When a major tsunami wave comes ashore, we all learned, in the recent Indian ocean tsunami that killed 200,000, that the big waves were proceeded by an amazing sudden unexpected low tide. It was a warning sign only a few people were able to grasp in the nick of time. The USGS geological survey people who were sitting in offices observing the wild behavior of seismographs with a force detectable that created a slight wobble in the earth’s axis were slow to react to the data and never considered contacting commercial satellite television stations to warn of the possibility of a potential tsunami.. That tsunami materialized as if the devil was unchained from under the sea. Reading the signs in retrospect is rear view driving.
The repatriation, rise of the US dollar in the financial crisis of late 2008 is one of several signs giving me that low low low tide pre-tsunami feeling. I have already seen too much financial upheaval with a lot of sudden new terminology that seems to be secondary rationalization by people trying to understand what makes little or no sense according to ordinary metrics. As a credit card customer or a mortgage holder , Libor, Credit default swaps, derivatives, toxic assets and other jargon like this are not part of you everyday life. It is not even certain that all hedge fund operators or mutual fund managers have any idea what this terminology is actually all about. Some are taking a crash course in crashes now. A survey of ordinary banking executives and administrators might reveal that few ever deal with Libor, credit default swaps , derivatives and those other new media buzz words we hear so much about constantly all of a sudden. It is the incredible rise in the value of the US dollar as the world’s safe currency that is becoming most alarming.
It is alarming because of election and post election rhetoric. A new administration is coming in to office promising big public works projects, higher fiscally responsible taxes to pay for more government spending. A new major economic stimulus package which could ultimately be 1 to 2 trillion dollars is being promised and does not include 700 billion dollars for an existing bank bail out. Add to that unspecified money needed to bail out Fannie Mae and Freddie mac, and government’s desire to put an end to our carbon based economy with an election promise to balance the budget. Unemployment rates that are quickly rising from the 6% level it was under Bush to what maybe over 10% when Obama is inaugurated.and yesterday a 400 plus billion dollar bail out package for Citicorp . Add to this markets around the world crashing and things seem a little bit unreal. OK very unreal. Deflation is definitely taking hold of the economy and anywhere debt is there is possibility of default. I see it sort of as a low low tide of believing what I see.
The danger now is not the deflation but rather what our government in particular is about to do to solve all of our apparent problems. If my worst fears materialize a lot of people who originally believed in the new president elect and his party are going to be unhappy with the results. What is to fear? The main thing is a massive devaluation of the US dollar. The temptation on the part of the fed , the treasury, the congress and the president is to fix what is wrong or what they think is wrong even if nothing is actually wrong. Low commodity prices in the deflationary downdraft is something the Fed and Treasury see as something that needs fixing no mater what. If goverment debases the currency in a big fix it means a big end to faith and credit in the system. The problem is that there is no way the government can absorb the full costs of the bail out now in progress, and they are not planning on making any cuts whatsoever , for any reason , under Obama. This means they will again try to shaft foreign creditors and American savers with a rapid currency devaluation . A devaluation would raise prices like you have never seen prices before. It could even head to hyper inflation. Here are some rough figures from the economic crisis so far. some reports say the markets in the US lost about 6 trillion dollars in market values. It could be as high as ten . The bail out package deals are now approaching 2-6 trillion dollars once you start adding together all the promises. The president elect is acting realistic saying he thinks it might take 2 years to get out of the mess and is calling for huge new public works programs when there is still no major unemployment numbers and not for blue color workers either. So back to the sense of disbelief and to say yes this maybe a severe state of unreality and i don’t want to be too psychic about it because the government really does not seem to have a handle on how to solve the problem. Inflating us out of a beneficial deflation seems counterintuitive but the complete absolute orthodox solution.
The fear now is that the US Government is wildly printing dollars to fix every problem add them up including all the loan guarantees and bail outs and then add more big printing runs for near term future problems and the total currency added to the system to give it liquidity will be ten trillion dollars or more. There is no way the dollar can maintain it’s world wide value with this pressure and ultimately, one way or an other it will result in a devaluation that raises prices for all staples and commodities beyond what wages can keep up with. You thought $200 a barrel oil seemed impossible a few months ago , think about $400 a barrel oil and the $10 loaf of bread going on $20. Fortunately other governments , worldwide, even Japan and china are printing money with nearly the same wild abandon with their own bail out strategy programs to stop debt defaults. That gives some equalization in the world system but we have to still be concerned with the US dollar and the consequences of loosing it as the world’s key currency. The effective or intentional devaluation that is coming will have foreign money fleeing US investments in a wholesale manner beyond what we have already seen in the market crash. What the government is really doing to prevent loan defaults is printing fantasy money to prevent foreigners from taking real collateral for the defaulted loans. In the old fashioned financial system foreigners would be asking for gold on deposit in bank in lieu of real estate or other assets and that would be the end of the story and the dust would settle and markets would eventually restore to equilibrium. The Rothschild bankers did this over and over again in European capitals to work their financial magic. The way the Rothschild money system worked was gold or even non existent credit gold would move from one Rothschild bank to another with credit paper going to governments in default. The closest thing visible today that is working in this manner is warren buffet who I think inherited some of the Rothschild charms his Ben Grahm education. If physical gold went into a government treasury to cover debts it soon ended up getting paid out and back in a Rothschild bank again.
The point I am making is that the US government is installing more completely financially incompetent people to run the treasury and federal reserve under the coming administration because all they know how to do is print money which is the same thing as the bush administration people. It is a huge mistake. The Obama administration needs to find a banker like the Rothschild’s to represent the US accounts balances the way the Rothschild banks managed their own assets and let charlatans dupe us with more easy credit and fantasy printing press dollars. Every time a bail out package is announced for billions or trillions of dollars we notice that wall street likes the idea but you have to remember that part of wall street reacting is the short term traders component of Mr. Market and he does not give a damn about hyper inflation tomorrow or an other wave of defaults. The sort term traders will invert their positions and flip them in seconds. They are the Wall street mega casino folks not the long term investors who over time seem to make much more substantial sums of money. Traders create their own reality and unreality and we see it daily with price swings in all directions that are meaningless in longer run trends.
The only real solution for the governments bail out frenzy to stop the event of a killer financial tsunami that will leave the entire economy a wreck for 20 years or more now is for the government to own up and figure out what real assets they have to sell to raise capital to back the dollar with. We can learn what not to do from the south sea bubble but I listen to the Obama plans being formulated and they sound just like the south sea bubble where government is looking for a host to take over its enormous growing debt and somehow repay it without by raising taxes, limiting use of federal owned resource lands and pushing Don Quiote like windmill schemes to get pies and castles to float in the sky. Government will be better allowing bad companies to go into receivership instead of bailing them out as special interests and government should soon start looking for what it will need to cut out of it’s own budget because it is going to find that the US treasury has no remaining faith and no credit as Americans just opt out of dollars by necessity to survive. That is what the tsunami is going to be like. The dollar becoming wall paper just means that the same problems we think we are solving now will come back with a vengeance. The only solution is to look at US government assets and see what can be sold off to take dollars out of circulation. These are not just paper dollars but random number generated code dollars in world banking computers. They are already beyond worthless but we won’t know it till the sudden devaluation occur rs. Countries that think they got ahead trading with the US with huge US treasury debt holdings are going to realize that hard work was completely wasted in ever dealing with the US treasury. The treasury will try to compensate with double digit interest rates and that means people wanting to sell their homes will go bypass banks and write their own seller/ buyer contracts.
I went to google and looked up the New proposed Obama secretary of the treasury and the google search key word mechanism asked me if I wanted the popular search that asked if this new guy was Jewish. I think that people wanted to know if this was a guy with Rothschild magic coming on board or just another incompetent policy wonk crazy about printing fantasy money. The guy I saw quickly did turn out to be Jewish as expected but he is no Rothschild banker. He has no major capital of his own and no thus no understanding of what money really is or how it really works. An other text book academic. The Rothschild bankers seem to have disappeared from the face of the earth lately. Obama is from Chicago, He should may consider bringing someone like Sam Zell in to instruct the treasury secretary. Zell is a guy who clearly understands money and creates it without necessarily printing it in his own financially dealings. The problem with zell is he might have some financial conflicts of interest but everyone that comes to the office does. You might remember Zell sold his commercial real estate holdings at the very top of the market. The guy is savvy with money. The secretary of the Treasury elect guy was involved with the bear Stearns and Lehman mess on the onset of the crisis. Someone like Zell, as an independent should be given the big books of US property assets and should go in and look for a sales program to work to support the US dollar. The price of Gold maybe high enough that existing US reserves might be better off sold now if the government can buy them back at a lower cost as deals and defaults are settled. An orderly liquidation of debts is what is required and not a just pretend solution . Propping up the dead body of an economy and putting make up on it so it looks like it is still in financial order is going to leave us with a rotten corpse that never got buried. Real Change is orderly liquidation and not more Keynesian paper money wall paper games. Zell is just an example of one non accademic guy of the sort the treasury needs to replace the the idea guys with no experience with money in the Treasury. Alan Greenspan comes to mind as someone who is quite a genius but not necessarily a real money man. His management of the US financial books at the federal reserve over a number of years ened up yielding a lower return than some one like Zell in his own financial dealings. Obama was quick to find someone to replace Paulson with someone who rubbed elbows with Alan Greenspan. By association that might make sense , And Guitner maybe yet another genius but where is his money?
Even as the tides goes out to sea , lower and lower and lower, there is still time to prevent or moderate the coming tsunami by avoiding the wholesale devaluation of the US dollar and American faith and credit and that will come with backing up the dollar with something that is real value. Let the rest of the world have their Latin American banana republic style devaluations and inflations by letting the tsunami hit them instead of us if they keep the incompetent money printers in power and we make the dollar as good as gold or any other commodities that are interchangeable as real value for ink on paper.