously, a currency undergoing inflation is worth less than a currency not undergoing inflation"

'Inflation' is the creation of the excess money.  Price increases are a symptom likely to follow.  So is devaluation.  'Decline is a choice.'  Our reckless policies were enabled by our fading, privileged status as the world currency.  Unlike third world countries, our debt is in our own currency.  Devalue the currency and you devalue the debt.   - Doug
----

http://www.smartmoney.com/investing/economy/the-dollar-s-fall-deal-with-it/

The Dollar's Fall: Deal With It

The dramatic recent fall of the value of the U.S. dollar grabs headlines every day, even as the U.S. stock market surges to new recovery highs. People are talking about a "dollar crisis," and it's not just the usual rant-and-rave topic on CNBC. There are serious hints from government authorities around the globe that maybe we should think about dethroning the U.S. dollar as the "reserve currency" held by the world's central banks, and maybe global markets like oil should stop being priced in dollars.

There are some currencies that are as weak as the dollar now, such as the British pound. And there are some that are weaker, such as the Malaysian ringgit. But against a basket of the world's major currencies, the dollar has fallen 15% in just seven months. That's a big move in any market, but for a currency it's practically a crash. If it falls another 6%, it will make historic all-time lows.

You'd think with all this going on, officials at the U.S. Treasury would be running around in a flat-out panic. But they're not. This week I met in Washington with a group of the most senior men at Treasury (please forgive me if I don't name names), and I was surprised to learn that they are not terribly worried.

Here's why.

First, they think that the 15% decline in the dollar is actually a sign of economic strength. They point out, quite correctly, that the value of the dollar surged during the recent credit crisis, as investors around the world suddenly craved the safety of dollar liquidity. At the most, the dollar soared 24%, reaching its top on exactly the same day last March that the stock market made its bottom.

That puts the 15% drop in context. And it also helps to explain why foreign governments are suddenly so interested in dropping their dependency on the U.S. dollar. It's not so much because the dollar is weak. It's because the credit crisis revealed that the dollar is intolerably unique.

By that I mean that when the world economy came off the rails last year, everyone in the world needed dollars — not pounds, not euros, not yen, not yuan, not ringgits — because the U.S. dollar is the de facto unit of global trading and investment. Why should the economies of the world be so dependent on a single nation's currency?

So while it may feel like a blow to our national prestige to have the dollar be just another currency, that's probably inevitable — and probably all for the best. It's in America's interest to live in a world more resilient to credit shocks than the dollar-dominated world turned out to be.

Another reason the Treasury isn't in a twist about the dollar is that they recognize there is nothing they can do about it. Oh, sure, Secretary Tim Geithner could give a speech or two about his "strong dollar policy," for all the good it would do, which would be precisely none. By the way, when I visited Treasury, nobody even mentioned the expression "strong dollar."

The reality is -- and the Treasury knows this -- that it's the Federal Reserve that ultimately determines the value of the dollar. That's because the Fed's monetary policies are what determines inflation —and obviously, a currency undergoing inflation is worth less than a currency not undergoing inflation. So if you want a strong dollar, write a letter to Fed Chairman Ben Bernanke, not Geithner.

There is one thing that the Treasury could do to support the dollar. But what I heard this week in Washington convinces me that they aren't going to do it. They are going to do the exact opposite.

What I mean is that the Treasury is going to every diplomatic means at its disposal to get countries like China to make their currencies more valuable vs. the dollar. Rightly or wrongly, the Obama administration's Treasury believes — exactly as the Bush administration's Treasury did — that China, and other giant exporting nations manipulate their currencies, to keep them cheap so that their exports will be cheap on world markets.

U.S. consumers benefit from cheap foreign goods at Wal-Mart. But U.S. manufacturers can't compete with the foreign manufacturers that make those cheap goods. And U.S. manufacturers make bigger political contributions than U.S. consumers. So the Treasury, naturally, is committed to getting governments like China to effectively raise their prices by appreciating their currencies.

Now when Treasury officials talk about this, they don't admit that they're trying to get China to stop manipulating its currency lower and start manipulating it higher. Instead, they say they want China to stop manipulating it altogether, on the theory that when the yuan floats freely on world markets, it will inevitably move higher.

Maybe it will and maybe it won't. But there's one inescapable truth here — at least when it comes to the Chinese yuan and several other exporting nations' currencies: They want the value of the dollar to be lower. There's no way around it. If you want the yuan to be higher relative to the dollar, then you necessarily want the dollar to be lower relative to the yuan.

So let's put it all together. I'm not worried that there's going to be some kind of "dollar crisis." But all the facts do point to a lower dollar.

First, if the Fed ultimately controls the dollar's value, then the dollar is going lower — with interest rates at zero for as far as the eye can see, inflation is inevitable.

Second, if the dollar gets stronger during times of credit stress, the dollar is going lower — because global credit markets are recovering, and getting stronger every day.

Third, the Treasury will be actively pursuing diplomacy to get China and other exporters to strengthen their currencies, so the dollar is going lower.

Crafty_Dog:
Doug et al:

No criticism for having posted that, but that has got to be one of the most specious and stupid pieces I have read in quite some time. :lol:

Marc

G M:
October 16, 2009
http://www.europac.net/externalframeset.asp?from=home&id=17446&type=schiff

Ignorance Is Bliss
 

While all the talk at present is about economic corners turned and markets charging ahead, no one is paying much notice to an American economy deteriorating before our eyes. These myopic commentators seem to be simply moving past the now almost-universally held conclusion that before the crash of 2008, our economy was on an unsustainable course. If these imbalances had been corrected, then perhaps I too would be joining in the euphoria. But evidence abounds that we have not veered at all from that dangerous path.

Last week, the Bureau of Economic Analysis reported that consumer spending as a percentage of U.S. GDP has risen to 71%, a post-World War II record. This level is notably higher than other wealthy industrialized countries, and vastly higher than the levels sustained by China and other emerging economies. At the same time, our industrial output is contracting, our trade deficit is expanding once again (after contracting earlier in the year), and our savings rate is plummeting (after an early year surge).

The data confirms that government stimuli are worsening the structural imbalances underlying our economy. The recent ‘rebound’ in GDP is not resulting from increased economic output, but merely from the fact that we are borrowing more than ever. That is precisely how we got ourselves into this mess. An economy cannot grow indefinitely by borrowing more than it produces. Not only is such a course untenable, but the added debt ensures a deeper recession when the bills come due.

This soon-to-be-called depression will not end until the pendulum of consumer spending habits swings violently in the other direction. This will be a jarring change, but it is the splash of cold water that we need to return our economy to viability. I believe that consumer spending as a share of GDP will need to temporarily contract to roughly 50% of GDP, before eventually moving toward its historic mean of 65%. Such a move would indicate a restoration of our personal savings, a decline in borrowing and trade deficits, and an increased industrial output. That would be a real recovery.

In the meantime, the higher the spending percentage climbs, the more painful the ultimate decline becomes.

Consumers and governments must spend less so their savings can be made available to businesses for capital investments. Businesses, in turn, will produce more products and employ more people – increasing domestic prosperity. However, rather than allowing a painful cure to return our economy to health, the government prefers to numb the voting public with a toxic saline-drip of deficit spending and cheap money.

The primary factor that enables our government to peddle economic snake oil is the dollar’s unique role as the world’s reserve currency, and our creditors’ willingness to preserve its status. By buying up dollars and loaning them back to us through Treasury debt, productive countries give American politicians carte blanche to play Santa Claus.

Ironically, as foreign governments finance our spending spree, they are simultaneously scolding us for our low savings rate. At the recent G20 meeting in Pittsburgh, all agreed – including President Obama – that resolving the global economic imbalances was a top priority. By definition, this would require Americans to spend less and save more. However, with foreign central banks continuing to buy our debt, the President has shown no political will to encourage this change.

Normally, if politicians run up the government deficit, voters soon suffer the unpleasant consequences of higher inflation and rising interest rates. Yet, if foreign central banks keep supplying the funds, these consequences are indefinitely postponed. As a result, there is no need for American politicians to ever make the tough choices required to solve our problems.

Instead, the burden may fall squarely on the citizens of those governments doing all the lending. The conflict is that within the creditor states, a vocal minority actually benefits from this subsidy (owners of Chinese exporters, for example) while the overwhelming majority fails to make the connection. Thus, foreign politicians have the same incentives as ours to keep playing the game.

The bottom line is that foreign governments can lecture us all they want about the need for prudence but if they keep lending, we’ll keep spending. Any parent knows that if you give your child a curfew yet never impose any penalties when it’s violated, it will not be respected. My gut feeling is that foreign governments are tiring of our conduct and on the verge of finally imposing some discipline. That means the dollar’s days as the world’s reserve currency are numbered, and the days of American austerity are about to begin.

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