Hard Times are on the Way For The USA

Bush's Chernobyl Economy -

by Mike Whitney /
www.dissidentvoice.org /


In the next few months, a financial crisis will arise somewhere in the
world which will jolt the American economy and trigger a swift and
precipitous decline in the value of the dollar.



This is not speculation. It will happen and there is nothing that the
Bush administration can do to stop it.



All of the traditional supports for the dollar have been removed by
the shrinking economy, a massive $800 billion account deficit,
dramatic increases in the money supply, and the reckless manipulation
of interest rates.



Now, the noose is tightening. Our foreign trade partners can see that
we are drowning in red ink and are refusing to buy back our debt in
the form of US Treasuries. This is a death sentence for the dollar. It
means that in a matter of months the once mighty greenback will crash
through the floor and free fall through open space.



Mike Swanson of the WallStreetWindow explains the worrisome details
related to last month's trade deficit:



Just a few days ago the US Treasury reported that the net capital
inflows from the rest of the world into the US fell for a 6th month in
a row. Private (purchases) from abroad fell to $34.7 billion in August
and from $72.9 billion in July. Asian central banks made up for the
shortfall. If they hadn't the current account deficit would have
exploded. 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.



Swanson poses an interesting theory, but it can't be verified since
the Fed stopped printing the M-3 (which would provide the relevant
facts about the current cash inflows) and since China and Japan have
slowed their purchases of UST Bonds.



Jim Willie of GoldenJackass.com, offers an entirely different theory
in his recent article "Spent Dollar Momentum". Willie opines:



Behind the scenes are the many illicit London-based firms busily
buying US Treasury Bonds with freshly-printed money from the Dept of
the Treasury. Their tracks are covered by the blackout on the money
supply statistic. (M-3) An isolated US government with a well-oiled
printing press as the primary support device makes for a dangerous
currency situation.



Willie's "conspiracy theory" jives nicely with the US Treasury's
figures on the "Foreign Financing of US Government Debt" (June 2006).
Surprisingly, between 2005 and 2006 our friends in the United Kingdom
purchased an additional $142 billion of USD bringing their stockpile
of dollars to $201.4?!?



Why?



Why would UK investors suddenly stock up on dollars when everyone else
in the currency market is bemoaning the greenback's systemic
problems?



Could it be that banks in the UK are just hiding the paper trail for
friends in America who want to forestall a collapse in the dollar
until after the election?



Of course, there could be another explanation for the irregular
activity in cash inflows, (purchase of US Treasuries) that is, that
we're still living in a "faith-based" Wonderland where our overseas
trading partners are more than willing to buy an endless supply of
worthless paper from a well-meaning Goliath who is busy spreading
democracy to the "great unwashed" in developing world.



This is an utter fiction. The world is backing away from the dollar
and whether one accepts the conspiracy theories or not, it's clear
that the Federal Reserve is trying to cover its tracks and conceal its
shadowy maneuverings.



There is nothing accidental about the crisis we'll soon be facing.
Officials at the Federal Reserve and the US Treasury are fully aware
of the devastating effects of massive trade deficits, increasing the
money supply, and self-serving interest rates manipulations. They have
set the country on the path to ruin as part of a broader scheme for
remaking the global system according to well-known precedents. In
truth, the plan to modify the present system has a long history, going
back to the 1980s when many of the same actors in government today
were in positions of power in the Reagan administration. For the last
six years they have been patching together their strategy, producing
record deficits, unfunded tax cuts, mammoth government expansion, and
doubling the money supply.



How can anyone argue that they did not understand the implications of
their actions?



Did Greenspan know that by lowering interest rates in 2001 to 1.5%
that he would sluice trillions of dollars into the real estate market
producing the largest equity bubble in history? And, if he didn't
know, then how is it that the Fed provides the statistics that state
precisely how large the housing bubble really is?



Didn't Greenspan read the charts and graphs put out by his own
organization?



And why did Greenspan support the shaky "no down payment," "interest-
only" loans and ARMs which allowed "high-risk" people to qualify for
mortgages when the Fed knew, according to their own figures, that when
interest rates went up, foreclosures would skyrocket?



Of course he knew; they all knew. How could they NOT know? They
produce the facts and figures themselves! It's all part of a madcap
scheme to shift wealth to the top 1% and drive a wooden stake into the
heart of the middle class. When Greenspan saw that doomsday was
approaching, he got "cold feet" and bailed out. Now the scholarly
Bernancke is left to supervise the economic meltdown and face the
public scorn.



Trouble Ahead



Currently, the U.S. economy is held together by the slimmest of
threads, literally duct-taped together by massaging all of the crucial
economic numbers, pumping as much cheap fiat-currency into the system,
and by "increasingly-suspicious" maneuverings in the futures markets.
After the elections, they'll be no reason to conceal the rot at the
heart of the system. After all, we are not facing an unforeseen
catastrophe, but a planned demolition intended to increase the
disparity between rich and poor to such an extent, that democracy, as
we know it, will no longer be possible.



Nothing is more repugnant to America's ruling elite than the notion
that every man, however broke and insignificant, can participate in
our system of government.



The Federal Reserve's bloody fingerprints are all over our present
dilemma. The privately owned Fed has never operated in the public
interest. By doubling the money supply in the last seven years and
keeping interest rates artificially low, the Fed has generated a $10
trillion housing bubble while, at the same time, ignoring an $800
billion trade deficit which is sucking up American assets and crushing
American industry at an unprecedented rate.



This massive expansion of debt has increased the likelihood that an
unexpected event, like a bank failure or a teetering hedge fund, will
cause a major disruption in the markets sending tremors through the
global system. Even if nothing explosive happens, the faltering real
estate market will continue to swoon, consumer spending will dry up,
and the fragile economy will crash to earth. In fact, this is taking
place right now; retail sales are anemic, residential housing dropped
a whopping 17% in the last three months, and economic growth shrunk to
a measly 1.6% in the third quarter. The only thing keeping the economy
from collapsing entirely is the sudden drop in oil prices, which
"conveniently" coincided with the midterm balloting.



This won't last. According to industry analyst Matthew Simmons the
world production of oil may have already peaked setting the stage for
a leveling-off period before the inevitable decline. Simmons has data
to show that "world supply of oil has declined to 83.98 million
barrels per day in the second quarter after hitting 84.35 million bpd
in the forth quarter of 2005." Oil production is going backwards not
forwards.



No one believes the price of oil is going down any time soon. As
energy prices rise and the housing market falls, consumer spending,
which added $825 billion from home equity into last year's economy,
will continue to shrivel. Thus, the Fed will have to make the tough
choice of whether to loosen the purse strings and lower interest rates
to keep the economy sputtering along or ratchet up rates to attract
more foreign investment. (Keep in mind that the real estate market is
already in retreat, even though, the full force of the Fed's interest
rate increases won't be felt for up to 6 to 12 months after they have
been raised. The worst is yet to come)



Most economists believe that Fed Chairman Bernancke will be forced to
lower rates sometime in 2007 to try to stimulate the economy and to
affect a "soft landing" in the housing market, but don't count on it.



I believe the Fed is more likely to either keep rates the same or
raise them to outpace the anticipated increases in Europe and Asia.
The reason for this is simple: it presently takes nearly $2.5 billion
per day to cover our current account deficit. To continue to attract
foreign capital, US Treasuries must offer a higher rate of return than
their foreign competitors. Now that the economies in Europe and Asia
are growing, naturally their interest rates are going up accordingly
(to slow inflation). That means that the only way that America can
continue to expand its debt, through the exchange of fiat currency for
resources and manufactured goods, is by raising the return on
Treasuries. And, that is probably what Bernanke will do, even though
it will skewer the struggling American worker and further damage the
US economy.



The secret of running the global economic system is to control the
issuance of currency and, thereby, be in a position to expand one's
own debt as one sees fit. The Federal Reserve must preserve its
"dollar hegemony" if it wants to maintain the greenback as the world's
reserve currency. To achieve that, the dollar must stay one step ahead
of its competitors (higher rates) and prove that it is on solid
financial footing. This is impossible now that the US economy is
contracting, so Washington has decided to do the next best thing;
corner the oil market. By controlling Middle East oil US policy-makers
believe that they can force foreign nations to accept the debt-plagued
greenback regardless of the faltering US economy. It is no different
than any other extortion racket.



If the plan succeeds the dollar will remain the de-facto international
currency. But it is a difficult task and the escalating violence in
Iraq suggests that the results are far from certain.



Corporate Colonization



"Free Trade" is the Holy Grail of neoliberalism. It is essentially a
public relations scam intended to disguise the shifting of wealth,
jobs and resources from either the middle class or the public sector
to the corporate and banking establishments. Despite the zealous
cheerleading of Thomas Friedman and his ilk, the basic facts have been
thoroughly examined and are not in dispute. Free trade has been a dead
loss for everyone except the people for whom it was originally
designed: the wealthiest and most powerful men on the planet. It has
served them quite well.



For example, "since NAFTA went into effect in 1994, the US has lost
over $4 trillion to foreigners through its trade deficit . . . During
that 11.5 year period, foreign ownership of US assets skyrocketed an
amazing 400% from $3 trillion to over $12 trillion . . . Foreign
interests now own 46% of US Treasury debt, 26% of corporate bonds, and
13% of US corporate equities. Now nearly 100% of on-going borrowings
by the government are funded by foreign interests."..."Foreign interests
also control a majority of US domestic industries such as movies,
music, publishing, metal ore mining, cement production, engine and
power plant production, rubber and plastics and are major owners of US
industries such as pharmaceuticals, chemical manufacturing, industrial
machinery manufacturing, motor vehicles, and electronic equipment and
components...In addition, the US has lost 3 million manufacturing jobs
over the last decade, real wage growth after inflation has been
essentially zero," and personal debt has never been higher. (Data from
Thomas Heffner, EconomyInCrisis.org)



Since 1980, 13,730 major companies have been sold to foreign
corporations. We no longer produce what we need to sustain
ourselves.



These facts may have a mind-numbing affect on the reader, but they
make a point that is simple and unavoidable. The country is being
colonized by corporate predators and its main assets are being sold
off to the highest bidder. This rampant carpet bagging is taking place
in full view of the American public that still clings to the spurious
idea that "free trade" is generally beneficial for all. It is not, and
we are about to experience its full-effects as America's "straw-house"
economy topples from its loss of manufacturing-capacity and its
staggering account imbalances.



"Foreign investors now own 46% of US Treasury debt" over $3 trillion
dollars! The Federal Reserve and their corporate she-wolves are
planning to prolong the hemorrhaging of US wealth as long as possible
extracting every last farthing from the prostrate corpse of the waning
republic.



Now, we are at the brink. Energy prices will go higher after the
elections, manufacturing will continue to flag, and the housing
Zeppelin is drifting towards the high-tension wires. To make matters
worse, the American consumer, the "engine for global economic growth,"
is drowning in a sea of personal debt.



There's no place to go but down.



Every part of this bleak picture was anticipated by its architects.
That's why they hastily slapped together the requisite legislation for
a modern-day police state. After passing the Military Commissions Act
of 2006 (which allows the president the arrest whomever he chooses
without charges) and overturning the Posse Comitatus Act (the
president is now free to deploy the military within America against US
citizens) the Bush administration is as ready as they can be.
Apparently, they feel like they can manage the public's shock and
outrage with detention camps and water cannons.



We'll see.



In any event, the trap has been set and any minor disruption in the
hedge funds or derivatives markets will put the economy into a violent
tailspin forcing our "Unitary" president to activate his plans for the
new world order.



Battle Stations, Battle Stations



Last week an article by Ambrose Evans-Pritchard appeared in the UK
Telegraph, where he stated:



[Treasury Secretary] Paulson re-activated the secretive support team
to prevent markets meltdown. Judging by their body language, the US
authorities believe that the roaring bull-market is just a sucker's
rally before the inevitable storm hits . . . the plunge protection
team is a shadowy body with powers to support stock-index, currency,
and credit futures in a crash. Otherwise known as the working group on
financial markets, it was created by Ronald Reagan to prevent a repeat
of the Wall Street meltdown in October 1987" . . . Paulson has set up
"a command center at the US Treasury that will track global markets
and serve as an operations base in the next crisis." [Members include
the heads at Treasury, Federal Reserve and Securities and Exchange
Commission]



Evans-Pritchard adds: "Mr. Paulson has asked the team to examine
'systemic risk posed by hedge funds and derivatives, and the
government's ability to respond to a financial crisis . . . We need to
be vigilant and make sure we are thinking through all of the various
risks and that we are being very careful here. Do we have enough
liquidity in the system?'"



And, finally, Evans-Pritchard queries: "[Do] Mr. Paulson and Mr. Cox
(SEC) know something that we do not: whether other hedge funds are in
the same sinking boat as Amaranth Advisors and Vega Management, keel-
hauled by bets on natural gas and bonds? Or whether currency traders
with record short positions on the Japanese Yen and Swiss Franc are
about to learn the perils of the Carry Trade, a high-stakes game of
chicken where you bet against fundamentals with high leverage to make
a quick profit. Everybody knows it will blow up if the dollar goes
into free fall."



So what is Paulson anticipating?



Gabriel Kolko offers us a clue in a CounterPunch article, "Why a
Global Economic Deluge Looms":



The entire global financial structure is becoming uncontrollable in
crucial ways its nominal leaders never expected. Instability is its
hallmark...Contradictions now wrack the world's financial system, and if
we are to believe the institutions and personalities who have been in
the forefront of the defense of capitalism, it may well be on the
verge of serious crisis."



Deregulation and reduced market transparency have created a plethora
of financial instruments which are relatively untested and
extraordinarily volatile. By eliminating the "rules of the game"
market-savvy investors have raked in the profits but reshaped the
economic landscape in a way that no one can predict what the ultimate
outcome will be. Hedge funds are now loaded with over-leveraged debt-
instruments that promise a generous return in an up-tempo market, but
certain doom in an economic downturn. Now, that all the arrows are
pointed towards recession the devastating effects of this new
"liberalized" system will be felt throughout the global economy.



No one knows what is in store for these high-risk hedge funds which
have only been in existence for a short time and which Americans have
dumped trillions of their hard-earned savings. As Kolko says, "The
credit derivative market was almost non-existent in 2001, grew fairly
slowly until 2004, and went into the stratosphere, reaching $17.3
trillion by the end of 2005.



Is it any wonder why the main players at the Fed, the Treasury and the
SEC are feeling a bit jittery?



Any shock to the markets could set off a system-wide cataclysm. Just
this week, for example, Taiwan was bracing for a stock market crash
following the surprise indictment of first-lady Wu Shu-chen. Even
relatively small incidents like this on the other side of the world
create the potential for contagion that can spread rapidly in this new
world of globalized markets. The danger is even greater when those
markets are built on a foundation of sand.



Hank Paulson was doubtless selected as Treasury Secretary as the best
possible "industry-insider" to oversee the unwinding of America's
humongous account imbalances and flimsy "deregulated" markets. His job
is to ensure that, at the end of the day, US banking giants, the
Federal Reserve, and western elites still control the global economic
system and that the dollar reigns supreme. Whatever happens to the
American middle class in the process is of no consequence.



But Paulson faces a daunting task from this point on; fudging the
numbers only won't work forever. So far, the greenback has benefited
from the manipulation of oil prices, but that will soon end. (Better
"fill 'er up" now) The US economy is a shriveled shadow of its former
self; housing and manufacturing are in a shambles and growth depends
entirely on the expansion of debt. As GDP begins to nosedive, foreign
investment will dry up, capital will flee to more promising markets in
Asia and Europe, and the American people will totter into a barren
world of soaring unemployment, hyperinflation, and 1930s-type
deprivation.



The country is now facing a Chernobyl-type meltdown and the prospects
for changing direction appear to be minimal. The foundation blocks for
sound economic growth and prosperity have been replaced by a misguided
faith in military adventurism and police state repression. The results
are plain to see.



We are now more vulnerable to a seismic economic event than anytime
since the Great Depression. The corporatists and the money lenders
have absconded with the nation's wealth, gutting the manufacturing
sector, creating enormous equity bubbles, and raffling off our vital
industries to foreign investors. At the same time, the Bush
administration has sown dragons-teeth around the world leaving the US
with precious few friends to throw us a lifeline when ship starts
taking on water.

Hard times are on the way, only this time it'll be detention centers
instead of soup kitchens.

----------------------------------------------------------------------
Mike Whitney lives in Washington state, and can be reached at:
fergiewhitney@xxxxxxxx

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