Source: The Market Oracle
Written By: Mike_Whitney
To some extent, the losses have been concealed by the up-tick in Treasuries sales to US investors who've been fleeing the money markets in droves. Investors have been trying to avoid the fallout from money funds that have been contaminated by mortgage-backed assets. Naturally, they bought US government bonds which are considered a safe bet. But that doesn't change the fact that the dollar's foundation is steadily eroding and that foreign support for the dollar is vanishing. US bonds are no longer regarded as a “safe haven”.
The dollar slumped to a 15 year low against 6 of its most actively traded peers and set the stage for an early morning market rout on Wall Street.
Foreign investment and currency deregulation has been a real boon for the stock market which thrives of a steady flow of cheap capital. It's also been good for ravenous consumers who like to borrow boatloads of low interest cash for their toys, SUVs and McMansions.
Of course, when things seem too good to last---they usually don't. The economy is contracting; credit is getting tighter, and the stock market is flailing about aimlessly. Worse still, the world is quickly losing confidence in American leadership on everything from human rights to global warming. In many ways the US appears to be tragically out-of-step with its epoch. The world is looking for innovative solutions to species-threatening problems while the Bush Administration insists on following an agenda that seems more suitable to medieval warlords in the Dark Ages. The social and economic consequences of their shortsightedness are obvious. Its been a disaster.
As Capital flight accelerates; interest rates in the US will rise, unemployment will mushroom, and the dollar will fall. It can't be avoided. American markets and consumers will be compelled to curb their gluttonous appetite for cheap foreign credit. The free lunch is over.
Overseas investors own more than $4.4 trillion in US debt in the form of bonds and securities. Even if they sell only 25% of that sum, the US would feel the pinch of hyper-inflation. For the last decade foreigners have been eager to by our Treasuries and equities---gobbling up America's enormous $800 billion current account deficit and keeping demand for the dollar artificially high. But just like the subprime mortgage holder whose “teaser rate” has suddenly expired; the US now faces the painful adjustment of higher payments and less discretionary income for indulgences.
Maybe the charade could have carried on a bit longer if not for the belligerent Bush foreign policy that has alienated friends and foes alike. But, then, maybe not. After all, the Fed's loose monetary policies added to Bush's extravagant spending---$3 trillion added to the National Debt in just 6 years--- doomed the country from the beginning. Deficit spending has been the central organizing principle from day 1. Now comes the hangover.
Bernanke is expected to drop the Fed funds rate on September 18. The move will provide more “easy credit-crack” for the addicts on Wall Street but it could also trigger a run on the dollar. That's what keeps the Fed-chief up at night.
The Bush Team was warned repeatedly---by the BIS, the World Bank, the IMF and the European Central Bank ECB---that their policies were “unsustainable” and would end in an economic meltdown. But they brushed aside the warnings with the same casual indifference as they did the critics of the war in Iraq.
Why would they care if the country suffered? Their friends would still get their massive, unfunded tax cuts. Their private armies and “no bid” contractors would still get their payola. The Democrats would still cave in on the enormous “off budget” war spending. And, they'd still be able to print as much counterfeit money as they chose until every last copper-farthing was drained from the public till.
No worries. Besides the media would mop up the mess they'd made with their usual “happy talk”. As the economic calamity unfolds, we can expect to see the usual parade of lacquer-haired phonies on the Business Channel singing the praises of “free markets” and the poisonous culture of overspending and consumerism.
The problems we're now facing should have been easy to spot for anyone willing to look beyond the empty rhetoric of the TV Pollyannas or their cheerleading co-conspirators at the White House. Instead, we were anesthetized by Greenspan's low-interest snake oil and Bush's “tax-slashing” mumbo-jumbo thinking that they‘d found a new path to prosperity.
It was a hoax. And the seven years of sleepwalking has cost us dearly. Unemployment is up, consumer spending is down, the housing market has slipped into recession, and the stock market is lurching back and forth like an overloaded washing machine. All of this could have been foreseen by anyone with minimal critical thinking skills and a healthy dose of skepticism of government.
Consider this: US GDP is 70% consumer spending. That means that wages have to increase beyond the rate of inflation OR THE ECONOMY CAN'T GROW. It's just that simple. So how is it that 50% of the American people still believe Bush's supply side baloney that cutting taxes for the uber-rich strengthens the economy? How does that increase wages or build a healthy middle class. If we want a strong economy wages have to keep pace with productivity so that workers can buy the goods they produce.
Greenspan knows that. So does Bush. But they chose to hide it behind an “easy credit” smokescreen so they could weaken the dollar, off-shore thousands of industries, out-source 3 million manufacturing jobs, fund an illegal war, and maintain the lethal flow of the $800 billion current account deficit into American equities and Treasuries. In truth, there hasn't been any growth in the economy since Bush took office in 2000. What we've seen is an ever-expanding bubble of personal and corporate debt amplified by a “structured finance” system that magically transforms liabilities (subprime loans) into securities and increases their value through leveraging.
That's it. No growth---just a galaxy of debt-instruments with odd-sounding names (CDOs, MBSs, CDSs, etc) stacked precariously on top of each other. That's what we call "wealth" in America.
It's all smoke and mirrors. The financial system has decoupled from the productive elements of the economy and is now beginning to show disturbing signs of instability. That's why the big blow-off in the bond market. The halcyon days of supplying our armies, funding our markets and building our subprime “ownership society” empire on the backs of foreign creditors is over. The stock market is headed for the landfill and housing is leading the way. Economic fundamentals can only be ignored for so long.
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