Sleepycatz

Are We Screwed?

I’ve been meaning to write about all economic lunacy perpetrated by the Federal Reserve for sometime, but this quote from this weekend’s OPEC summit just floored me:

On Friday, Prince Saud Al-Faisal, Saudi Arabia’s foreign minister, warned that the dollar could “collapse” if the US currency was mentioned in the declaration.

His remarks – made in what was supposed to be a closed ministerial meeting – were accidentally broadcast to reporters.

Al-Faisal is stating that the dollar is is in such a precarious position that even mentioning that OPEC needs to consider the effects of a low dollar on its members could cause the currency’s collapse. This would lead to outright panic here in America, as well as many of the oil producing states, such as Saudi Arabia, which use dollars as the basic pricing mechanism for oil. Because of the fall in the dollar’s value –44% since the last OPEC meeting 7 years ago– a number of the oil states are calling for greater oil prices to offset the devaluation. This, of course, will result in deepening the nascent recession here at home –which will, no doubt, result in the Fed cutting baseline rates again, thus, causing greater devaluation of the dollar.

In other words, under current Fed policy, we’re screwed. The Fed, however, sees it differently. By cutting baseline rates they are funding speculative investing, and keeping the equities and option markets (artificially) high. The Fed seems to be counting on foreign interests to keep the dollar from collapsing. The belief, seems to be, is that China, which holds around $1 trillion in US bonds, and the oil states of OPEC cannot afford to see the US currency collapse, and will continue to invest in dollars. But this is a strategy of russian roulette. Eventually, these states will decide they can no longer afford the losses on the dollar and begin to reinvest elsewhere –China, earlier this year began selling off US bonds at an alarming rate.

Last week President Bush charged congressional Democrats with spending money like “a teenager with a new credit card.” This from a man whose administration shipped 360 tons of US dollars to Iraq with no accounting or oversite in place. This from a man who has presided over the greatest increase in national debt in US history; an in increase in spending which has had no positive effects for the majority of Americans. When Franklin Roosevelt and Lyndon Johnson borrowed, they did so to try to enrich the American people. This president has done so simply out of hubris, and has enriched only the wealthy. The American people have found their wages stagnated at levels lower then those 30 years ago. They have found themselves with crumbling infrastructure, a crumbling military, and an inept and crony filled regulatory landscape to protect them.

I don’t generally believe in grand conspiracy theories, but, if I did, I could easily see one here. Thanks to Bush’s tax cuts, and outrageous spending on a never ending war and ‘homeland security,’ coupled with the “spend it now” attitude of the Federal Reserve we find ourselves perilously close to an economic meltdown. When one looks around, one can easily see the ‘free market’ wolves waiting in the wings. They will cry out that the problem with the US is that it spends too much on social programs, like Medicare and Medicaid, and others; that government is too inefficient and we need to privatize more and let the markets run without restraints and regulations. The fact is, they will be responding to a crises of their own making.

Liberty Death

One of the great things about running an independent coffeehouse is the variety of people you meet and the movements you become aware of. A year or so ago, one of our regular customers convinced us to become an exchange point and merchant for Liberty Dollars. The Liberty Dollar is a private currency which is backed by, and minted with, precious metals. Carol and I saw the dollars as a type of local currency and worked to get other local business owners to sign up as merchants. This afternoon our original Liberty Dollar customer came by, somewhat panicked, and took all the literature and promotional materials from our shop. He simply told Carol, something bad had happened. It turns out that federal agents raided Liberty Dollar’s headquarters, in Evansville, IN, this morning and seized all their assets –including gold, silver, and platnium bullion–, its records, and its minting dies. At this point, the Western District of North Carolina U.S. Attorney’s Office, which issued the warrants, has not detailed any specific charges against the Liberty Dollar.

There is nothing inherently illegal with private or local currencies — in fact the United States has a long history of alternative currency models. Private currencies, however, cannot be represented as legal, government backed, tender. This point was always stressed to any of our Liberty Dollar users. Most of our users, however, didn’t care, as they saw the coins — made of silver — as having traditional fungible value. Personally, I have some issues with metallic currency standards, and a number of the folks with Liberty Dollar and I had some heated discussions about the topic. However, I always found the Liberty Dollar people to be very thoughtful, well informed, and committed. So I would be surprised to find that there was any real illegality occurring within Liberty Dollar itself.

It does seem odd that the government would choose this time to act against the Liberty Dollar, and in such a heavy-handed fashion. It may be that some in the government are concerned about the perceived value of the US dollar –presently trading at 1.47€ and $1.02 to the Canadian dollar, a drop of 50% in the past 9 months. If even a small percentage of Americans began to loose confidence in the dollar and began to adopt a commodity based currency, the result could be disastrous: we could easily find ourselves in a period of hyper-inflation and economic depression. Of course, eliminating commodity currencies does not prevent this from happening anyway. If such a downturn would occur it would be the result of the disastrous monetary policies followed for the past seven years, far more then it would be the fault of the Liberty Dollar.

It’s Raining Money

The Fed today decided to drop the target rate for Federal funds by 50 base points, to 4.75 percent. The board felt as though this was necessary to help stabilize investments in the mortgage and stock markets after the recent unpleasantness related to default rates and MSO devaluations. Of course, this sent the stock markets into a buying frenzy — putting the DOW at +300, as I write this. Wall Street loves cheap money that can be bandied about and thrown into risky investments. But at the same time stock trading surged, the global ramifications also became apparent: the dollar dropped to a record low and gold is approaching a record high — two signs that overall confidence in the American economy are waining. As borkafatty succinctly stated on Calculated Risk:

Consider this: In 2000, when Bush took office, gold was $273 per ounce, oil was $22 per barrel and the euro was worth $.87 per dollar. Currently, gold is over $700 per ounce, oil is over $80 per barrel, and the euro is nearly $1.40 per dollar. . . According to economist Martin Feldstein, “The falling dollar and rising food prices caused market-based consumer prices to rise by 4.6% in the most recent quarter.” (WSJ). That’s 18.4% per year—and yet, Bernanke is cutting interest rates and further fueling inflation?!?

With this cut, it appears the Fed is propping up a failing economic model. For the past several years, the American economy has been built on consumer spending and financial shenanigans. 70 percent of US economic activity is related to this consumer spending which has been fed by low interest rates resulting in ever rising consumer debt. As real world wages have remained stagnant, and food and transportation costs continue to rise, this system becomes unsustainable. At some point creditors will have to be paid and consumer spending will have to decline significantly. Without artificially high consumer spending a large portion of service jobs will disappear causing further recession. Our present economic situation is built on an illusion of free markets and a never ending, never inflating, money supply. This is the Bush policy of neo-reality applied to economics — “If I say everything is good, then by nature it is good”. This administration has tried to force their reality on the American people for years whether is was with regards to Iraq, Afghanistan, the War on Terror, Global Warming, or the economy.