The US dollar and the biggest default in history.

Discussion in 'Economics' started by SouthAmerica, Mar 16, 2008.

  1. .
    March 16, 2008

    SouthAmerica: Just a Reminder: The US dollar and the biggest default in history….

    The Economist Special Report dated December 4, 2004 said: “If the dollar falls by another 30 percent as some predict, it would amount to the biggest default in history: not a conventional default on debt service, but default by stealth, wiping trillions off the value of foreigners' dollar assets.”

    The US dollar was trading around US$ 1.30 to euro 1.00 when that article was published in December 2004, since then the US dollar has declined another 21 percent and still is heading South.

    By the way, if you did not read the Financial Times (UK) dated March 14, 2008 – they published a front page article “Dollar falls to record low” – and the article said: “…The euro moved to record highs above $ 1.56 – at which point Goldman Sacks estimated that the eurozone had overtaken the US as the world’s biggest economy measure by market exchange rates…”


    Euro 1.00 = US$ xxx

    25 Nov 2004 = 1.3213
    24 Nov 2004 = 1.3146
    23 Nov 2004 = 1.3089
    22 Nov 2004 = 1.3033
    19 Nov 2004 = 1.3020
    18 Nov 2004 = 1.3024
    17 Nov 2004 = 1.3026
    16 Nov 2004 = 1.2971
    15 Nov 2004 = 1.2955
    12 Nov 2004 = 1.2921

    Source: European Central Bank

    Here is the closing rate for the euro on a daily basis - and the euro trading range when the author wrote this special article for The Economist – article published on December 4, 2004.


    The Economist had a Special Report regarding the US dollar on its December 4, 2004 issue - "The disappearing dollar." (Pg 9)

    Quoting from that article:

    …America's challenge is not just to reduce its current-account deficit to a level which foreigners are happy to finance by buying more dollar assets, but also to persuade existing foreign creditors to hang on to their vast stock of dollar assets, estimated at almost $ 11 trillion. A fall in the dollar sufficient to close the current-account deficit might destroy its safe-haven status. If the dollar falls by another 30 percent as some predict, it would amount to the biggest default in history: not a conventional default on debt service, but default by stealth, wiping trillions off the value of foreigners' dollar assets.

    The dollar's loss of reserve-currency status would lead America's creditors to start cashing those checks - and what an awful lot of checks there are to cash. As that process gathered pace, the dollar could tumble further and further. American bond yields (long-term interest rates) would soar, quite likely causing a deep recession. Americans who favour a weak dollar should be careful what they wish for. Cutting the budget deficit looks cheap at the price.

  2. .
    March 16, 2008

    SouthAmerica: Here is some information that I posted on the PBS forum in December 2004.

    My screen name on that forum was: Brazil.


    December 22, 2004

    Brazil wrote: There are too many US Dollars floating around the globe total, and the US government still borrowing by the trillions from the rest of the world.

    In the near future the United States will need to change the exchange rate of the US dollar in relation to 1 Euro and other currencies. The US dollar will be sold by a more realistic international measurement. The US dollar it will be sold in kilograms as follows:

    1 Euro = 1 kg of US dollars.

    Conversion value:
    1 Kilo = 2.2 lbs.

    Note: Before long the market will demand that the conversion rate be at least:

    1 Euro = 1 kg of US$ 100 dollar bills.


    Brazil wrote: History repeats itself and the melting US currency.

    A reminder from the past "Germany 1922 to 1923" and a lesson for what to expect from today's "Crashing US dollar."

    How does the value of a currency get destroyed?

    In a nutshell: by issuing or creating tremendously excessive amounts of it. Not just too much of it, but way too much; today's major example: US dollar.

    The information below gives you an idea of the future of the US dollar.


    Germany 1922 - 1923

    How does the value of a currency get destroyed? In a sentence, by issuing or creating tremendously excessive amounts of it. Not just too much of it, but way too much. This excessive issue can happen in different ways; for example, by British counterfeiting, as occurred with the U.S. continental currency. The central bank itself might print too much currency; or the central bank might allow speculators to destroy a currency, through excessive short selling of it, similar to short selling a company's shares.

    The destruction of a national currency through "speculation" is what concerns us in this case. It is also a timely topic considering how speculation was recently allowed to destroy several Asian currencies, which have dropped over 50 percent against the dollar, in a few months time, threatening the lives of millions.

    It works like this. First, for whatever reason, there is some obvious weakness involved in the currency. In Germany's case it was World War I, and the need for foreign currency for reparations payments. In the case of the Asian countries, they had a need for dollars in order to repay foreign debts coming due.

    Such problems can be solved over time and usually require some national contribution toward their solution, in the form of taxes, or temporary lowering of living standards. However, because currency speculation is still erroneously viewed as a legitimate activity, private speculators are allowed to make a weak situation immeasurably worse; to take billions of dollars in "profits" out of the situation, by selling short the currency in question. Not just selling currency which they owned, but making contracts to sell currency which they didn't own - to sell it short.

    If done in large enough amounts, such short selling soon has self-fulfilling results, driving down the value of the currency, faster and further than it otherwise would have fallen.

    Then at some point, panic strikes, which causes widespread flight from the currency by those who actually hold it. It drops precipitously. The short selling speculators are then able to buy back the currency which they sold short, and obtain tremendous profits, at the expense of the industrialists and working people whose lives and enterprises were dependent on that currency.

    The free market gang claim that it's all the fault of the government that the currency was weak in the first place. But by what logic does it follow that speculators take this money from those already in trouble? And they call this business? It should be viewed as a form of aggression, no less harmful than dropping bombs on the country in question. The recent outrage expressed on this by the prime minister of Malaysia got it right.

    The proper reaction would be to help strengthen the currency, not promote its destruction. Industrialists should realize that when they allow such vicious activity to be included under the umbrella of "business activity," they are cutting their own throats. They should help isolate such sociopathic speculators, so that they can be stopped by the law.

    Back to Germany. Far too many German marks were being created under the privately controlled Reichsbank. Exactly how, will be discussed shortly. These excessive issues drove down the value of the mark:

    By July 1922, the German mark fell to 300 marks for $1; in November it was at 9,000 to $1; by January 1923 it was at 49,000 to $1; by July 1923, it was at 1,100,000 to $1. It reached 2.5 trillion marks to $1 in mid-November 1923, varying from city to city.

    In the monetary chaos, Hamburg, Bremen and Kiel established private banks to issue money backed by gold and foreign exchange. The private Reichsbank printing presses had been unable to keep up, and other private parties were given the authority to issue money. Schacht estimated that about half the money in circulation was private money from other than Reichsbank sources.

    Source: The Crashing US Dollar – By Brazil

  3. So what is your suggestion in order to preserve our existing capital during this depression?

    Mind you, I am not seeking to profit from it, I just want to put my capital somewhere so that I know it will stay valued in the coming years of this.

    Commidities? I don't think so... I think it is in a bubble and once recession hits, big crash or no, demand drops and it'll correct. Maybe AFTER the correction?

    Gold/Silver? Possibly, but it's too in a bubble and could correct and run on gold investments for liquidity can possible hurt, I don't know enough to analyze.

    Foreign currency? US dollars?
    Heliban is inflating the hell out of the US to get itself out of trouble which is devaluing the dollar. Likewise, when derivatives crash, the ensuing contraction/deflation and loss of liquidity can make the dollar sought after again.

    Withdraw money and store under the mattress?
    Hell... maybe even the local banks down the street like bank of america or wells fargo, will dollars in those savings accounts even be safe there?? Would FDIC confidence ensure it? Would all those major banks die and refuse any withdrawals even from basic savings?

    Even brokerages like scotttrade, fidelity, charles schwab that just facilitate trading (but don't take on any risk of their own.. supposedly...), will money in those accounts be safe?

    What is your recommendation to ride this out and preserve existing capital?
  4. "Americans who favor a weak dollar" are (1) counting on some short-lived benefit, and (2) are TOTAL DUMBASSES! The Dollar default on "foreigners" is SMALL by comparison to the loss of wealth by Americans whose assets are denominated in Dollars.

    The PRIMARY reason the Dollar is weak is deficit spending by US Congress... to the tune of nearly $10 TRILLION in national debt.

    The Gummint of the US is DESTROYING the financial fabric of the country. Historically, the path the US is on has always (let me emphasize.. A-L-W-A-Y-S) escalated to the point of destroying the currency and bankrupting its citizens.

    20 years ago the Gramm, Rudman, Hollings bill... requiring the government to stop deficit spending... was passed into law. But when it came time to obey the law, it was just junked like it had never been passed. So, when the Gummint defies the rule of law for their own personal aggrandizement and greed, what chance do we have?
  5. Foreign countries are crying about the dollar default, so they don't mind what really matters:

    Why they don't have enough investment oportunities in their own countries?

    As simple as that.
  6. .

    Crgarcia: Foreign countries are crying about the dollar default, so they don't mind what really matters:

    Why they don't have enough investment opportunities in their own countries?

    As simple as that.


    March 16, 2008

    SouthAmerica: The countries from around the world are going to wake up in a hurry.

    If you are an investor from the Eurozone and you made investments in the United States in the last 5 years – your investment is going up in smoke.

    If you are from Brazil – then you certainly made a very bad bet if you have invested on the US market on the last 5 years.

    But, if you are from Zimbabwe then your investment did work on the last few years on your favor.

  7. .

    Protodigm: So what is your suggestion in order to preserve our existing capital during this depression?

    What is your recommendation to ride this out and preserve existing capital?


    March 16, 2008

    SouthAmerica: Reply to protodigm

    I am not recommending anything for you or anybody else on this forum, since I don’t have a license to recommend any type of securities.

    But I friend of mine asked me a similar question: what he should do with some money that he has received recently? (only $350 k) – he told me he did not want to put it under his mattress – since we talk on a regular basis we are about in the same wavelength regarding what is going on economically here in the US and around the world.

    Here is what I told my friend (actually I have told that to more than one of my friends):

    The risks are too high here in the US today. I would not invest any money in the stock market. The housing bubble it is being deflated. The only place that makes sense to me right now to park your money it is in U.S. Government securities - "TIPS"

    Below is brief information about these US government securities. I told my friends better safe than sorry. Cash is king when the Shit hits the fan. If you have cash on hand, after the decline you can buy the pieces for a fraction of its previous price.

    In a Nutshell: Keep in mind the following information regarding the speed of a possible Wall Street meltdown – today it happens at the speed of light:

    Bear Stearns Companies Inc. (NYSE: BSC)
    Info as of March 17, 2008

    52 Wk High = $159.36

    Closing price as of March 12, 2008 = $ 62.97

    Closing price as of March 14, 2008 = $ 30.00

    On March 16, 2008 JP Morgan buys Bear Stearns for $ 2.00 per share.

    Bear Stearns went from $ 160 per share to $ 2.00 per share in less than one year - Or even better from $63 to $ 2 on just a matter of days.

    There is a positive side here to the story: the Bear Stearns investors did a little better than the investors of Enron.

    The other insight that we have learned with the latest experience is that the US government is ready to nationalize many companies if necessary to keep them afloat. And we probably will have many more Bear Stearns ready to explode in the coming weeks

    At this point I would not be surprised to find out that companies such as Citigroup is on the top of the list of companies to be nationalized by the US government. I would dump ASAP any Citigroup stock among other financial stocks that I would be holding on the portfolio, but if you don’t sell it now you probably still have the opportunity to sell your shares at $ 1.00 per share on a final fire sale.

    Basically Wall Street has become very fast a major minefield and we will have many more financial nuclear explosions in the near future.

    Keep in mind that from the US government to all these major financial institutions everybody is in full damage control mode, and at this point everybody is going to say anything necessary to calm down the financial markets.

    The faster you can go through the door the best it will be for you, but you will be able to hear the noise of the stamped of the herd that is coming behind you.

    I can’t even imagine what is going on inside of the entire derivatives global market – I wonder if the trigger point for a total meltdown of the derivatives market it has already been pressed?

    Let’s see if the US dollar will be able to reach the price of US$ 1.60 or higher versus the euro during this coming week.

    It’s getting ugly out there, but I am not surprised even a bit by what is happening since I have been writing about it for a long time.

    So let the fireworks start in Wall Street.




    The first issuance of TIPS was in February 1997. Now there are seven years of TIPS history, and the TIPS market, as of 11/30/03, has more than $176 billion, or 4.9%, of the total $3.6 trillion outstanding marketable Treasury debt held by the public. The U.S. Treasury department, under both Democratic and Republican leadership, has assured investors that they are an integral part of the government's debt management strategy. The current Administration's stated policy is to keep the TIPS program in place without a review for change for at least another five years, and has increased the new-issuance frequency from three to four times

    How They Work

    Currently, 10-year TIPS yield 1.96%. That is 2.29% less than the 4.25% that one will get with a 10-year U.S. Treasury note (the cash bond). The principal is adjusted to inflation and semi-annual interest payments are based on the inflation-adjusted principal at the same time interest is paid. As long as inflation remains greater than 2.3% - the difference between the regular Treasury's 4.25% yield and the 1.96% TIPS yield - TIPS are a bet. Like all U.S. Government securities, TIPS are guaranteed to return 100% of original par value even if deflation caused the principal value to fall below 100 as the Treasury will make up the difference when the principal is repaid at maturity.


    Like all U.S. government securities, TIPS are guaranteed to return 100% of the par amount at maturity, even in deflation.

    If you need more detailed information go to:"government+securities++Tips"&hl=en&ie=UTF-8

  8. .

    April 22, 2008

    SouthAmerica: I wrote various articles over the years about how Brazil also should adopt the Fairy Tale system of US government statistics to show all kinds of meaningless information like the ones the people on Wall Street uses on a regular basis to make their investment decisions – information provided by the US government regarding the US unemployment rate, GDP, and so on…

    The world of illusion has worked well for Wall Street and for the United States economy for a number of decades now and people from around the world also have been rushing with their money and they want to participate on this massive economic world of illusion.

    Americans should be glad that there are so many naïve suckers around the world who believe on the illusion that are being staged as we can see by foreign lending and investments that continues to come in into the US even when these foreigners start losing their shirt as soon as the money arrives in the US.

    Yesterday I bought a copy of the May 2008 issue of Harper’s magazine after reading a terrific article by Kevin Phillips “Why the economy is worse than we know.”

    Here is what Paul Krugman (one of a hand full of economists that I respect) said on his NYT column on April 11, 2008 regarding that article: “Have you seen the awesome article by Kevin Phillips in the latest Harpers: “Numbers Racket — Why the economy is worse than we know. ...”

    I 2007 alone 15 percent of GDP was based on phantom figures. The United States government has been using for a long time the Enron System of how to deceit people with cooked figures.

    I wonder if the Chinese government understands to what extent that they have been taken for a ride so far, and when it is better to cut your losses than continue to sinking more fresh money into the money pit.

    Here are some excerpts from "Numbers Racket: Why the economy is worse than we know" by Kevin Phillips, from the May 2008 issue of Harper’s Magazine, but I strongly suggest that if you have the opportunity then you should read the entire article (about 5 pages long) on Harper's magazine:

    “…The effect, over the past twenty-five years, has been to create a false sense of economic achievement and rectitude, allowing us to maintain artificially low interest rates, massive government borrowings, and a dangerous reliance on mortgage and financial debt even as real economic growth has been slower than claimed. If Washington’s harping on weapons of mass destruction was essential to buoy public support for the invasion of Iraq, the use of deceptive statistics has played its own vital role in convincing many Americans that the U.S. economy is stronger, fairer, more productive, more dominant, and richer with opportunities than it actually is.

    …The truth, though it would not exactly set Americans free, would at least open a window to wider economic and political understanding. Readers should ask themselves how much angrier the electorate might be if the media, over the past five years, had been citing 8 percent unemployment (instead of 5 percent), 5 percent inflation (instead of 2 percent), and average annual growth in the 1 percent range (instead of the 3-4 percent range). We might ponder as well who profits from a low-growth US economy hidden under statistical camouflage. Might it be Washington politicos and affluent elites, anxious to mislead voters, coddle the financial markets, and tamp down expensive cost-of-living increases for wages and pensions?

    Let me stipulate: the deception arose gradually, at no stage stemming from any concerted or cynical scheme. There was no grand conspiracy, just accumulating opportunisms. As we will see, the political blame for the slow, piecemeal distortion is bipartisan--both Democratic and Republican administrations had a hand in the abetting of political dishonesty, reckless debt, and a casino-like financial sector. To see how, we must revisit forty years of economic and statistical dissembling.

    …The GDP has been subject to many further fiddles, the most manipulatable of wich are the adjustments made for the presumed starting up and ending of businesses (the “birth/death of businesses” equation) and the amounts that the Bureau of Economic Analysis “imputes” to nationwide personal income data (known as phantom income boosters, or imputations; for example, the imputed income from living in one’s own home, or the benefit one receives from a free checking account…). During 2007, believe it or not, imputed income accounted for some 15 percent of GDP.

    …"...if you were to peel back the changes that were made in the Consumer Price Index (the inflation rate) going back to the Carter years, you'd see that the CPI would now be 3.5 to 4 percent higher -- meaning that, because of lost CPI increases, Social Security checks would be 70 percent greater than they currently are.

    …The real numbers, to most economically minded Americans, would be a face full of cold water. Based the criteria in place a quarter centruy ago, today's U.S. unemployment rate is somewhere between 9 and 12 percent; the inflation rate is as high as 7 or even 10 percent; economic growth since the recession of 2001 has been mediocre, despite a huge surge in the wealth and incomes of the superrich, and we are falling back into recession. If what we have been sold in recent years has been delusional "Pollyanna Creep," what we really need today is a picture of our economy ex-distortion. For what it would reveal is a nation in deep difficulty not just domestically but globally.

    Undermeasurement of inflation, in particular, hangs over our heads like a guillotine. To acknowledge it would send interest rates climbing, and thereby would endanger the viability of the massive buildup of public and private debt (from less then $11 trillion in 1987 to $49 trillion last year) that props up the American economy. Moreover, the rising cost of pensions, benefits, borrowing, and interest payments -- all indexed or related to inflation -- could join with the cost of financial bailouts to overwhelm the federal budget. As inflation and interest rates have been kept artificially suppressed, the United States has been indentured to its volatile financial sector, with its predilection for leverage and risky buccaneering.

    Arguably, the unraveling has already begun. As Robert Hardaway, a professor at the University at Denver, pointed out last September, the subprime crisis "can be directly traced back to the (1983) Bureau of Labor Statistics decision to exclude the price of housing from the Consumer Price Index...With the illusion of low inflation inducing lenders to offer 6 percent loans, not only speculation run rampant on the expectation of ever-rising home prices, but home buyers by the millions have been tricked into buying homes even though they only qualified for the teaser rates." Were mainstream interest rates to jump into the 7 to 9 percent range -- which could happen if inflation were to spur new concern -- both Washington and Wall Street would be walking in quicksand. The make-believe economy of the past two decades, with its asset bubbles, massive borrowing, and rampant data distortion, would be in serious jeopardy. The U.S. dollar, off more than 40 percent against the euro since 2002, could slip down and even rockier slope.

    The credit markets are fearful, and the financial markets are nervous. If gloom continues, our humbugged nation many truly regret losing sight of history, risk, and common sense.”



    On this website there is further information about Kevin Phillips’s article including informative charts that were mentioned on the Harper’s magazine article.



    Kevin Phillips also just published his latest book and you can see the review of it at Bloomberg News:

  9. Give it a rest.
  10. Why are you critical?

    Seems to me that we need LOTS more of this info and widespread in the media. Probably less than 1% of the American population understands this situation.
    #10     Apr 22, 2008