Wednesday :: May 3, 2006

Tuning The Flute

by pessimist

There comes a time, when the party ends, and reality once again imposes itself, that the entertainment account must be settled. That time is upon us now that the Big 1945 Victory Square Dance has been called out:

Mark Boucher of says The Dollar is set for a large decline and A perfect storm may be brewing for certain asset classes.

"There will be a major decline in the dollar; internal and external balances will eventually force it to crack and it’ll be ugly, perhaps even reaching $1,50:€1,00 to $1,60:€1,00," affirms GFMS precious metals consultancy CEO Paul Walker.

US Federal Reserve chairman Ben Bernanke declared in his testimony to the Joint Economic Committee of Congress last week that growth was likely to moderate as the year wears on, partly because of some softness in housing markets. [T]he fact that he has sent such a signal at all gave rise to speculation that the Fed is really more keen to see a weak dollar than it is anxious about inflation. On the basis of the first-quarter GDP figures, a further rise looks more likely than not.

The dollar duly obliged with further falls on Thursday and Friday,
when it hit a seven-month low against the euro of $1.2578.

And the beat goes on - over the fold.

Confidence in the dollar has to be low if the following question is being asked:

Time to Short the Dollar?
By Ben Abelson,
30 Apr 2006

[T]here’s plenty of evidence to suggest that the dollar’s short-term bull could be nearing an end. Gold has recently topped $650, up more than 50% in just the past year, with the bulk of those gains occurring in the last six months. The Federal Reserve is likely nearing the end of its cycle of raising interest rates, which will lessen investor interest in the dollar. In the meantime, strong Japanese growth will probably lead to an end to that country’s zero interest rate policy, which will should lead to further investor interest in yen holdings. Conversely, the almost continuous growth of the United States’ budgetary and trade deficits will not help create new dollar bulls.
[P]erhaps most telling of the dollar’s coming decline
is the waning interest of foreign governments’ in dollar holdings.
Foreign government participation in U.S. treasury auctions has been declining for several months, and the growing stability of many emerging economies’ currencies likely means these countries will need to acquire smaller amounts of U.S. dollar reserves going forward. It is also likely that more fiscally prudent countries will begin to lighten their dollar holdings in order to protect themselves.
On April 21, for example, the extremely conservative Swedish central bank announced
that it would reduce its dollar holdings from 37% of its reserves to 20% of its reserves.

Remember the recent announcement of reductions in dollar reserves by Saudi Arabia and Dubai?

In the coming year, I would expect to see one of the following market conditions occur:

* If gold strengthens, then the dollar is likely to weaken to a larger degree, so as to 'catch up' to its relative valuation.
* If gold stays around the $600-$650 level, the dollar will likely still weaken in order to recapture this relative valuation.
* Finally, even if gold declines back to $450-$500, the dollar will probably still not strengthen, so as to re-establish its historical relative valuation.

There can't be much value if the investors aren't interested:

Dollar starts the big slide against major currencies
by DAVID SMITH, ECONOMICS EDITOR, The Sunday Times, April 30, 2006

THE dollar has embarked on a big decline that will see it fall against all leading currencies, according to analysts. The plunge is being prompted by America’s $800 billion (£438 billion) current-account deficit, they say. The dollar has been under pressure following last weekend’s meeting of G7 finance ministers and central bankers, which emphasised 'global imbalances' and said currencies should reflect economic fundamentals.
"The dollar has been supported by high yields
but markets are saying that is no longer enough.
"The question for policymakers is going to be how to manage the dollar’s decline. It won’t be a one-way street but the fall is likely to be biggest against Asian currencies."

That will include the Chinese reminbi, or yuan, as it is more often called. As the dollar falls, so does our independence. Hu has the gold, so Hu will soon make the rules. This isn't my opinion, but it is that of an interested outsider:

The Chinese era is here
Dateline D.C. is written by a Washington-based British journalist and political observer.

It does not appear that President Bush has a well-informed adviser on China.

China is a giant able to rock the world. The sleeping giant has now surpassed us as the largest user of grain, meat, coal and steel. The giant creates 20,000 new manufacturing facilities each year and has eclipsed the United States on the purchases of TV sets, refrigerators and mobile phones. In 1996, there were 7 million cell phones in China; today there are more Chinese users of cell phones than the entire population of the United States.

We only had to look at President Hu Jintao's itinerary to realize that
the Chinese know more about our political power structure
than most [Americans].
China's president... began the "inspection tour" of some of his assets in the United States. Planned by China, our White House and our State Department, we became a mirror image of "inspections" of Shanghai, Nanjing or Chengdu.
His government controls $300 billion in U.S. trading bonds,
which if China suddenly changed its dollar holdings to euros or gold,
would cause us a major calamity.
First on his list was Seattle's "Corporate America" and last was a lecture at Yale to "Academic America." The "inspection" of corporate America was effective. Boeing, having profited mightily from sales of technology and aircraft to China, was delighted with another $7 billion for yet another 60 planes. These will be known as Boeing 787s, with the numeral "8" representing a "good-luck" number in China. And, of course, there had to be a lot of "8s" in Microsoft's horoscope, with the equivalent of a Great Hall of the People's Banquet honoring "Inspector" Hu, hosted by a beaming Bill Gates at his lakeside home.

That's harsh. But it's the reality.

Only corporate America can be blamed for off-shoring production jobs,
moving our knowledge-based technology and shipping out middle-class jobs to China.
While the usual excuse is "the labor unions," even a quick look at balance sheets tells us that the real cause is higher profits for a few who end up paying high-priced lawyers to get them shorter jail terms for fraud.

While the GOP has been busy selling and selling out America, the international creditors are beginning to prepare to take over the last remaining asset America has - hegemony.

The flute has been tuned and the piper is warming up:

Hu lives in a world where the private words of his predecessor to a group of friends are remembered:
"When the 21st century arrives, the Chinese era will eventually arrive.
The West's decline will follow both economically and militarily."
The United States believes that with five carrier task forces at sea, its security is assured. The Chinese believe that victories are won through inferiority overcoming superiority, know that resupply is vital, and that the United States always will be thousands of sea miles away from the sharp end of its fighting machines. Thus, Hu supposes that his rocket-armed, nuclear submarine fleet could be an expensive match for carrier task forces.

I just wrote about this very scenario just last week.

Despite all of the short-term happy talk about how well the Bu$hCo False Economy is doing ("People are still buying RV's despite the high price of gasoline" - NBC Network News, 5/2/6), in the longer term there is much trouble brewing. Our wrong-winger friends can make the most specious argument in support of 'prosperity' what they will, but TANSTAAFL. All the hard work of several generations of American wage-earners past and future is now going to pay for Reagan's 600 ship Navy from the 1980s, Bu$h I's Gulf War, and Bu$hCo Afghanistan and Bu$hco Iraq. All of those bills have come due and payable. The fact that the dollar is losing value against the world's currencies is evidence that confidence in America repaying its debts is declining along with our future prosperity, weakened by these deficits run up to enrich those who promoted radical Republican self-enrichment values to be imposed on everyone else at the point of a gunboat since 1980.

Just keep telling yourself (as you dine on the three-day-old canned food you stole from the guard dog protecting the mansion you pass on your way to the garbage dump where you scrounge for food now that you can't work, or fight for oil) that they knew better than you, and that it was all for your own good. How else could you be protected by those who hate your freedoms from those who hate your freedoms?

Be sure to thank them appropriately!

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pessimist :: 7:26 AM :: Comments (19) :: TrackBack (0) :: Digg It!