I will use this blog to do three things. One, provide a voice of opposition to the liberal controlled government. Two, to track their progress on promises they made to get elected (to see if they ever deliver.) Three, to vent, educate, and to work through my own frustration. Please read the ground rules if you wish to respond to this blog.

Wednesday, December 3, 2008

Dollars and Sense

The last few weeks have been amazing as I watch what they say on the news, then what they don’t say. It is hard for me to understand what is real and what is speculation, but it is time for me to work out some things and I thought there is not a better place to do it then here so this post is an exercise in trying to understand what is going on.

The world economy is in trouble. No matter what the network and cable news programs are saying, and what program they are pitching, the world economy is unstable to say the least, and at most, on the brink of catastrophe. Trust your gut. You know it is true. Something is wrong, and no one either knows, or isn’t telling us because they don’t want us to know. Something is wrong, like never before.

Here is what I believe to be true.

China owns more U.S. debt than anyone else, and they are not lending anymore. In fact, they have decided to invest more in gold going from 600 tons to over 4,000 to diversify away from currency (12-3-08). This means that they do not see a strong future in our currency. No one else in the world is in a position to invest in U.S. debt, yet, our government has pledged $7.7 billion for recovery. This doesn’t grow on trees, China is not going to lend it to us, and we can’t get that in tax revenue if we are in a recession. The dollar has gained ground on the Yuan (WSJ, 12-3-08), but how do you trust a currency that is controlled by a government? Devaluing their currency may be the only way to stabilize their investment in U.S. Dollars for the time being. A collapse in the dollar hurts China, but none-the-less, just like any investor pouring good money after bad isn’t palatable. The shift from dollars to gold is a shot across the bow. A signal most of us wouldn’t see or understand.

The U.S. government deployed 20,000 troops WITHIN the U.S. (go to the Pentagon’s website). They are calling them ready response teams. Why now? Why at this point? This in and of itself is peculiar, but couple it with the current financial crisis and one has to ask, what are they preparing for? The terror threat level has not been increased, no one is talking about another attack from without, and it was done quietly without a lot of hoopla from either side of the isle, even though it’s in direct violation of the Posse Comitatus Act, a 130-year-old federal law restricting the military's role in domestic law enforcement. (Washington Post 12-1-08) Is this the second signal we should be listening to?

Back to the dollar, which is not backed by anything. There is no gold standard. The dollar exists on one thing, consumer confidence. This means that collectively we have to give the dollar value by believing that it has value. This scares me to death, and has for the better part of my life. Think about it. The only place you can spend a dollar is with someone who believes it is worth a dollar. You can’t trade it in for gold, or silver, or anything else. Today consumer confidence is not at its lowest point, (http://www.conference-board.org/economics/ConsumerConfidence.cfm) but how much would it take for us to collectively NOT believe that the dollar has value. Or more to the point, that China, Russia, or other holders don’t believe that the dollar has value.

The big three auto companies are in trouble, state and local governments are looking for handouts, big box stores, that survive on small margins and huge inventories are going under (Mervyns, Circuit City, Linens-N-Things,etc.) and there the tip of the iceberg. How many others will go under after a dismal Christmas? More to the point, how much have you, yourself or family cut back? Is it 10%, 25% or is it more? This is important to think about. If you cut your own spending by 20% (which is great for your family) what would that same amount do to the U.S. economy?

20% from every family decreases the U.S. economy closer to twice that amount. Why? Simple economics. Not only do you not buy what you do not buy, but the person who isn’t getting your purchase isn’t making additional purchases because you money isn’t there. It is at least twice the amount now that I think about it. It is a domino effect.

40% is catastrophic. It is a game changer. I am not talking about 40% loss in the stock market, that is already happening. I am talking about 40% loss in the economy as a whole. Scary.
What is the worse case scenario?

China sells off massive investments, simply trashes the dollar, or just decides not to lend us anymore money. The dollar loses value in the world market because no one believes it is worth anything. Now we have hyperinflation. Bread goes from $3 a loaf to $30 a loaf. Hyperinflation.
Don’t think it can happen?

Ever been to Mexico or Korea? Mexico’s money is in Pesos. Why isn’t a peso and a dollar worth the same? Korea is in Won. It takes nearly 1,000 won to equal a dollar. How did that happen? Hyperinflation. It may happen here too.

I used to think that the worst case scenario would be a long, deep, wide spread recession.

Not anymore.

I think the worst thing that could happen is a collapse of the dollar, hyperinflation, and a restructuring of world economics.

Think about the movies. Think The Postman or Mad Max.

Maybe that is why they have deployed 20,000 troops in the U.S.

Come to think of it, I don’t think 20,000 will be enough.

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