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From: Americans for Limited Government Sent: Wednesday, November 10, 2010 Subject: Global Revolt Against Fed's Dollar Devaluation
 The global revolt against U.S. dollar devaluation continues. Now China is calling for the G20 to have a role in Federal Reserve policy. So is Russia. Adding to the escalation, China's credit rating agency has once again downgraded the U.S. credit rating, as reported by Reuters. While the Fed and Obama prattle on about targeting unemployment and trying to restore economic growth, the whole world sees the Fed's decision to print $600 billion to buy treasuries for what it is: Papering over the debt. Interestingly, in the Reuters report, they quote Herbert Kaufman, professor emeritus of the W.P. Carey School of Business at Arizona State University as saying, "Since they are a large holder of U.S. Treasuries. it is not to their advantage to downgrade." Except it was not a hypothetical. They have downgraded us, because they understand that printing hundreds of billions of monopoly money is nothing more than the "pretended payment" of debt Adam Smith warned against in The Wealth of Nations. This is getting bad. If tough decisions are not made to balance the budget, pay down the debt, and stabilize the dollar, we are likely in just a few years to lose our status as the world's global reserve currency. Our creditors are getting ready to pull the plug. They are reaching the tipping point. What is the tipping point? Nobody knows for certain.But the numbers speak for themselves. The Chinese hold $868 billion of treasuries. The Fed will print about $600 billion every year for the next three years to buy treasuries, increasing its own balance sheet from $2.34 trillion to $4.14 trillion if all other things remain constant. That will increase the Fed's treasuries holdings to $2.6 trillion. That's a 76 percent increase in the Fed's balance sheet, which when you factor in leveraging and the central bank's lending capacity throughout the banking system, could in theory result in about a 38 percent depreciation of the dollar. But it could be worse, when you consider that the Fed's purchases will constitute a 214 percent increase in the central bank's treasuries holdings. So, if you're China, you either 1) hold onto your assets (and keep buying) and eat the 38 percent loss; 2) slow down purchases and still take a 38 percent loss; 3) stop purchases and accept the 38 percent loss on remaining assets; or 4) stop buying and actively dump the assets as fast as possible for whatever you can get because the dollar depreciation will actually be much larger than 38 percent. The tipping point is fear. It is panic. It is when the Chinese and others believe they will get less money in return for holding the assets than by selling them for whatever the market will fetch. The dynamic where countries keep pouring money into U.S. debt is definitely subject to change because it is based on market variables. In this case, the variables are rather predictable. The more treasuries the Fed buys, the less marketable they become, the less China and others buy, and therefore the more the Fed needs to buy to finance the U.S. spending obligations which are unsustainable. That is the dollar run. It'll be like a tsunami once it gets going — fast and merciless. Keep your eyes on this. Both our monetary and fiscal authorities are playing with fire. They are assuming that the current monetary system with the dollar being the world's peg will not change, when everything changes. We're staring a global currency crisis right in the eyes. In today's Liberty Action Report, Fred Upton has not earned a promotion, a tree falls in the woods, the death tax is about to rise from the grave, and Republicans must heed voters' concerns to avoid extinction. Plus, Sarah Palin makes the case for a stable dollar. Please send your letters to the editor to Robert@getliberty.org. We publish all points of view! Today, Sanna Huebschmann of Wisconsin writes to our action alert to incoming members of Congress and returning members to urge them to tie any increases in the national debt ceiling to sharp spending reductions: "Why are we advocating raising the debt limit, AT ALL?" Great question. Ideally, ALG supports freezing the debt ceiling at about $15 trillion (to account for the $1.3 trillion or so budget deficit Pelosi and Reid are handing off to the new majority), and then balancing the budget from here on in and paying down the debt. We advocated for that position here: And here: But even that contemplates raising the ceiling by another $700 billion or so from its current $14.3 trillion level. What we're saying with the action alert is that the least Republicans can do is tie any future increases in the debt ceiling to gargantuan spending cuts. Ultimately, we'd like to prevent the nation from ever defaulting. But that's the trajectory we're on. If the dollar loses its status as the global reserve currency, we will not be able to meet our obligations. And if we continue destroying the value of the dollar, we will certainly lose that status. So, step one is to stop devaluing the dollar. And that has to mean balancing the budget and paying down the debt. How far along we get will largely be up to House Republicans. The estate tax will go from zero to 55 percent at the end of the year. Republicans can avoid extinction if they take voters' message to heart. "When Germany, a country that knows a thing or two about the dangers of inflation, warns us to think again, maybe it's time for Chairman Bernanke to cease and desist." All Original Content Open Source & Copyright Free |
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