The dollar is headed for a bear market and it is exactly what the Bush administration and the leadership of the international banking cartel want. The demise of the dollar as predicted by Warren Buffett and George Soros is around the corner. The question is what are you going to do about it?
I’ve noticed over the past few weeks some very fascinating articles in several major newspapers, including the Washingtonpost, New York Times, Wall Street Journal, and Chicago Tribune. Although some were straight news articles and some were editorials, they all had the same theme - “What obstacles will the next President face?� All of the writers cited the budget and trade deficits and how they have reached a crisis situation, which will cause the dollar to drop.
I’ve been talking about these things for the past three years so it grabs my attention when I see a bunch of articles in mainstream papers that actually follow my line of thinking in regards to the stock market. At the same time, several Fed officials have come out and practically endorsed a decline in the dollar.
Last month, right before his recent resignation as head of the Dallas Federal Reserve Bank, Robert McTeer said, “over time there is only one direction for the dollar to go � lower.�
Right after his statement, a few other Fed officials made similar comments. Soon after, I began to see loads of articles on the subject. Some of them hinted that Bush - or Kerry (if he won) - would have to put together some sort of deal with other countries to control the dollar’s decline. The story carried over into the foreign press. For instance, check out this quote from the New Zeland Herald News :
“The United States is running an unprecedented current account deficit this year of 5.4 per cent of national output, or US$640 billion ($934.4 billion), and economists say it can’t go on forever.�
“More frugal US households could hurt many major economies who have thrived on the seemingly insatiable US demand for imports � a record US$150 billion in August. “
“And world savings are seen as already heavily concentrated. With the US needing $2 billion a day of foreign money just to break even, the International Monetary Fund says the US budget deficit alone absorbs 6 per cent of world savings.�
“The only short-term safety valve, it seems, is a slide in the dollar that would make US exports less pricey, imports more expensive and US assets cheaper to buy.�
“But that, warn economists, could be punishing for the world economy if allowed to get out of hand. It risks undermining export-dependent economies such as Japan, China and Germany and may even accelerate the pace of US interest rate rises.�
“If world leaders had a vote, experts say, they would probably back the presidential candidate most likely to secure an international accord on minimising the disruption from an accounting rejig.�
“Peter Kenen, senior fellow at the Council on Foreign Relations think tank, said such a “grand bargain� in which the United States tightens its budgets in return for Asia allowing a lower dollar and Europeans promising to fuel demand, may be the only solution.�
These newspaper articles and statements by Fed officials are very important. They suggest that a new line of thinking has emerged among the most powerful people in the United States - a decline in the dollar is going to happen. It can’t be stopped. The President will just have to do his best to at least try and control it.
You would never have seen anything like this a year ago. And throughout the 1990’s a strong dollar was a linchpin of policy. Not anymore.
It is only a matter of time before someone in the Bush administration makes a statement “in support� of a weaker dollar.
How Politics Works
I wondered where the newspaper writers were getting this story when I was reading it. Who started all this? But I know now.
Let’s take a quick look at how things tend to work in Washington. Ideas and policies usually don’t originate from the White House. Ideas come from think tanks. And if you look inside the think tanks and read their white papers as they are being written and know who the players are then you’ll understand the policies. This will give you a good idea, ahead of time, about what is going to happen down the road
I did this with the Iraq war. A year before the war started, I knew - through reading articles by people such as Paul Wolfowitz and Richard Perle and with some conversations of people who worked with my father in the US Army(he was Chief of Preventive Medicine for the Army and served on the Army Staff) the following things one year before the war in Iraq began:
1) Very few people in the intelligence community believed that Saddam Hussein’s weapons or military were a serious threat to the United States. There was no solid evidence that he had a nuclear program or an ongoing chemical or biological weapons program. Almost all of the intelligence that suggested he did came from sources that were lobbying for war. However, everyone assumed he still had weapons left over from the 1980’s.
2) High ranking officers in the US Army doubted the wisdom of going to war. They did not think Saddam was a threat that justified pre-emptive war. They are professional soldiers and patriots though who follow the Presidents orders without question.
3) The Iraq war’s intellectual origins lay in a circle of people such as Paul Wolfowitz and Richard Perle who saw a war in Iraq as a way to do two things. First, it was a way to deter other dictators from building weapons or supporting terrorists by showing them that the US was serious. Second, that rebuilding Iraq and turning it into a Democracy would be a way to change the dyanmics in the Middle East, which might eventually make the grievances of the terrorists fade away.
4) The issue of WMD was not the real reason to go to war. It was however used to justify going to war through the United Nations.
The point is that Perle and his ilk were talking about going to war in Iraq years before Bush ever got elected. Once he got in office many of these people, who lobbied for war, took positions inside the Bush administration. By looking at their writings and statements you can better understand why we went to war. You’ll also see that anti-war activist Michal Moore’s claims that Bush did it for oil or Halliburton are nonsense.
“The Eastern Establishment�
There is also in the United States something of an establishment that works behind the scenes. Probably the best description comes from a book written in 1961 by Richard Rovere called The American Establishment. Rovere wrote for the New York Times and New York Post. He calls the establishment “a more or less closed and self-sustaining institution that holds a preponderance of power in our more or less open society.� He goes on:
“The Establishment does not control everything, but its influence is pervasive, and it succeeds far more often than its antagonists in fixing the major goals of American society. Though it does not, as I have noted, come anywhere close to controlling Congress, Congress is everlastingly reacting to it.�
“The Establishment is not, of course, at any level a membership organization in the sense that it collects dues, issues cards, or holds meetings openly under its own auspices. It is a coalition of forces, the leaders of which form the top directorate, or Executive Committee...At the lower levels, organization is quite loose, almost primitive in some cases, and this is one of the facts that explains the differences in definition among experts. In the upper reaches, though, certain divisions have achieved a high degree of organization. For instance, the directors of the Council on Foreign Relations make up a sort of Presidium for that part of the Establishment that guides our destiny as a nation.�
“In matters of public policy, it may be said that those principles and policies that have the editorial support of the New York Times are at the core of establishment doctrine. And those irregularities and eccentricies that receive consideration in the Times(not only on the editorial page but in the Sunday magazine and Book Review) are within the range of Establishment doctrinal tolerance.�
“The Russians have caught on to the existence of the Establishment and understand some of its working quite well. Nikita Kruschev showed himself to be no slouch when he told Walter Lippman last spring, that President Kennedy was controlled by Nelson Rockefeller. Many people regarded this as depressing evidence of the grip of old-school Marxism on Kruschev’s mind. They thought he was mistaking a faded symbol of industrial and mercantile power for the real wielder of authority under People’s Capitalism. He was doing nothing of the sort. He was facing the facts of Establishment life. Not as a Standard Oil heir but as an Establishment agent, Nelson Rockefeller had forced the Republicans to rewrite their platform and provided for a vigorous anti-Communist defense program. Where did the central ideas of both platforms originate? In - where else? - the studies made by the Rockefeller Panel for the Rockefeller Brothers Fund and published as Prospects for America. Who was on the Rockefeller Pnael? Here are just a few names, left and right: Dean Rusk, Chester Bowles, Henry Kissinger, Lucius Clay, and Henry Luce. And when Kennedy became President, from what foundation did he get his Secretary of State? The Rockefeller Foundation, of course.�
Rovere quotes one newspaper editorial as defining the establishment as “a general term for those people in finance, business, and the professions, largely from the Northeast, who hold the principal measure of power and influence in this country irrespective of what administration occupies the White House...It is a working alliance of the near-socialist professor and the internationalist Eastern banker calling for a bland bi-partisan approach to national politics.�
There are other power blocks in the United States that aren’t based on north eastern banking and have opposed establishment policies. The economic base of the “eastern establishment� are New York international banking firms and high-technology industries that compete on the world market. Its political constituency has come from liberal Demoracts, what used to be “Rockefeller Republicans� in the 1960’s, and academia.
The “eastern establishment� promotes free trade and an internationalist foreign policy. Many of their policies and interests go against those of declining industrial companies dependent on the United States as their national market, labor intensive industries, and independent oil companies. Their opponents reside in the right-wing of the Republican Party and are made up of businessmen resentful of international banks, defense contractors, religious fundamentalists who hate liberalism, and Southerners who resent New England.
The capital of the “eastern establishment� is New York City and the power centers of the right-wing are in Dallas, Texas and Orange County, California. During the 1960’s, its counterpart to the Rockefeller group were independent oil billionaires who lived in Texas and California, such as H.L. Hunt and Clint Murchinson. They had an almost paranoid hatred of Rockefeller and funded John Birch Society literature which argued that he was a communist in the 1960’s. In the 1970’s, the Hunts had a wild scheme to corner the silver market that ended up blowing up in their face.
George Bush isn’t an establishment man, although his father was. Ronald Reagan wasn’t either. He selected Bush Sr. as his VP candidate to get the support of the establishment. The Iraq war wasn’t an establishment idea either. When Richard Nixon was President, he used to cry and complain while being taped about the “eastern establishment.� He thought they looked down on him and that he had a vindictive soul. The day after he was re-elected he held a meeting at Camp David and told his inner circle that he had two objectives for the next four years - get out of Vietnam and destroy the “eastern establishment.�
An interesting thing tends to happen after Presidential elections. People who think of themselves as ‘establishment spokesmen’ and ‘opinion leaders’ like to give the President advice. For instance, right after Clinton got elected, David Rockefeller Jr. published an editorial in the New York Times with the title “Why I Trust Clinton.� He said that he trusted Clinton to “take the heat� in order to balance the budget.
I interpret some of the current “What obstacles will the next president face?� articles now as similar advice giving. In fact they may be inspired by an article published in the September issue of Foreign Affairs, the journal of the Council for Foreign Relations, written by Peter Peterson.
Foreign Affairs is probably the most influential journal in the United States. Some of the articles discuss subjects which, years later, become the prime agenda. This isn’t due to conspiracy, but because the writers are among the most well connected and influential people in the country. They have a better view of what is coming ahead than you or I do. In the late 1950’s, Henry Kissinger introduced the nuclear war concept of “Mutually Assured Destruction� in the journal and then wrote an article about a detente with China before he became Secretary of State.
In the early 1990’s, Foreign Affairs devoted an entire issue to an article written by political science professor Samuel Huntington titled the “Clash of Civilizations,� which predicted a terror war between Islam and the west. And now Peter Peterson just wrote an article about the deficit crisis facing the United States and the almost inevitability of a dollar crisis.
Peterson succeeded David Rockefeller as the Chairman of the Council for Foreign Relations. He took the position when David Rockefeller retired in 1985. He had been the CEO of Lehman Brothers and served as a director of RCA, Federated Department Stores, General Foods, and Minnesota Mining and Manufacturing. He also served as a trustee for the New York Museum of Modern Art along with David Rockefeller. When John McCloy (who had served as President of the World Bank, Chairman of the Rockefeller controlled Chase Bank, and Chairman of the Council for Foreign Relations) died in 1989, Peterson was an usher along with McGoerge Bundy and former Federal Reserve Chairman Paul Volker at his funeral. In short, he’s connected.
Riding for a Fall
Peterson’s article, titled Riding for a Fall, opens by discussing the huge increase in government expenditures over the past few years, noting that they are likely to rise due to the military budget and war on terror and the aging of America’s population.
He notes that the government budget deficit and America’s consumption of goods and services has forced the United States to borrow $540 billion a year from the rest of the world. “This unprecedented current account deficit is paid for through direct lending and net sales of US assets to foreign businesses or persons: everything from stocks and bonds to corporations and real estate. “The United States,� he writes, “imports roughly $4 billion of foreign capital each day, half of that to cover the current-account deficit and the other half to finance investments abroad. At 5.4% percent of GDP in the first quarter of 2004, this deficit is substantially higher than its previous record (3.5 percent of GDP) in 1987, when the dollar fell by a third and the stock market took its “Black Monday� plunge.�
Economists at the Federal Reserve believe this deficit is going to continue to grow, with dire implications. According to Peterson, “If nothing else were to change, borrowing would continue until foreigners accumulate all the US assets they cared to own, at which point a rise in interest rates(choking off investment) and a decline in the dollar (choking off imports and stimulating exports) would gradually close the current-account deficit....In the absence of an increase in the national savings rate, people would just have to get by with less investment in their own economy and debt-service payments would no longer rise. Instead, Americans would simply make do with less capital, slower growth in GDP, and, of course, a slower rate of increase in their living standards.�
Peterson calls this a best case “soft landing� scenario. The alternative is a continual decline in the dollar that eventually snowballs into a fall blown panic, which leads to a sharp jump in inflation, soaring interest rates, and loss in confidence in the economy. It would be the type of thing that we’ve seen happen over the past few years in Argentina.
Peterson interviewed tons of powerful people to write this article. “Many see a real risk of a crisis. Former Federal Reserve Chairman Paul Volker says the odds of this happening are around 75 percent within the next five years,� he writes, “former Treasury Secretary Robert Rubin talks of a day of serious reckoning.�
Peterson notes that there are skeptics who say not worry “because governments around the world would never allow a crisis to happen. They would intervene massively to support the American currency by buying dollars....but foreign governments might lose their nerve sooner than place vast sums of their own taxpayers money into declining dollar-denominated assets. And once the mood of private investors worldwide changed decisively, there would be little that governments could do.�
Peterson wants the adjustment to be a “soft landing.� He thinks the only way this can happen is if the US works with foreign governments to help slow the dollar decline and also for the world to go on a path of more balanced growth. This would require the US to save and export more while the rest of the world imports and consumes more. The problem is, as he admits, this would require “profound cultural changes.�
Peterson wants the next President, whoever that is (remember he published this in September), to stop leaving “the impression that vaunted superpower status comes with few long-term costs or responsibilities.� He believes “the United States would greatly benefit from a serious and realistic discussion of the total cost of its long-term security agenda. It is a discussion that would lend welcome urgency to efforts to control the federal deficit, and, in particular, to reform ballooning entitlement programs.�
You can expect these topics to be all over the press over the next 6 months and it wouldn’t surprise me if Bush doesn’t end up taking on some of them, especially the reform of social security. This is the type of “advice� Peterson is pushing. It’s the type of thinking that is in the air now. But it has to be. As a country, this is the most serious issue we face.
What I want to underscore in this article is the point that the people in the know all recognize the reality of the deficits our country faces and the high possibiliy of a full blown dollar crisis. They know the dollar will drop. The strong-dollar policy of the past is being abandoned, because there is now no other choice. Even Federal Reserve officials are saying as much.
The writing is on the wall. The dollar is going to drop and gold is going to rise. It is only a question of how fast and how far each will move. A lot of people have argued that there is a conspiracy of Wall Street banks, led by JP Morgan, to suppress the price of gold in order to keep the dollar strong. If there ever was such a conspiracy, which I doubt, then there is no reason for it to exist now. Any artificial cap on gold is being lifted. I don’t see why in the world JP Morgan and all of these large Wall Street banks would sit on some short position if they know it is going to go against them.
To make money in the financial markets all you have to do is to understand what the dominant trend is. In the late 1990’s, the trend was a boom in technology stocks and the Nasdaq. That boom was driven by super low interest rates thanks to Alan Greenspan’s bailout programs for Long Term Capital, Asia, and Russia in 1997 and 1998. But all you had to know to make serious money was that technology stocks were going up.
All you need to know now is that the dollar is going to drop and gold is going to go up. The dollar decline will be the wheel that turns all of the financial markets over the next year and beyond. All of the implications for this aren’t clear. No one knows exactly how it will play out. I’m still studying this myself and I know I’m going to grapple with it for the next few months; however, I am skeptical that George Bush and the Federal Reserve are going to be able to engineer a “soft landing� for the dollar. It is impossible to control a financial market. Alan Greenspan said he was going to make a “soft landing� for the Nasdaq in 2000 and it didn’t happen. But what I do know for sure is that the falling dollar means gold is going to up.
The current account deficit is reaching a crisis level. It has grown so large that the foreign investment coming into the United States is no longer creating economic growth. Although the United States is taking in 80% of the world’s surplus savings, it is all being used to finance the deficits.
According to Stephen Roach, the head economist of Morgan Stanley, the deficits are growing so large that, by the end of the year, America’s indebtedness to other countries will reach 28% of GDP. That would bring US indebtedness to a level of 300% of exports. Argentina and Brazil were at 400% right before they collapsed in the 1990’s.
US Treasury data shows that the net capital inflows from the rest of the world into the United States fell for the 6th month in a row. Private investment from abroad fell to $34.7 billion in August from $72.9 billion in July. Asian central banks made up for the shortfall. If they hadn’t, the dollar would have crashed.
The NY Times quoted Ashraf Laidi, a currency analyst at MG Financial Group, as saying, “foreign central banks saved the dollar from disaster. The stability of the bond market is at the mercy of Asian purchases of US Treasuries.�
The problem is, China and Asia are not going to support the dollar forever. They do so now because they depend on the US as their main export market. Eventually though they will turn away from focusing solely on export-led growth to focusing their monetary policy on managing internal demand and trade with other Asian countries. When China raised interest rates last week it may have been a sign that they are starting to do this.
China’s central bank also dropped a bombshell over the weekend when it announced that it would “create a more flexible exchange-rate mechanism� that would allow allow its currency to float more. Right now China has the yuan pegged at 8.30 per dollar. If they allow it to fluctuate the yuan will gain against the dollar.
As the dollar continues to decline, it is likely that mainstream investors will begin to recognize gold as a real store of value, especially if a falling dollar brings a dose of inflation along with it. The next year is going to be about the mainstreaming of gold. This is what wave two is about. And as someone reading this you are already well ahead of the curve.
Links:
[1] http://www.wallstreetwindow.com/content/node/267