1. The US financial markets are fighting a battle against trade and financial imbalances and are “caused by dislocations too fundamental to reverse”. The slippery slope is a collapse in dollar denominated assets and standard of living.
2. The US trade deficit in 2005 stood at $1 trillion. The US society has shifted away from saving; shifted from manufacturing to services; reached near maximum levels of personal and national debt; and borrowed money to finance excessive consumption of unproductive imported goods.
3. “Our impressive gross domestic production growth, dominated as it is by consumption, is not a measure of how much wealth we have created but of how much we have destroyed.” The result is a trade deficit of $800 billion annually, a budget deficit running $300/400 billion, and a national debt of $8.5 trillion. Unfunded liabilities such as social security included could run the national debt to $50 trillion. “I believe that we are fast approaching a perfect storm scenario, with a monetary collapse that most likely way it will play out.”
4. “Because Americans are not saving and producing, but are borrowing and consuming, we have become precariously dependent on foreign suppliers and lenders.” “America’s unprecedented consumption and borrowing binge has put records amounts of liabilities in foreign hands.” No fear, if the dollar buying power remains strong.
5. The fed’s job is to stimulate consumer confidence by adjusting the interest rates and increasing credit availability; the fed must allows keep US dollar denominated securities looking attractive to foreign investors.
6. Foreign central banks use accumulated dollars to buy our Treasury and mortgage backed securities, helping finance our growing deficits and keep the housing market propped up. Is the US economy to big to fall? If foreigners stopped buying treasuries, “our choice would be to further tax … or default like Russia.”
7. “Due to insufficient domestic saving and profligate government spending, an increasing percentage of US treasuries debt is held aboard.”
8. “The dollar is going to collapse, and Americans are going to experience stagflation on an unprecedented scale in the form of recession and hyperinflation.” Hyperinflation will result from foreign countries exchanging dollars into their local currency making the local currency stronger and the dollar weaker. Recession resulting as more employment shift from manufacturing sector to the service sector. Taxes will move more jobs oversea to be out-source using cheap labor.
9. The US dollars status as the world’s reserve currency has shielded the US from the consequences of persistent and growing trade imbalances.
10. The Bretton Woods accords made the US dollar the currency used by other governments and institutions to settle their foreign exchange accounts and to transact trade in certain vital commodities, such as gold and oil. The dollar was originally accepted by the world as its reserve currency was due to the America’s unequalled industrial might, it status as both the world’s leading exporter of manufactured goods and its greatest creditors, and its currency back in gold.
11. If the US dollar loses its status, as the world reserve currency surplus dollars will come home causing hyperinflation, a super tax, a day reminiscent of the green backs of the continentals.
12. Erosion of the manufacturing base is the fault of aggressive labor unions, increased government regulation, aging plants and equipment, too much waste, smugness about delivering quality for profits has put US manufacturing at a disadvantage. American manufacturers were drive out of business by more efficient foreign manufacturers, resulting in huge trade deficits as we imported items no longer produced domestically. Workers were forced to accept lower-paying jobs in the service sector. Now these jobs are being set to third world countries like India. Eventually, 70 percent of the service sectors will be outsource to India and China.
13. Technology as a GDP savior won’t happen. “We are simply not exporting enough information technology to pay for the real goods that we import. The resulting trade deficits prove that our so-called information/service economy is a reality a sham.”
14. “The world no more depends on US consumption than medieval serfs depended on the consumption of their lords, who typically took 25 percent of what they produced.” Will China’s internal consumption fuel its economy independent of US consumption? “Quite to the contrary, China’s own capacity to consume is much greater than ours and the productive capacity needed to serve it is already in place-in China!” “Chinese citizens now produce export goods from which they themselves derive no direct economic benefit. In effect, consumer goods are rationed in China so as to make them plentiful in the United States.” Asia is overburdened with US IOUs. “Like the serfs being liberated from their lords, their scarce resources will be freed to satisfy their own needs and desires, and their standards of living will rise accordingly.”
15. The Chinese now sacrifice to support the purchasing power of the Americans. If China allowed the dollar to decline against the yuan, American purchasing power would by definition be transferred to the Chinese…Factories would retool and labor would seek more productive employment. Instead of wasting scarce resources producing goods to export, China would instead produce goods for domestic consumption.”
16. Foreign markets are the most conservative place for your money right now. Wall street holds conservative domestic investing to be conservative but regards foreign investing too be speculative. “My goal is to avoid the substantial risk I see in the US market by seeking safe havens abroad.” “Invest in foreign currencies that are expected to rise significantly as the dollar falls.” “Bonds can be bought and sold abroad”, “Current US tax laws favor dividend over interest income and apply to most foreign stock”, “I have made a speciality of conservative stocks that can be bought at an undervalued price and provide generous dependable dividend yield” (safe, growth, and income). “Current dividend income must justify the purchase.” “10 to 20 stocks provide adequate diversification”. “Electric, oil, and gas utilities are attractive equity investments because they have a captive audience and enjoy constant high demand, their earnings are predictable because they can raise their rates, and they pay consistently high dividends.” Utility stocks are sometimes bond substitutes. “Many Canadian oil and gas companies pay dividends of 12 to 15 percent”. “Coal producers pay dividends averaging something like 11 percent, and companies mining nickel, zinc, and lead are paying 7 percent to 10 percent.”
17. The Money supply (M3) between 1980-2005 increased 20 fold. M3 include the following components of money: treasury bills, savings bonds, commercial paper, and other assets readily convertible to cash. Much of the money that has been created has gone abroad and so consumers have not felt it in prices. "If we didn't have China, if we were a closed system and we were printing money that way we are, not producing, and spending it all here, consumer prices would already be off the charts." "But our trading partners, by accumulating dollars, haven't stopped inflation; they have only delayed its effects. One day the flows will reverse, with the Chinese and other using their dollars to buy consumer goods as well as properties in the United States." "In effect, the Chinese will merely repossess all those goods they sold us on credit." "Actually, in the case of China, the yuan-dollar peg has artificially kept US import prices low, temporarily suppressing US consumer prices." The Chinese currency will rise reflecting higher raw material costs and higher labor costs.
18. "When new money or credit is added to an economy, thus diluting the existing supply, the general level of prices (aggregate prices) will rise, assuming the amount of goods and services within the system stays the same." This dilution causes the banks to raise rates to cover the devaluation. More dollars are required to buy a given quantity of goods. The dollar value is diminished. Inflation is monetary expansion: more money chasing a diminish supply of goods and services. "Anything that artificially increases aggregate demand for goods and services is inflation." The demand is artificial because it does not result from increased productivity, but from inflation. Inflation is paying today's debts with cheaper money in the future. The result is that prices rise. In true economic growth, price fall, as increases in productivity output raise the supply of goods relative to the supply of money.