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Very simple. something as easy as 1+1=2 to understand.
But you will have to read very patiently setting aside preconceived perceptions about U.S.A.
If you are okay with that, then go ahead and read this article. Otherwise quit now and enjoy something else.
I will not go too much in detail. Just spare 15 minutes at the max. A brief summary of how they had a very high standard of living so far and how they are in the brink of losing it forever will do.
Here we start with some known facts and their profound implications. ("Profound" means knowing what is really behind something that is obvious in front of your eyes).
Post World war II America was the richest country in the world. Barring pearl harbour not even a single gun shot was fired in U.S.A. during the entire war. America's manufacturing capacity and infrastructure were intact while Britain, Germany, Japan, France and Russia were devastated by the war.
Americans accumulated almost 90% of World's gold by selling arms during ww II.
All other countries were in the brink of bankruptcy. No nation was willing to trust other nation's currency for fear of hyperinflation.
International trade came to a grinding halt.
In this circumstance all World countries assembled at Bretten woods in 1944 to resolve the currency crisis.
The American govt promised to keep its currency stable by maintaining one ounce of Gold for every thirty five dollars in circulation which means any world country can export goods to U.S.A and if they don't know what to do with the dollars, well, they can hand it over to U.S.A govt and get gold at a fixed price of 35 dollars per ounce at any point of time in the future.
Mind here "Any point of time in the future" is a very crucial promise that no other country other than U.S.A was capable of honouring in those days.
The world countries trusted them and some countries pegged their currencies to american dollar at a fixed rate while many other countries accepted only American dollars for transaction between any two countries.
Simply put the American dollar became the dancing queen in a leper colony with nobody around to match its manufacturing capacity.
Then came the Vietnam war in which America was smacked left and right. To manage the war expenses Americans printed dollars like mad far exceeding the Promised Gold reserves value.
In 1971 France began to retaliate by dumping dollars and asking for Gold in return from America as per Bretten woods agreement.
U.S.A did not have the Promised amount of Gold. It could not honour its commitment.
Nixon shut the Gold window and thereby severed the dollar peg to gold at 35 dollars per ounce and let it float freely or simply put the dollar was backed by nothing from then on but the paper it was printed on and mere faith in U.S.A.
The world started to lose confidence in U.S.dollar. Dollar began to depreciate wildly. Gold skyrocketed from 35 dollars per ounce to 800 dollars per ounce. So severe was the loss of purchasing power of the dollar that every country started to avoid the American dollar.
Exactly at this point a crucial ally Saudi Arabia led OPEC came to America's rescue. It was monopoly in oil. It saved the dollar by declaring that it would accept only American dollar for its oil and no other country's currency, not even Gold.
Since every country needed oil and there was no way to get oil except having American dollar in hand. All Foreign countries must export something to U.S.A. first, get their dollars and only then can they buy oil from OPEC. The result being artificial demand for dollars. Once there is a demand for something it only has to appreciate, appreciate and appreciate in value and once a currency appreciates its buying power goes up and up.
And then started the real fun. A dream cycle started sending the American standard of living higher and higher. Foreign goods became cheaper and cheaper to an extent that even a sweeper in U.S.A. has ten times more buying capacity than an I.A.S. officer in India.
But there was a negative side. All their manufacturing industries could not compete with cheap imports due to high wages. Too many factories were shut down or offshored and the American economy transformed itself into a service based economy where all essentials are imported. Majority of People are hired in malls and consumer outlets thereby pretending to have employed everybody for useful purposes.
Now we will take an overall view into the American economy to see how it was functioning since then by borrowing more than what it was producing and how long it could sustain that way.
The American banks loaned money to the American consumer.
The American consumer bought goods from foreign countries with those dollars.
The foreign countries did not buy anything back from America. Instead they saved those dollars by depositing in U.S.Treasuries and kept those T-bills in a never to use trash can called “Forex Reserves" for using it to buy more oil when their economy expands.
The treasury spent that money deposited by foreigners to balance Federal budget deficits and never ending wars.
The dollars spent by way of budget deficits circulated in the US economy and finally ended up in bank deposits again.
This time the banks magically lended ten times of every dollar deposited with them to the American consumer again.
(Thanks to Fractional reserve lending, where American banks can create ten dollars out of thin air for loaning out to consumers electronically subject to a condition that they have one dollar in deposit. Simply put 9 out of 10 dollars of every new loan never at all existed with the bank in the first place even when the consumer applied for a loan. The moment the bank sanctioned the loan the dollars electronically appeared from nowhere. Some sort of legal counterfeiting. Non believers can just type Fractional reserve lending and Google search.)
Again the consumer imported ten times more goods from foreign countries exchanging those dollars.
Again those foreign countries did not buy anything in return from America with those dollars. Once again they deposited those dollars in U.S. Treasuries and piled up even more T-bills in a never to use trash can called “Forex reserves”.
Now start reading the overall view from the first line again. Repeat reading as many times as possible till your eyes go sour.
Yes. You guessed it right. This cycle went on for decades together, the result being trillions and trillions of dollars ending up in Chinese, Japanese and all other Asian country’s forex reserves while the American govt became a debtor of 11 trillion dollars on one hand and the average American citizen loaded with thirty years mortgage loans, home equity loans and dozens of credit cards utilized to the fullest limits on the other hand.
Then came the Vietnam war in which America was smacked left and right. To manage the war expenses Americans printed dollars like mad far exceeding the Promised Gold reserves value.
In 1971 France began to retaliate by dumping dollars and asking for Gold in return from America as per Bretten woods agreement.
U.S.A did not have the Promised amount of Gold. It could not honour its commitment.
Nixon shut the Gold window and thereby severed the dollar peg to gold at 35 dollars per ounce and let it float freely or simply put the dollar was backed by nothing from then on but the paper it was printed on and mere faith in U.S.A.
The world started to lose confidence in U.S.dollar. Dollar began to depreciate wildly. Gold skyrocketed from 35 dollars per ounce to 800 dollars per ounce. So severe was the loss of purchasing power of the dollar that every country started to avoid the American dollar.
Exactly at this point a crucial ally Saudi Arabia led OPEC came to America's rescue. It was monopoly in oil. It saved the dollar by declaring that it would accept only American dollar for its oil and no other country's currency, not even Gold.
Since every country needed oil and there was no way to get oil except having American dollar in hand. All Foreign countries must export something to U.S.A. first, get their dollars and only then can they buy oil from OPEC. The result being artificial demand for dollars. Once there is a demand for something it only has to appreciate, appreciate and appreciate in value and once a currency appreciates its buying power goes up and up.
And then started the real fun. A dream cycle started sending the American standard of living higher and higher. Foreign goods became cheaper and cheaper to an extent that even a sweeper in U.S.A. has ten times more buying capacity than an I.A.S. officer in India.
But there was a negative side. All their manufacturing industries could not compete with cheap imports due to high wages. Too many factories were shut down or offshored and the American economy transformed itself into a service based economy where all essentials are imported. Majority of People are hired in malls and consumer outlets thereby pretending to have employed everybody for useful purposes.
Now we will take an overall view into the American economy to see how it was functioning since then by borrowing more than what it was producing and how long it could sustain that way.
The American banks loaned money to the American consumer.
The American consumer bought goods from foreign countries with those dollars.
The foreign countries did not buy anything back from America. Instead they saved those dollars by depositing in U.S.Treasuries and kept those T-bills in a never to use trash can called “Forex Reserves" for using it to buy more oil when their economy expands.
The treasury spent that money deposited by foreigners to balance Federal budget deficits and never ending wars.
The dollars spent by way of budget deficits circulated in the US economy and finally ended up in bank deposits again.
This time the banks magically lended ten times of every dollar deposited with them to the American consumer again.
(Thanks to Fractional reserve lending, where American banks can create ten dollars out of thin air for loaning out to consumers electronically subject to a condition that they have one dollar in deposit. Simply put 9 out of 10 dollars of every new loan never at all existed with the bank in the first place even when the consumer applied for a loan. The moment the bank sanctioned the loan the dollars electronically appeared from nowhere. Some sort of legal counterfeiting. Non believers can just type Fractional reserve lending and Google search.)
Again the consumer imported ten times more goods from foreign countries exchanging those dollars.
Again those foreign countries did not buy anything in return from America with those dollars. Once again they deposited those dollars in U.S. Treasuries and piled up even more T-bills in a never to use trash can called “Forex reserves”.
Now start reading the overall view from the first line again. Repeat reading as many times as possible till your eyes go sour.
Yes. You guessed it right. This cycle went on for decades together, the result being trillions and trillions of dollars ending up in Chinese, Japanese and all other Asian country’s forex reserves while the American govt became a debtor of 11 trillion dollars on one hand and the average American citizen loaded with thirty years mortgage loans, home equity loans and dozens of credit cards utilized to the fullest limits on the other hand.
Don't know what is a trillion dollars?. This is it. 1,000,000,000,000 dollars.
"arasan evvazhiyo kudigalum avvazhiyae".
Simply put the USA only had to print T-bills while the world had to accept that and give real goods of any sort in return. The Americans never had to do any dirty jobs like Asians. They could just like that write a credit note and import anything they wanted.Their standard of living could only go up and up forever due to reserve currency advantage. Something similar to an unlimited fairy credit card without any due date.
Saddam Hussein tried to break this reserve currency advantage by refusing to accept dollars for oil. He insisted to be paid in Euros for his oil. He was too stupid to believe that once he starts to price his oil in euros then all arab countries which hate America will also price their oil in euros thereby making the American dollar crash and he thought he could get away with it without any consequence.
The dollar started to devalue as a result and once it devalues beyond certain extent the unlimited fairy credit card regime for Americans would be shut forever. Americans had to do something to stop saddam hussein from successfully selling his oil in a non dollar currency and that's the exact reason why Iraq was attacked in 2003 and once the Americans conquered Iraq the first thing they did was to shift its oil sales back to American dollars.
Further Americans ensured that saddam was hanged and there was a deliberate leaking of that saddam's hanging video just to threaten other Arab dictators of what will happen to them if they ditched the dollar.
Iran is threatened today exactly for the same reason. It is refusing to accept American dollars for its oil. Iranian nuclear weapons programme is a pure humbug like Iraq's WMD.
Things have changed much since 1971. Now we have entered a world where OPEC is not a monopoly. Russia is the largest exporter of oil. It has set up its own Oil and Gas exchange at st.petersburg and is also planning to refuse to accept dollars and sell its oil in rouble from mid 2009 thereby reducing the demand for dollars.
Now Russia is not Iraq. It is also a nuclear power. There is nothing Americans can do to stop it. They can only delay things with Russia like that Georgian provocation or Missile shield programme. If not this year next year Russians will do it.Once Russia starts selling oil for roubles Iran and venezuela will shift their sales to roubles too.
In that case a majority of European countries and Some Asian countries have to sell their dollars away and buy Roubles in its place, to buy oil, which will lead to dollar crash and the unlimited credit card with no due date for Americans will come to a sad end by 2010.
That's the future course of action. But so far as of present everything looks fantastic. Should have been an impeccable never ending fairy credit card regime for Americans. Then where the hell from this American financial crisis originate?
Again simple. Sheer greed and stupidity broke the chain. Here's how.
The collateral for the loans the banks made to the American consumer were houses whose prices were assumed to go only up and up forever.
Suddenly new houses were built in every nook and corner leading to supply of new homes far far outpacing demand which leads to sub prime lending.
(Sub prime lending is a concept where the only eligibility for a borrower to buy a house 100% financed by bank is “he should be alive while signing the mortgage’. That’s it. Nothing else like income proof or assessing a person’s prior credit history was reqd. The more the sub prime loans the more the bankers pocketed bonuses. They knew very well that when sub prime borrowers start defaulting their bank will eventually go belly up. Nobody cared because if they cared for their banks then they will stand to lose out the hefty bonus.)
Naturally sub prime borrowers started defaulting leading to foreclosure.
The more and more foreclosed homes come up for sale the less and less the takers for them ultimately resulting in house price collapse.
The worser the house price collapse the more the losses for banks.
Some how the banks want the dollars, they loaned out to consumers back, for mere survival.
But alas the consumer is broke, broke and broke long back. Only reason he survived thus far was by drawing home equity from the appreciated value of his house year after year and also credit cards which again he has started defaulting in droves.
Now that house prices have started going down nowhere could he turn up to refinance the loan.
Ultimately the consumer and bank both are bankrupt. They don’t have any money. Can you guess where all the money has gone?
Yes. you guessed it right. All the dollars are with foreigners. Asians in particular.
Now the American consumer must find some way to get back the dollars from foreigners to repay the bank.
The only available clean and straight option is to increase exports which requires manufacturing something the world really needs at a competitive price.
For that to happen the federal govt must help him by intervening in forex markets and devaluing the dollar, of course in an orderly manner so that his products are more competitive in international markets.
While at the same time cutting off fresh credit lines by allowing thousands of insolvent banks to collapse will ensure that absent more and more credit cards and home equity loans all unnecessary imports suddenly go beyond his buying power. His standard of living will go down drastically meaning lesser and lesser imports.
Once exports to Asia starts outpacing imports, Asians have no other option than to pay him for the trade deficit in dollars from those never to use trash cans, with which he can repay the surviving banks.
Even though painful to reduce the standard of living it is a win-win option for every body as well as guiding the future of America, sans petrodollars fairy credit card regime, in the right direction.
Now, here comes the stupid USA govt. A devil dressed like an angel. Instead of educating the people what went wrong and helping them to transform from reckless consumerism to a productive economy in a less painful way, it aggravates the problem by doing the stupidest of all stupid actions.
It feels that the best way to counter hangover is to drink more alcohol. Giving more debt to a person crumbling under severe debt is the solution U.S.A. is proposing to get out of the financial crisis.
The Federal reserve (American Central Bank) tries to print money out of thin air and buys up all the debt which the banks think they can't collect. The federal reserve is too stupid to believe that the banks will lend again.
Now the bank is ready to lend. But still the consumer is broke.
The bank doesn’t want to lend to the broken consumer again. The financial crisis worsens.
"arasan evvazhiyo kudigalum avvazhiyae".
Simply put the USA only had to print T-bills while the world had to accept that and give real goods of any sort in return. The Americans never had to do any dirty jobs like Asians. They could just like that write a credit note and import anything they wanted.Their standard of living could only go up and up forever due to reserve currency advantage. Something similar to an unlimited fairy credit card without any due date.
Saddam Hussein tried to break this reserve currency advantage by refusing to accept dollars for oil. He insisted to be paid in Euros for his oil. He was too stupid to believe that once he starts to price his oil in euros then all arab countries which hate America will also price their oil in euros thereby making the American dollar crash and he thought he could get away with it without any consequence.
The dollar started to devalue as a result and once it devalues beyond certain extent the unlimited fairy credit card regime for Americans would be shut forever. Americans had to do something to stop saddam hussein from successfully selling his oil in a non dollar currency and that's the exact reason why Iraq was attacked in 2003 and once the Americans conquered Iraq the first thing they did was to shift its oil sales back to American dollars.
Further Americans ensured that saddam was hanged and there was a deliberate leaking of that saddam's hanging video just to threaten other Arab dictators of what will happen to them if they ditched the dollar.
Iran is threatened today exactly for the same reason. It is refusing to accept American dollars for its oil. Iranian nuclear weapons programme is a pure humbug like Iraq's WMD.
Things have changed much since 1971. Now we have entered a world where OPEC is not a monopoly. Russia is the largest exporter of oil. It has set up its own Oil and Gas exchange at st.petersburg and is also planning to refuse to accept dollars and sell its oil in rouble from mid 2009 thereby reducing the demand for dollars.
Now Russia is not Iraq. It is also a nuclear power. There is nothing Americans can do to stop it. They can only delay things with Russia like that Georgian provocation or Missile shield programme. If not this year next year Russians will do it.Once Russia starts selling oil for roubles Iran and venezuela will shift their sales to roubles too.
In that case a majority of European countries and Some Asian countries have to sell their dollars away and buy Roubles in its place, to buy oil, which will lead to dollar crash and the unlimited credit card with no due date for Americans will come to a sad end by 2010.
That's the future course of action. But so far as of present everything looks fantastic. Should have been an impeccable never ending fairy credit card regime for Americans. Then where the hell from this American financial crisis originate?
Again simple. Sheer greed and stupidity broke the chain. Here's how.
The collateral for the loans the banks made to the American consumer were houses whose prices were assumed to go only up and up forever.
Suddenly new houses were built in every nook and corner leading to supply of new homes far far outpacing demand which leads to sub prime lending.
(Sub prime lending is a concept where the only eligibility for a borrower to buy a house 100% financed by bank is “he should be alive while signing the mortgage’. That’s it. Nothing else like income proof or assessing a person’s prior credit history was reqd. The more the sub prime loans the more the bankers pocketed bonuses. They knew very well that when sub prime borrowers start defaulting their bank will eventually go belly up. Nobody cared because if they cared for their banks then they will stand to lose out the hefty bonus.)
Naturally sub prime borrowers started defaulting leading to foreclosure.
The more and more foreclosed homes come up for sale the less and less the takers for them ultimately resulting in house price collapse.
The worser the house price collapse the more the losses for banks.
Some how the banks want the dollars, they loaned out to consumers back, for mere survival.
But alas the consumer is broke, broke and broke long back. Only reason he survived thus far was by drawing home equity from the appreciated value of his house year after year and also credit cards which again he has started defaulting in droves.
Now that house prices have started going down nowhere could he turn up to refinance the loan.
Ultimately the consumer and bank both are bankrupt. They don’t have any money. Can you guess where all the money has gone?
Yes. you guessed it right. All the dollars are with foreigners. Asians in particular.
Now the American consumer must find some way to get back the dollars from foreigners to repay the bank.
The only available clean and straight option is to increase exports which requires manufacturing something the world really needs at a competitive price.
For that to happen the federal govt must help him by intervening in forex markets and devaluing the dollar, of course in an orderly manner so that his products are more competitive in international markets.
While at the same time cutting off fresh credit lines by allowing thousands of insolvent banks to collapse will ensure that absent more and more credit cards and home equity loans all unnecessary imports suddenly go beyond his buying power. His standard of living will go down drastically meaning lesser and lesser imports.
Once exports to Asia starts outpacing imports, Asians have no other option than to pay him for the trade deficit in dollars from those never to use trash cans, with which he can repay the surviving banks.
Even though painful to reduce the standard of living it is a win-win option for every body as well as guiding the future of America, sans petrodollars fairy credit card regime, in the right direction.
Now, here comes the stupid USA govt. A devil dressed like an angel. Instead of educating the people what went wrong and helping them to transform from reckless consumerism to a productive economy in a less painful way, it aggravates the problem by doing the stupidest of all stupid actions.
It feels that the best way to counter hangover is to drink more alcohol. Giving more debt to a person crumbling under severe debt is the solution U.S.A. is proposing to get out of the financial crisis.
The Federal reserve (American Central Bank) tries to print money out of thin air and buys up all the debt which the banks think they can't collect. The federal reserve is too stupid to believe that the banks will lend again.
Now the bank is ready to lend. But still the consumer is broke.
The bank doesn’t want to lend to the broken consumer again. The financial crisis worsens.
DEFLATION........ DEFLATION...... DEFLATIONARY DEPRESSION ...... will be the only result
for foreseeable future.
ANY WAY SINCE THE U.S. GOVT IS NOT PREPARED TO ACT RESPONSIBLY AND INSTEAD OF WASTING TIME IN TRYING THINGS THAT WON'T WORK.
I think the following simple layman’s suggestions would be of much help in extending the reckless consumption party for some more time.
Assuming 20,000 dollars is the average mortgage repayment per year by an American consumer and only 20 million consumers have defaulted on their mortgage payments so far, (Oh! my god) the govt can pay 40 million consumer’s yearly mortgage payment for free, to the banks with that 800 billions stimulus funds this year. Some thing like hitting two fruits at the same time with a single stone.
Financial crisis is solved. Both the consumer as well as banks are saved. The consumption party is saved from ending in Recession or Depression.
Next year repeat the same handout. Say loudly “Every body is saved”. The consumer has a good credit rating. The bank is awash with funds. Even the counter party risks plaguing AIG would have vanished by then.
Stop building new houses. House prices go up still.
When house prices go up and up the banks can give away more and more of home equity loans.
Make merry, dance and enjoy. Ensure consumers consume more by importing more.
Go to war with Iran and kill as many Iranians as possible. “AFTER ALL” the govt can explain to the stupid common man “PRODUCING WAR GOODS WILL BE HEALTHY FOR THE ECONOMY AND EMPLOYMENT”. Come what may, never admit the real reason.
By the way do not forget to say time and again that we are the World’s largest economy and American economy is built on strong fundamentals. Make sure this statement comes straight from the mouth of none other than the president himself.
The only grave consequence as per basic law of economics is dollar value crashing in international markets giving American dollar a time of less than a year to come to parity with Zimbabwean dollar and paving way for 1.67—2—3---4—40—400---4000---40000 dollars per gallon gas price.
“But please do mind to close your ears to economists". The U.S. govt can assure its citizens "If the dollar crashes then it is the foreigners who are at loss since all their savings in U.S.Treasuries would become worthless.”
Further some economic genius from AIG can elaborate like this "With a sincere prayer to god on our part and the deep worry of foreigners about the declining value of their dollar reserves it would be very wise of them to keep on buying U.S. T-bills so that there is an artificial demand for dollars. In their own interest they will be kinder and kinder forever to keep on lending to us".
something akin to a borrower telling his lender that " If you don't lend me more I will stop buying goods from you and will also go broke. You will never get a penny back of what you have lent thus far. If you want to count on the money you have lent out to me thus far, then keep lending more and more forever. Never ask me to repay".
Treasury secretary can say like this "The biggest concern of our president right now is the consumerism party ending so abruptly without govt intervention and the inability of American consumer to borrow,borrow and borrow and spend,spend and spend more".
The average American citizen can defend his country's actions like this "If you stop the consumerism party right now won’t you be struck with an economic readjustment hangover? Is a hangover acceptable"?
Hmmm. We can debate, debate and debate a lot about this. But history knows the answer from the demise of previous empires like Rome, France, Britain and as recent as 90's example of U.S.S.R. etc,etc.,
Nope. Not at all. Whatever be the consequences. The U.S. govt is not at all prepared to face the economic readjustment hangover even for a short while. It will rather face an inevitable total cardiac arrest by late 2010. History will record it as the demise of an empire which lived in denial mode in its final days.
Now. Enjoy these evidences of what I have written thus far. Do mind to open them in seperate windows.
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http://www.dollardaze.org/blog/?post_id=00050
http://www.dnaindia.com/report.asp?newsid=1241555
http://www.marketskeptics.com/2009/03/how-big-deal-is-loss-of-dollars-reserve.html
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. Additional links added six months after I wrote this article is here.
http://www.nakedcapitalism.com/2009/08/guest-post-farming-out-housing-crisis.html
http://economictimes.indiatimes.com/news/international-business/UN-calls-for-new-reserve-currency-to-end-dollar-privilege/articleshow/5094057.cms
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