Global Report
The Global US Dollar Showdown
William (Bill)
Buckler
Captain of The
Privateer
Oct 24, 2007
Extracted
from the Late October Issue of Bill Buckler's "Global Report"
The October 19 meeting of the G-7 Finance Ministers and Central
Bankers in Washington which takes place in the wings of the IMF/World
Bank meetings stands as one of the pivotal post WW II meetings.
The European Union appears to have had its fill of false American
protestations to the effect that the US has a "strong
Dollar policy". The US has had no such policy for a
long time. The US Dollar has been falling since early 2002 and
the Bush Administration has done nothing to support it.
The Word from Europe is "Extreme":
On October 15, the President
of the European Central Bank came out and said that he was paying
"great attention" to American statements in
support of a "strong US Dollar". The previous
week he had said that he was paying "extreme attention".
This is not so "coded" speech to the effect that
the US Dollar is in danger of losing EU support.
A Matter of Balance - A Matter of
Scale:
Over the past six years, Europe
has added jobs at a faster rate than has the US. It has had a
much lower budget deficit than the United States and is now posting
higher productivity gains and a $US 3 Billion annual trade surplus
as well as a global current account surplus. The US stands with
a current account deficit of $US 860 Billion annually, about
6 percent of GDP. It is the US which is out of balance with the
world, not Europe.
The Bernanke Fed's recent interest
rates cuts while the US Dollar hovered near all time historical
lows shows that the international value of the US Dollar is today
only being held up by the courtesy of others - mainly Europe.
Japan is not helping while it holds it official interest rates
at 0.5 percent and fosters the "carry trade". China
is holding down its currency.
The Importance of True Global Scaling:
The European Union (EU) stands
with a $US 16 TRILLION plus economy and is the largest trading
bloc in the world accounting for nearly a third of the global
economy. The $US 13.8 TRILLION US economy accounts for 27 percent,
Japan 9 percent and China less than 6 percent. Europe is the
creditor nation, the US is the debtor nation. Unless this fact
is kept firmly in mind, the events surrounding the G-7 meeting
which starts on October 19 will, on the surface, not make any
sense at all. The US, of course, will maintain the facade that
it is still the number one in the world, at least for internal
consumption. The Europeans will see straight through this as
empty and hollow blustering. What the EU wants to see is direct
and concrete US actions to rein in its ongoing internal credit
expansion.
The US wants to reaccelerate
that same credit expansion. There is a huge collision ahead.
Listen to the US Dollar - TIC, T-I-C:
August was the turn of the
tide. The latest US monthly net TIC (Treasury International Capital)
flows include all non-market flows, short-term securities and
changes in banks' US Dollar holdings. This measure of US net
foreign capital outflow(!) was $US 163 Billion in August compared
with an inflow of $US 94.3 Billion in July. This is a net turnaround
in the money flows across US borders of $US 257 Billion! This
is what The Privateer has analysed and forecast would
happen if the US continued on its present course. The fact that
this outflow is now happening is, of course, to be seen by the
huge fall in the international value of the US Dollar as well
as the global increases in US Dollar commodity prices. The US
Dollar is now falling against most currencies, against most global
commodities and against Gold.
The Data of this US Turn is Drastic:
The August US TIC flow compares
with the $US 57.59 Billion trade deficit during the month as
reported last week by the Commerce Department. Foreign official
institutions such as Central Banks sold a net $US 29.7 Billion
of Treasuries, up from net sales of $US 6.9 Billion during the
previous month.
For US equities, net foreign
sales totalled $US 40.6 Billion in August, compared with purchases
of $US 21.2 Billion the previous month. For US corporate bonds,
net foreign sales were $US 1.2 Billion in August versus purchases
totalling $US 4.5 Billion in the previous month. Net foreign
sales of long maturity securities accelerated to $US 85.5 Billion
in August, following sales of $US 2.7 Billion in July, according
to the US Treasury Department report. Foreign official holdings
of US Treasury bills, notes and bonds fell to $US 1.428 TRILLION
in August from $US 1.453 TRILLION in July.
Japan remained the largest
holder of US Treasury securities, though its holdings fell to
$US 585.6 Billion in August from $US 610.4 Billion. China was
still the second largest world holder of US Treasuries. Its holdings
declined to $US 400.2 Billion from $US 409.0 Billion. Great Britain
remained in third place, with holdings increasing to $US 244.0
Billion from $US 210.6 Billion. The US has to borrow $US 2.1
Billion a day to finance its huge trade gap. But the money outflows
from the US have begun. The US cannot even gain the funds internationally
to cover for its own monthly trade deficits. Something has to
give. The main item which is "giving" and will "give"
more is the international value of the US Dollar.
Washington - October 19, 2007:
As he prepares to host the
G-7 Finance Ministers and Central Bankers in Washington on October
19, US Treasury Secretary Paulson has had his ability to fight
back undermined. He cannot point to a strong US economy as mortgage
defaults and foreclosures roll like a threshing machine across
the US economy. He cannot point to a "strong US Dollar"
as its fall in the 12 months through September has caused US
import prices to increased by 5.2 percent. Over the past year,
US producer prices rose 4.4 percent, compared with a 2.2 percent
rise in the 12 months through August. He cannot point towards
US corporate earnings, as S&P 500 earnings estimates have
dropped significantly since the beginning of the quarter. In
the aggregate, US corporate earnings are now expected to have
increased only 0.7 percent during the third quarter. He had also
better not call attention to either the Dow or the S&P 500
as good places to invest. The US "price to book ratio"
of the S&P 500 index is now at 4.04 - compared with 1.73
in 1987.
Have NO doubts whatsoever.
The other G-7 Finance Ministers and Central Bankers have already
looked at all the numbers that you have read on this page. They
all know that the US cannot handle this.
The other G-7 Finance Ministers
and Central Bankers know that the US cannot keep doing what it
has done over recent decades. A continuation will inescapably
lead to a massive fall in the US Dollar.
That is why THIS G-7 meeting
in Washington on October 19 is of true world changing importance.
Resetting - A Subprime US or a US
Foreclosure:
Geo-monetarily as well as geo-financially,
the US is now, in principle, in the same position as any American
who has had a subprime loan at low teaser interest rates for
some years. In the case of the US, the "subprime" loan
goes back decades during which the ever climbing debts owed were
easy to carry because of the very low interest rates. But now,
these low international interest rates which the US has had to
pay are going to be reset at much higher rates. Either that,
or as the economic inverse of same, the US Dollar is set to fall
massively if the international interest rates the US pays are
not raised drastically.
There is only one alternative
to this. It is that the US as the borrower, and the other G-7
members as the lenders, sit down at their Washington meeting
and jointly agree to a bail-out plan for the US. This will in
the first instance require a real currency swap from the EU,
Japan and others (perhaps with China participating) of gargantuan
proportions. A currency swap at this level, the Central Bank
level, is essentially a swap of two currencies with the US Treasury
getting a huge sum of Euros from the ECB and other Central Banks
and the ECB (and the other Central Banks) getting a matching
sum of US Dollars. The US Treasury signs up for its side of this
swap, in effect a huge international Euro loan, and uses the
borrowed money to support the international value of the US Dollar.
It does this with conditions.
While supporting its Dollar, the US also acts to bring its federal
budget into balance with revenues and then into a real fiscal
surplus. This US surplus is then used to pay down the Euro currency
swap. Inherently such a US currency swap with the EU has to be
long-term, taking into account the enormous US debts owed. Meanwhile,
the US Dollar maintains its value against the Euro.
Also inherent in such a huge
Euro currency swap is the dire necessity for the EU (and the
other participants) NOT to sell any of the enormous amounts of
US Dollars received in the swap. After that, it is incumbent
on the US Treasury that these US Dollars now held by "foreigners"
will NOT lose their international purchasing power. Otherwise,
a situation arises where the US once again defaults on its international
debts through a currency depreciation. But such a gigantic bail-out
of the US has some chance to work IF the US does its part. With
the stabilisation of the international value of the US Dollar,
other nations will have less incentive to sell it into oblivion
in a US Dollar global panic. Of course, the US doing its part
would make necessary a global geo-strategic pullback from all
its 760 odd military bases around the world. This would include
those now in Iraq, in Afghanistan, in Europe, in Japan, in South
Korea and in many other nations. This is by no means historically
unique. It is precisely what happened to Great Britain after
its failed attack on Egypt in 1956. President Eisenhower simply
moved to end the US credit line to Great Britain. Since Britain
was then in a position where it could no longer borrow from the
US, it could also no longer funds its own empire. Great Britain
spent the next decade folding its former global empire up and
withdrawing its armed forces.
Regrettably, with President
Bush in charge of the US, the chances of THIS currency swap are
next to nil.
The Alternative is Foreclosure USA:
Nothing better demonstrates
the vehement denial of plain facts by the US Political Establishment
than its recent moves to raise the official US debt ceiling by
$US 850 Billion to almost $US 10 TRILLION as well as cutting
US official interest rates by 0.50 percent! To follow that by
going out and borrowing more is absurd. But that is what the
US Political Establishment intends to do. That points the US
and the rest of the world which has to lend the US the money
towards an international version of foreclosure.
Foreclosing on the US not only
means that the rest of the world stops lending more of its money
to the US but also that the rest of the world starts showing
up in the US and demanding repayment of all the past loans! This
has now started happening as shown by the "TIC" data
already reported. The US financial system will not be able to
handle a situation where the world demands that they begins to
repay debts. US market interest rates would soar, as would US
Treasury rates. An instant US recession follows.
The Growing Spectre of US Foreign
Exchange Controls:
If an accelerating outflow
of funds now held by foreigners inside the US were to start,
it is a near certainty that at some point in this accelerating
outflow, the US would act to institute a version of FOREIGN EXCHANGE
CONTROLS. In effect, these would prohibit funds owned by foreigners
from leaving the US. For all those who had lent to the US, that
would be a global catastrophe.
The recent freeze-up in the
global interbank payments system would be small potatoes in comparison
because the flow of money across the world's borders would also
start to freeze up. Many smaller nations in this bind would promptly
institute their own national versions of foreign exchange controls
and some of them would simply seize American assets inside their
borders and sell them in their own local markets, using the proceeds
from the sale to compensate their nationals from the losses they
had suffered from having their money blocked by the US. International
trade and air travel would come to a shuddering halt. Factories
beyond number would be standing still because required foreign
components would not be arriving. Economically, most nations
would be thrown backwards to function upon the productive means
presently existing inside their own borders. Deep recessions
and outright depressions would follow.
Lots more
follows for subscribers.
October 2007
William (Bill) Buckler
Captain of The
Privateer
email: capt@the-privateer.com
© 1984-2007 The Privateer
http://www.the-privateer.com/
All Rights Reserved.
capt@the-privateer.com (reproduced with permission)
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