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December 31, 2012

The Federal Reserve continues its reckless printing, borrowing and spending, while our leaders continue the ruination of our dollar. The world is watching the charade and will,at some point, give up on the U.S. dollar and throw their hands up in surrender. When that happens, it will be an economic tsunami for the U.S. economy. But for now, we export our inflation as France did early on in the last century.

Americans buy more from the world than the world buys from us,and so the rest of the world ends up with piles of U.S. dollars. This works out pretty well for them as the U.S. dollar is the primary reserve currency of the world and is used in international trade far more than any other currency is for the time being.

The percentage of foreign exchange reserves in U.S. dollars peaked at 71 percent in 1999 and since has slid back to 62 percent an overwhelming amount. For the moment We can print, borrow and spend like crazy because the rest of the world is there to soak up our excess dollars because they need them to trade with one another. But what will happen someday if the rest of the world decides to reject the U.S. dollar?

We will see a virtual tsunami of U.S. dollars come flooding back into our country. Just take a moment and think of the worst rainstorm you can possibly imagine, and then replace each drop of rain with dollar bills. This giant currency rainstorm will eventually hit this nation and will be far worse than that because it will be in $20,$50 and $100 dollar bills. Most Americans don't realize that there are far more dollars in use in the rest of the world than in the United States itself. The dollar is the major cash currency around the world. More than 70% of $100 dollar notes and 60% $20 & $50 dollar notes are held abroad, while two-thirds of all U.S. banknotes have been in circulation outside the country in the last twenty years. For decades we have been exporting gigantic quantities of our currency as well as the inflation it denominates.

So what would happen if that process suddenly reversed and massive piles of dollars started coming back into the country? It is frightening to think about and the key is to get the rest of the world to continue to have confidence in the U.S. dollar so that will never happen, right?

Much of the world including Brazil, Russia, India, China and S. Africa are planning their own development bank and bailout fund which would pool some $250 billion in foreign exchange reserves, about the size of the GDP of 150 countries. Over the past few years it has been proposed and encouraged to use international national currencies over the U.S. dollar. Makes me think that our government might start a war over this when it happens! 

The fact is, that, the expansion of a nations budget deficit, the accumulation of national debt leads to a non-competitive economy. That lesson cost the Soviet Union and is the path we on in the U.S.  Why can't our politicians see how destructive debt is?

What the federal government continues to do is absolutely insane. The national debt increased by more than 24 billion dollars in one day after Thanksgiving this year.  But utter disaster has not struck yet, and most Americans are not really that concerned about the debt. So things just keep rolling along and of course our national debt of $16 trillion is nothing when compared to the future liabilities that our federal government is facing. The actual liabilities of the federal government which includes Social Security, Medicare, and federal employees' future retirement benefits exceed $86.8 trillion, or 550% of GDP. One never hears anything like that figure used to calculate the deficit. In reality, the reported budget deficit is less than one-fifth of the more accurate figure. Some economists state the figure is even higher to the tune of $238 trillion of unfunded liabilities.

So where are we going to get all that money? Well, why don't we just print more money  than ever before so that the U.S. government can borrow and spend more money than ever before? Don't laugh. as that is actually what some economists recommend, the solution being to print, borrow and spend a lot more money. These economists figure that because we have our own currency, almost all our debt, both public and private that we can't collapse our system. So our government, unlike the Greek's, literally can't run out of money. After all, we can print as much as we like.  I'd say no risk at all if it weren't for the chance that the Republicans would once again try to hold the nation hostage over the debt ceiling. But if the U.S. government prints money to pay its bills, won't that lead to inflation? No, not if the economy is still depressed like it is today.

Investors may start to expect higher inflation some years down the road. They might also push down the value of the dollar. Both of these things, however, would actually help rather than hurt the U.S. economy right now. Expected inflation would discourage corporations and families from sitting on cash, while a weaker dollar would make our exports more competitive. This thinking is void of any common sense and sheer madness!

At some point this con game is going to collapse and the rest of the world is going to say "NO" to the U.S. dollar. Why should they continue to use a currency that is becoming extremely unstable and that is constantly being manipulated? And when the rest of the world rejects the U.S. dollar, the value of the dollar will drop like a rock because there will be far less global demand for it. In addition, if the rest of the world is not using the U.S. dollar for trade any longer, other nations will cease to soak up our excess currency and huge mountains of currency that are floating around out there and it will start flooding back to our shores.  At that point we will be looking at inflation unlike anything we have ever seen before. The era of cheap imports will be over and we will pay far more for everything from oil to the foreign-made plastic trinkets that we buy at Wal-Mart.

Most Americans don't even know what a "reserve currency" is, but when the U.S. dollar loses reserve currency status it is going to unleash a nightmare that most economists cannot even imagine.

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Spot prices accurate as of
Fri Jun 23 15:48:14 PST