Thursday, November 18, 2010

A Bad Plan Poorly Disguised

From Prudent Bear. Yes, it's another big-picture economic post, but it tells you why dollar devaluation is important to you, and how it's affecting you right now with purchasing power. It's the other half of the inflation coin--the half Bernanke doesn't want you to see.

"With our economy sagging and our international clout waning, one of the few assets upon which the United States can rely is the confidence that the rest of the world has traditionally showered upon us. That confidence is the reason why the U.S. dollar was elevated to global reserve status more than 65 years ago.

With so much riding on perception, Treasury Secretary Tim Geithner's recent statements denying the existence of a dollar debasement campaign could not be seen as anything less than foolhardy."


"Over at the Federal Reserve, Chairman Bernanke doesn't talk about currency debasement. Instead, he extols the virtues of "pushing up inflation to levels consistent with our mandate." He hopes that no one will understand that he is using different adjectives to describe the same action. With the possible exception of the New York Times editorial board, he is fooling no one.

Given that the Administration and the Fed are prepared to sacrifice precious credibility for the goal of currency debasement, many may assume that there is some benefit for America that would be derived from a weaker dollar. Unfortunately, there isn't."


"History shows that, over the medium- to long-term, a devalued currency leads to increased trade deficits. Furthermore, a currency debasement policy for the U.S. dollar, still the world's reserve currency, is bound to spark a climate of international competitive devaluation –a currency war–as each nation fights to protect its balance of trade. If not corrected, such currency battles lead all too easily to trade wars, and they, in turn, often result in armed conflict.

The second, and more compelling, argument for Washington to pursue currency debasement is that a devalued dollar would wipe out large amounts of dollar debt. This amounts to a huge subsidy to debtors at the expense of savers, and no one owes more than the U.S. government."


"So if we assume a conservative 40% devaluation of the dollar over the past ten years, our current $13.4 trillion federal debt is equivalent to an only $8 trillion liability in 2001 dollars–the rest is just inflation. The $189 trillion of unfunded obligations to Social Security, Medicare, government pensions, etc., would appear as $113 trillion a decade ago!

It is clear that a debased currency suits the U.S. government, but what of Americans? The 40% devaluation equates to a 40% tax on every holder of U.S. dollars, rich and poor alike. It has hindered, rather than encouraged, consumer spending. It forces Americans to make do with less, purchase shoddier products, and deal with inferior service. Sometimes it's hard to perceive slowly ebbing living standards, but take a look around and think whether you feel richer than a decade ago."

We've been living with a 30-40% less amount of purchasing power--this means it takes 30-40% more money to buy what $1 did a decade ago. This is INFLATION that Bernanke doesn't want you to see or be aware of. Even though the Fed hasn't announced any inflation by interest rate rises, there is HIDDEN INFLATION in the form of dollar devaluation. We would be in the streets in open revolt if there were 30-40% rate hikes, and using the back door to get the inflation is how we contain civil unrest.

We have rampant inflation, people--it's just cleverly disguised. You see and feel it, though, every time you go into a store--now you know where it STARTS, and where it travels (through commodities, making your food more expensive before you've even bought it). The manufacturers pay a higher price, turn the commodities into processed foods, then have to charge us more because of THEIR costs.

This is ON TOP of the ongoing drought/bad weather happening around the world, leading to crop shortages, and the Wall Street traders snapping up commodity contracts as fast as they can...well, until recently. Most of Wall St. had placed bets on China's climbing demand, but that demand isn't materializing, and China's government is implementing price controls--there soon will be no money to be made from their demand. This means commodity and fuel prices will come down slowly over the next year, when better crop yields and oil drillers get the Obama offshore drilling constraints yanked off them.

C'mon 2012! In the meantime, we deal with a 30-40% loss of money while our government enjoys the fruits of its labors--a discounted national debt, a better-looking trade imbalance, and discounted liabilities (like Social Security).


Post a Comment