Jul 3, 2008
There is a game of ‘Pass the Parcel’ happening in the world at the moment. The ‘parcel’ is filled with U.S. dollars. Just like little children at a birthday party, the governments who are holding vast reserves in the form of US paper dollars, are full of apprehension and nervous giggling lest they be left holding the ‘parcel’. They are jiggling the parcel up and down and frantically trying to pass it on to the government sitting next to them. The general hubbub is almost drowned by the din of bursting balloons.
The problem in the real world of course is that there are many, many parcels of U.S. dollars in the hands of foreign governments, and they are all trying to pass them to each other. No one wants the parcel they already have, let alone the one in the hands of the government sitting next to them. They all want to avoid being left with a vast wad of cash which they strongly suspect will end up not only worthless, but making them look like complete mugs.
All are hoping against hope that the storm will pass. All fear to be the first to start selling in large amounts, yet simultaneously fear to be the last. Each is regularly divesting itself of tiny amounts. As fast as they do manage to dump a part of their parcel those dollars head back to the U.S.. U.S. exports will start to look good for a while which will reflect the desperate desire to exchange the dollars for something, anything.
All money must eventually head back to the country of its issuance. That is the only way ultimately that value can be realized. Now is the time for that value to be realized, whilst there still is any. The trillions of U.S.$’s in the world are returning home. As that money washes up into the US economy so it will continue to drive U.S. domestic prices higher and higher, placing ever greater strain on the economy, which is already at breaking point.
The period wherein the U.S. dollar was the official reserve currency of the western world is now over. That will neither be announced nor admitted by any government until they have finally dumped the dollars that they own. It is in everyone’s interest to maintain the facade, at the moment. In reality they want almost anything except U.S.$’s in their reserves.
Bernanke must dramatically raise interest rates to strengthen the U.S. dollar, that is a MUST. Of course that will mean the collapse of the whole U.S. real estate market within a month. That would lead to the absurd and sad situation of millions of empty houses within sight of millions of families living in cars and tents. Such an interest rise would take a Volcker on steroids which Bernanke most certainly is not, so of course he hasn’t raised interest rates, and he won’t.
His whole education and training make him more inclined to again drop interest rates in a forlorn attempt to re-start money flow into the asset area of the economy. Too late he has been disabused of some of his Ivory Tower notions and now knows that won’t work any longer either. ‘Fool me once shame on you, fool me twice shame on me’. Dropping interest rates would also precipitate a panicked flight from the U.S. dollar which would see a faster flood of ever more worthless dollars turning up in the supermarket and energy area of the domestic economy. No matter what Bernanke does or doesn’t do, the chickens are coming home to roost.
It is unlikely to be the Chinese or any of the other major holders of U.S. dollars who precipitate mass selling. They have so many that they would crash the currency just by opening their mouths. They also are damned if they do and damned if they don’t. It will more likely come out of left field and be one of the smaller holders. Maybe one of the Arab mini-states will take the chance that they can dump all their dollars without anyone noticing. The likelihood is that it would be immediately noticed. Everyone has their beady eyes on everyone else at the moment. The awareness that the ‘big dump’ had started would lead to a stampede. How would the Fed handle that… print more dollars… tinker with interest rates?
Obviously, not selling at the moment is seen by the major holders of U.S. dollars as an option, albeit an enforced one. Becoming a buyer most definitely is not an option. Along with the game of ‘Pass the Parcel’ there is another concurrent game being played called ‘First to Blink’. The government who blinks first and tries to dump their wad at below market price just might win, immediately followed by everyone else losing. There may be some reservations about being the first seller, but there will be none about the desire to avoid being the last seller.
The unpleasant truth is that the mutually agreed selling truce is occasioned by the fact that there are no buyers of the amounts needing to be sold. All would dump their dollars now if they could, the fact that they would like to, but cannot, speaks loudly and eloquently of the problem.
Thus Bernanke will continue to procrastinate and do nothing with interest rates. It is the sanest approach, as it is the approach most likely to put off the inevitable for a while longer. Procrastination is contagious, which at this point may be a good thing. Any decision to do something will end in complete disaster as it forces the governments playing pass the parcel to blink and also do something. Whatever they do would be very bad for the U.S. dollar and curtains for the U.S. economy. For many decades there has been a very ugly reality underneath the attractive veneer of confidence in the U.S.$ and economy. That veneer of confidence has now completely gone. What lies exposed is not a pretty sight.
The only hope for America is that those governments holding U.S.$’s will continue to hold them even though they are quite aware that they will at best drift down in value, and at worst collapse. It is a conspiracy of silence aimed at maintaining the status quo. I will hold mine and pretend that they are still valuable if you will do the same. All governments are using the borrowed time as best as possible to prepare their economies for the coming collapse of America. The U.S.$ will continue to be a currency for as long as that tacit agreement holds.
The End of the Party
I wonder how Bernanke is sleeping at the moment? I also wonder whether he and Paulson are personally buying gold and silver and secreting it away. Everyone who truly understands the situation has a survival plan. I find it hard to believe that Bernanke and Paulson still do not understand the real situation. Maybe they believe the government will look after them… maybe it will. What is for certain though is that the government will not look after Main Street. As always the common herd is pencilled in to foot the bill for this disaster. The bill is far larger for each household than each household owns in total assets. If it is any consolation the banks will go down as well.
For those who have not already lost everything, there is right now, possibly, one final chance to remove their capital from the cesspit that comprises the U.S. financial markets and exchange pseudo investments for real money… namely gold and silver. Not the paper variety of options or futures, but bullion. All paper is now suspect.
Even stock in mining companies is now suspect due to the vast amounts of naked short selling that has taken place. Many ‘owners’ of mining stock are going to find out, too late, that the statements of stock ownership in their filing cabinet are worthless. There are publicly listed companies on the major U.S. exchanges that have more stock sold than legally exists, a lot more. The situation on the minor boards is even more dire. An unknown at this time number of ‘owners’ of stock are going to find out too late that they in fact own fraudulently printed paper worth precisely zero.
Criminality in the U.S. financial markets is rampant and all pervasive. Corruption exists from the top to the bottom. A blind eye is turned by the regulators because they are afraid that to expose it now would topple the whole system. That gives an indication of how large the corruption is. It is the return of the Wild West (WW2), and at this point, the outlaws are running the show. Marshall Elliot Spitzer was the guy who rode into town on a white horse. He was almost immediately gunned down. Is there anyone else out there who will publicly challenge what is happening… preferably someone who doesn’t mind going home to his wife at the end of the day?
Naked short selling is a great example of the type of ‘mal-investment’ created by showering a financial system with cash and credit and calling it economic growth. The past has, and the future will, show a direct parallel between the size of the inflation and the size of the ensuing criminality. What has been exposed so far is just the tip of the iceberg.
The economies of the world are on a knife’s edge and we can but cross our fingers for the ‘system’ to hold together a while longer. The best hope is for a long, meandering collapse, much along the lines of the last 37 years, but at a greatly increased pace. It will end up with not just both parents being forced to work to survive, but the children as well. That will probably be spun as ‘Children’s Liberation’.
America no longer has even the appearance of an expanding economy because the world will no longer lend the money to finance it. That is because they know now, as they should have known years ago, that the U.S. cannot hope to ever pay back the money that it has been borrowing.
The worst case scenario is for a sudden and calamitous fall with no time to adjust. The end result over whatever time frame it happens will be very unpleasant. It will be a profound shock for most people who have been conditioned to believe that whatever happens the government will look after them.
A Party Bag For Everyone
The transition from fear to panic when it comes will be remarkably fast. One moment people will be just sitting there eating their Prozac, the next they will have a party bag in their lap. Inside the party bag will be a parcel which has finally found its way to its real home. At that point the contents of the parcel will be exposed for what it really always was under our current banking system… debt… vast, unpayable debt.
The brilliant Professor Emeritus Antal Fekete is conducting a seminar in Canberra, Australia from the 11th to the 14th November this year. Meet and hear one of the giants of our age. Bookings for the seminar can be made through:
I attended Professor Fekete’s seminar in Hungary in August of last year and to say that it was memorable is an understatement.
Jul 2, 2008
© Sam Mathid 2006-2008