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“Using this printing press – or even without it, in this modern, electronic age – the feds can create all the dollars they want. But unless they know something we don’t, they can’t create even a single additional ounce of gold.”
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by Bill Bonner

“The Comeback Kids,” is this week’s headline at The Economist. On the cover of the latest issue is a photo of Bill and Hillary Clinton…arm in arm…

“Will Hillary be our next president?” we asked a friend who thinks about this sort of thing.

“Yes, most likely,” came the answer. “People don’t really like her…but those Clinton years are looking better and better. And they think that by voting for Hillary, they’ll get Bill Clinton. And with Bill will come the Clinton years again. No subprime debt problem. No housing slump. No war in Iraq.”

In other words, when the comeback kids come back, peace and prosperity come back with them.

Yesterday brought news of comebacks. For example, it almost looked as though the dollar was coming back. Anyway, that was how the financial media described Monday’s bouncing buck.

But wait…it still takes more than $1.40 to buy a pound (GBP). And the yen (JPY) is still trading over 118. And the Australian currency (AUD) just hit a 23-year high against the dollar. So, reports of the dollar’s health may be exaggerated.

Still, oil fell below $80. And gold lost ground too, when measured against the kind of money you don’t have to dig out of the earth.

(Incidentally, Byron King, over at Outstanding Investments, has discovered a way to get gold out of the ground – and into your hands – for just a penny per ounce. Many a long suffering DR reader have taken advantage of this unique opportunity…why don’t you take advantage of gold’s slight decline and join them? But act fast – you only have until October 23rd…

We are still fascinated by the simple observation that the surest bet you could have made 35 years ago was also the most obvious one. When the dollar was cut loose from gold on August 15, 1971, that gold would rise and the dollar would fall was as certain as anything you ever get in the financial world.

“We have a little technology…the printing press…” says Ben Bernanke. Using this printing press – or even without it, in this modern, electronic age – the feds can create all the dollars they want. But unless they know something we don’t, they can’t create even a single additional ounce of gold.

“Gold is the answer,” we keep saying.

The only trouble is: we haven’t quite figured out what the question is.

What will be higher next year? Gold? We don’t know…

What is the safest place for your money? Gold? We don’t know…

What starts with a G and ends with a D and rhymes with ‘old’? Ah, there…

The Clinton Years look like golden years in many ways. Not because of anything the Clintons did. They came in at the tail end of a huge boom – and managed to avoid messing it up.

The boom had begun during the Reagan Administration, after Paul Volcker got control of inflation. Then, interest rates could fall for the next 20 years. Cheaper, more abundant credit had the usual effect; cautiously at first…then recklessly…people threw money around. The U.S. economy boomed. Stocks rose 12 times – so much that people sold their gold to get in on it. Even the central banks sold gold. The yellow metal was out of fashion.

Lately – say, for the last seven years – gold, too, has been making a comeback. It’s come back almost all the way to where it was in January…when Ronald Reagan first took the presidential oath.

Now what? What will it be? Another ‘golden era’ when the Clintons come back? A final, inflationary blowout bubble in the world’s markets? Or the comeback of tougher times…like the stagflation of the pre-Volcker years?

The big question is probably this: can the Fed now save stocks, housing and the economy by destroying the dollar?

Gold is probably the answer to at least one of those questions.

The Daily Reckoning
Buenos Aires, Argentina
Monday, October 8, 2007

Welcome back, dear reader.

We had an agreeable weekend, mostly spent catching up with old friends in Buenos Aires.

Americans are happy down here; it is one of the few places where the dollar is not going down. You go into a restaurant and you are pleasantly surprised, rather than depressed, as you are in London or Paris.

How come the dollar and the peso stick together? It is partly because the Kirchner government controls the peso/dollar exchange rate – trying to hold the dollar at around 3.15 pesos. And partly because, north of the Rio Grande and south of the Rio Plata, both governments are destroying their currencies at about the same rate.

We have no figures for Argentina, but M3 – the broadest measure of the money supply – has been increasing in the United States at a 14% rate, the fastest in 35 years. Thirty-five years ago, the U.S. government was struggling with trying to pay for “Guns & Butter” at the same time. That is, the Johnson administration had decided that it could have a war in Vietnam and a war against poverty at the same time. It lost both of them. And one of the costs was domestic inflation, which rose throughout the ‘70s to a peak of 12%.

Gold reacted to the rise in inflation by rising too…it went up 20 times – to over $800 an ounce. Imagine if you had just looked ahead at the (now obvious) consequences of the Nixon administration’s decision to cut the dollar loose from gold in ‘71. You could have bought gold at, say, $50 an ounce…buried it in the ground…and you would have beat every other asset class or investment category that we can think of. No commissions. No taxes. No worries. No hassles. You would have avoided the collapse of U.S. stocks in the ‘70s…the rise and fall of Japanese stocks in the ‘80s…the dotcom euphoria of the ‘90s…and the housing bubble of 2001-2006.

Then, if you sold your gold your now…you’d have 15 times as many dollars.

But wait? Why would you want to hold dollars now? And if it doesn’t make sense to hold dollars now…when will you EVER want to hold dollars? And if your wealth just sits in the ground, like a forgotten tomb, what is the point of having it at all?

You’re right, dear reader. You’re better off playing the ups and downs of the markets. It’s more fun…if you like that kind of thing.

But, if you’re like us…and the thought of playing the bipolar markets isn’t exactly your cup of tea, we know of a very interesting way to pad your portfolio with gold – for only a penny per ounce. No joke. So, if you’ve been wary of investing in the yellow metal because of the recent near-record highs, fear not…

Meanwhile, speaking of housing, there are a lot of long faces among house sellers this morning. According to the weekend news, the story just becomes more and more depressing.

“American Dream turns to a Nightmare,” begins the report in the Arizona press.

(A modest suggestion to financial journalists: find a better headline. We’ve read that same headline at least 20 times already. This downturn in the housing threatens to last for years. You can’t keep using that same line. Please try to think of something new.)

The Phoenix market was so hot it attracted buyers from all over the country. Now, the buyers have disappeared. Houses are empty. Foreclosures are rising. Who could have guessed that it would turn out this way? Well, anyone who bothered to think about it…but apparently none of the thousands of people who bought houses did! According to the report, people bought houses in 2006 for $250,000…fully expecting that their places would be worth $500,000 in five years. Prices were rising steeply; they couldn’t imagine that it would ever stop.

In Las Vegas, meanwhile, there are still some 568 subdivisions in various stages of building and marketing. An estimated 48,000 houses are already on the market, with more coming.

How things have changed! Just two years ago, buyers lined up for a chance to pick up lots and houses. People would camp out overnight to be first in line. Sometimes hundreds of potential buyers would show up for only a handful of lots. And builders had to limit the number of lots per customer. Buyers always said “yes” and lenders never said “no.” It was paradise for builders.

But now, Business Week reports that builders are desperate to clear away inventory. On September 14th, for example, Hovnanian, one of America’s big nail drivers, announced a “72-hour Deal of the Century,” in which it cut prices by as much as $100,000 in 19 states.

“Massive…six-figure price cuts” are becoming common, says BW. Standard Pacific offered $20 million in discounts at about the same time.

The builders are making a simple business decision; it’s better to get rid of inventory than to carry it. Houses – and here, dear reader, we let you in on a fundamental insight, are a WASTING ASSET, not an appreciating asset. Let them sit around in the desert sun for a while and you see how fast they waste away. The curtains fade; property taxes must be paid; paint chips and cracks; the lawn must be watered and mowed. They might as well be a crop of lettuce.

Better to make them someone else’s problem, the builders concluded.

And so they unloaded them at steep discounts. And then, all the neighbors got to see what their own houses were really worth.

“China oil imports soar,” comes the headline.

The 1950s…the 1960s – what a great time to grow up in the United States of America! You could drive some huge land barge down the wide-open streets…while smoking a cigarette and drinking a can of beer at the same time. The world’s oil…you had it practically all to yourself. Steel too. And rubber. The good things that came out of the earth were loaded onto ships and sent to the USA. Everybody else was either too broke or too hopeless to be able to use them. The communist Chinese were still going around in dunce caps…and trying to make steel in backyard barbecues. The Indians were making a mess of things too – and everyone thought they were going to starve themselves to death.

You had to worry about keeping these morons alive – not about competing with them for a job! It never occurred to us that they would someday take our factories and our work. Back in the ‘50s and ‘60s, the Japanese were just beginning to make inroads into the U.S. market. But their products were still cheap and often shoddy. If you wanted something good, you had to “Buy American.”

All that has changed. Kids growing up today think that American-made products are cheap and shoddy. They want foreign-made cars…and gadgets that come from overseas too. And they know that for every one of them who can remember what a quadratic equation is, there are hundreds…maybe even thousands…of Asians who can actually do the math better, cheaper and faster.

And they know, too, that every time they drive up to a gas station, there are thousands of Chinese, Indians and other Asians…bidding for that same tank of gas.

Until tomorrow,

Bill Bonner
The Daily Reckoning

Alex’s Notes: Interesting article. Author is missing a few things though.

Low inflation? I suppose this information comes the Consumer Price Index? Which happens to conveniently leave out key indicators such as the cost of housing and food? Dont know about you, but housing and food are pretty large items on my month costs breakdown.

Low unemployment? Respectable growth? Someone has been watching too much TV. I find it ironic how even our news media is fed crap in the dark and then parrots it back to the general populace as the truth.

The thing that I find curious is how we are all so programmed to talk about the ‘National Defecit” instead of the “National Debt”. I encourage each and every one of you to look up the difference, it is quite huge.

In reality, the numbers of the ‘National Defecit’ are so small as to almost be irrelevant when compared to the size of the ‘National Debt’. Its kind of like Congress saying, ‘well we ony added an additonal $200 billion to what we already owe, so its not so bad, arent you proud of us?”, instead of saying “holy crashing dollar batman, we added another $200 billion to the $50 Trillion we have in fincancial exposures already!”

People need to wake up to the fact (including our journalists) that we are borrowing almost $2 Billion dollars a day just to continue to run our government, and if foreign governments such as Japan and China decide to stop giving us loans, we are in deep doo doo.

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Victor Davis Hanson
October 6, 2007

President Bush’s current approval ratings are about 32 percent. Only 1 in 4 Americans approves of the Democratic-controlled Congress.

So why are we so upset with our political leadership? Despite the housing slump, it is not the worst of times. After all, the economy is still strong, with low inflation, low unemployment, low interest rates and respectable growth.

The Iraqi war remains unpopular, but good news has emerged recently about the surge and Iraqis joining Americans against the terrorists. We haven’t had a repeat of the terrorist attacks on America of September 11, 2001, and the Europeans — especially France and Germany — seem far friendlier.

Instead, our anger with our political leaders more likely originates over money — or rather the lack of it. Americans believe their rich country is either going broke or is seen as a global spendthrift that can’t pay for what it charges. And the worry over insolvency gets worse at a time of conflict — which, as the Roman statesman Cicero once remarked, is often decided by money, “the sinews of war.”

We are servicing $9 trillion in aggregate national debt. China and Japan alone hold over $1.5 trillion in U.S. dollar reserves — the result of a general American trade deficit that usually runs about $700 billion per year. The euro — pegged at less than 90 cents to the dollar in early 2002 — is now more than $1.40. And the historically weaker Canadian dollar now roughly equals the value of our own.

Oil prices were around $22 to $28 in 2000, and are now over $80 a barrel. Over the last seven years Middle East oil exporters — many hostile to the United States — have raked in well more than $1 trillion in windfall profits.

The annual budget deficit is shrinking but still will come in this fiscal year at about $160 billion. Economists and government officials, of course, attempt to explain away all this red ink. Creditor nations, they remind us, simply lend us back money at relatively cheap interest to keep buying their goods. So they can’t really call in their debts without ruining their own best market.

Where else will Japan and China bank their profits but in the politically stable, transparent and honest United States — an atoll of security in a world of political upheaval and corruption — in Africa, Latin America and Asia?

Meanwhile, our weak dollar supposedly makes American goods more competitive and keeps employment here strong as we export products and services to dollar-laden customers. In any case, despite European trade surpluses in the last few years, the U.S. economy has outperformed the European Union’s, and our standard of living remains much higher.

True, oil is outrageously expensive. But in real dollars it cost more in 1979, when petroleum also took a much larger bite out of the total U.S. economy. Billions of dollars in annual deficits are scary, but as a percentage of our gross national product the current yearly shortfall is not historically that alarming.

Still, there are problems with these easy rationalizations about charge-it America. First, we will have to spend trillions of dollars for unfunded Social Security and Medicare commitments in the next few years as our population ages. Ever fewer workers must support more lavish benefits for ever more retirees.

Our military has put off necessary plane and ship replacements, and needs billions to replace worn equipment. At home, neglected bridges, roads, airports and railroads need even more money in fresh investment. So we should be saving now, not going into debt, for an upcoming nasty date with fiscal reality.

Even more critical is the toll on our national psyche. Americans don’t like to read that they are borrowing to pay their annual bills, to import their gas, to buy Japanese cars and Chinese consumer goods — and passing on the ever-larger tab to their children.

When they go abroad they feel embarrassed that their currency is weak — and getting weaker. They are bothered by global whispers that our houses and cars are too large, and that we consume in a manner we haven’t earned.

So our collective debt is not just a problem of fiscal sustainability, but also one of national pride and security. Especially at a time of war, the perception of strength — political, financial and military — is critical to our success.

Instead, Osama bin Laden screams that we are spoiled and decadent. Europe chimes in that our national character is profligate. An ascendant China hopes that if present trends hold, even our military power must — as was true of the cash-strapped British in the 1950s — shrink to meet fiscal realities.

So shamed Americans wait in vain for a leader to tell us that the government will balance its ledgers — and that we the people must spend less and invest more now while we can, rather than later when we must.

Victor Davis Hanson is a nationally syndicated columnist, a classicist and a historian at Stanford University’s Hoover Institution. He is author of “A War Like No Other: How the Athenians and Spartans Fought the Peloponnesian War.”

http://www.americaneconomicalert.org/news_item.asp?NID=2857622

By Gavin Evans and Christian Schmollinger

Oct. 8 (Bloomberg) — Crude oil traded near $81 a barrel after falling last week as U.S. stockpiles increased and the rising dollar reduced the attraction of physical assets for investors.

U.S. crude oil inventories climbed for a second week to 321.8 million barrels on Sept. 28, the Energy Department reported last week, as refiners shut units for pre-winter maintenance. Oil fell Oct. 5 after a report showing stronger- than-expected September jobs growth in the U.S. pushed the euro to a two-week low against the dollar.

“Eighty dollars certainly is an important litmus test” for the market, said Christopher Edmonds, an analyst at FIG Partners Energy Research & Capital Group, in Atlanta. “We’re still facing very tight markets both here in the United States and globally” and that should maintain prices above $75, he said.

Crude oil for November delivery was at $80.90 a barrel, down 32 cents, in after-hours electronic trading on the New York Mercantile Exchange at 9:39 a.m. in Singapore.

The contract fell 22 cents, or 0.3 percent, to $81.22 on Oct. 5, taking its decline for the week to 0.5 percent. Oil reached a record $83.90 a barrel on Sept. 20 and has fallen five of the past six sessions.

Hedge-fund managers and other large speculators reduced their bets on rising prices for the first time in five weeks, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, fell 1.7 percent to 239,250 contracts on Oct. 2. Short positions, or bets that prices will fall, fell 8.6 percent to 182,780 contracts, increasing the net-long position by 30 percent to 56,470 contracts, the Washington-based commission said Oct. 5.

That change in holdings may reflect a “seasonal rounding out of positions” FIG’s Edmonds said, and he cautioned against reading too much into one week’s data. Still, any further decline in short positions will tend to support prices, he said.

Brent crude oil for November settlement fell 25 cents, or 0.3 percent, to $78.65 a barrel on the London-based ICE Futures Europe exchange at 9:39 a.m. Singapore time.

To contact the reporters on this story: Gavin Evans in Wellington at gavinevans@bloomberg.net ; Christian Schmollinger in Singapore at christian.s@bloomberg.net .

This chart shows a historical relation between how many barrels of oil are required to buy an ounce of gold.

If this chart holds true for the future, then a sustained oil price of $80 means we should see a gold price of $1200.00 per ounce. Thats a 162% gain over todays gold spot price.

Alex’s Notes: Very long article, posted in its entirety because the whole thing is that good.

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by F. William Engdahl
Global Research, October 14, 2006

Text of author’s presentation at an international conference held in Feldkirch, Austria, September 2003.

It’s accepted wisdom that the United States, despite recent problems, is still the strongest growth locomotive for the world economy, the pillar of the global system. What if we were to discover that, instead of being the pillar, that the United States was, in fact, the heart of a dysfunctional economic system, which is spreading instability, unemployment, and depression globally?

No other nation on earth comes near to the commanding US military superiority in smart bombs, military IT, or in sheer force capabilities. The US position in the world since 1945, and especially since 1971, has rested on two pillars, however: The superiority of the US military over all, and, the role of the dollar as world reserve currency. That dollar is the Achilles heel of American hegemony today.

In my view, the world has entered a new, highly dangerous phase since the collapse of the US stock market bubble in 2001. I am speaking about the unsustainable basis of the very Dollar System itself. What is that Dollar System?

How the Dollar System works

After 1945, the US emerged from war with the world’s gold reserves, the largest industrial base, and a surplus of dollars backed by gold. In the 1950’s into the 1960’s Cold War, the US could afford to be generous to key allies such as Germany and Japan, to allow the economies of Asia and Western Europe to flourish as a counter to communism. By opening the US to imports from Japan and West Germany, a stability was reached. More importantly, from pure US self-interest, a tight trade area was built which worked also to the advantage of the US.

That held until the late 1960’s, when the costly Vietnam war led to a drain of US gold reserves. By 1968 the drain had reached crisis levels, as foreign central banks holding dollars feared the US deficits would make their dollars worthless, and preferred real gold instead.

In August 1971, Nixon finally broke the Bretton Woods agreement, and refused to redeem dollars for gold. He had not enough gold to give. That turn opened a most remarkable phase of world economic history. After 1971 the dollar was fixed not to an ounce of gold, something measurable. It was fixed only to the printing press of the Treasury and Federal Reserve.

The dollar became a political currency—do you have “confidence” in the US as the defender of the Free World? At first Washington did not appreciate what a weapon it had created after it broke from gold. It acted out of necessity, as its gold reserves had got dangerously low. It used its role as the pillar of NATO and free world security to demand allies continue to accept its dollars as before.

Currencies floated up and down against the dollar. Financial markets were slowly deregulated. Controls were lifted. Offshore banking was allowed, with unregulated hedge funds and financial derivatives. All these changes originated from Washington, in coordination with New York banks.

The dollar debt paradox

What soon became clear to US Treasury and Federal Reserve circles after 1971, was that they could exert more global influence via debt, US Treasury debt, than they ever did by running trade surpluses. One man’s debt is the other’s credit. Because all key commodities, above all, oil, were traded globally in dollars, demand for dollars would continue, even if the US created more dollars than its own economy justified.

Soon, its trade partners held so many dollars that they feared to create a dollar crisis. Instead, they systematically inflated, and actually weakened their own economies to support the Dollar System, fearing a global collapse. The first shock came with the 1973 increase in oil by 400%. Germany, Japan and the world was devastated, unemployment soared. The dollar gained.

This Dollar System is the real source of a global inflation which we have witnessed in Europe and worldwide since 1971. In the years between 1945 and 1965, total supply of dollars grew a total of only some 55%. Those were the golden years of low inflation and stable growth. After Nixon’s break with gold, dollars expanded by more than 2,000% between 1970 and 2001!

The dollar is still the only global reserve currency. This means other central banks must hold dollars as reserve to guarantee against currency crises, to back their export trade, to finance oil imports and such. Today, some 67% of all central bank reserves are dollars. Gold is but a tiny share now, and Euros only about 15%. Until creation of the Euro, there was not even a theoretical rival to the dollar reserve currency role.

What is little understood, is how the role of US trade deficits and the Dollar System are connected. The United States has followed a deliberate policy of trade deficits and budget deficits for most of the past two decades, so-called benign neglect, in effect, to lock the rest of the world into dependence on a US money system. So long as the world accepts US dollars as money value, the US enjoys unique advantage as the sole printer of those dollars. The trick is to get the world to accept. The history of the past 30 years is about how this was done, using WTO, IMF, World Bank and George Soros to name a few.

What has evolved is a mechanism more effective than any the British Empire had with India and its colonies under the Gold Standard. So long as the US is the sole military superpower, the world will continue to accept inflated US dollars as payment for its goods. Developing countries like Argentina or Congo or Zambia are forced to get dollars to get the IMF seal of approval. Industrial trading nations are forced to earn dollars to defend their own currencies. The total effect of US financial and political and trade policy has been to maintain the unique role of the dollar in the world economy. It is no accident that the greatest financial center in the world is New York. It’s the core of the global Dollar System.

It works so: A German company, say BMW, gets dollars for its car sales in the USA. It turns the dollars over to the Bundesbank or ECB in exchange for Marks or Euros it can use.

The German central bank thus builds up its dollar currency reserves. Since the oil shocks of the 1970’s, the need to have dollars to import oil became national security policy for most countries, Germany included. Boosting dollar exports was a national goal. But since the Bundesbank no longer could get gold for their dollars, the issue became what to do with the mountain of dollars their trade earned. They decided to at least earn an interest rate by buying safe, secure US Treasury bonds. So long as the US had a large Budget deficit, there were plenty of bonds to buy.

Today, most foreign central banks hold US Treasury bonds or similar US government assets as their “currency reserves.” They in fact hold an estimated $1 trillion to $1.5 trillion of US Government debt. Here is the devil of the system. In effect, the US economy is addicted to foreign borrowing, like a drug addict. It is able to enjoy a far higher living standard than were it to have to use its own savings to finance its consumption. America lives off the borrowed money of the rest of the world in the Dollar System. In effect, the German workers at BMW build the cars and give it away to Americans for free, when the central bank uses the dollars to buy US bonds.

Today, the US trade deficit runs at an unbelievable $500 billion, and the dollar does not collapse. Why? In May and June alone, the Bank of China and Bank of Japan bought $100 billion of US Treasury and other government debt! Even when the value of those bonds was falling. They did it to save their exports by manipulating the Yen to dollar to prevent a rising yen.

Because the world payments system, and most importantly, the world capital markets—stocks, bonds, derivatives—are dollar markets, the dollar overwhelms all others. The European Central Bank could offer an alternative. So far it does not. It only reacts to a dollar world. German banks destroy the German economy as they rush to imitate US banks. The Dollar System is destroying the German industrial base. German national economic policy as well as Bundesbank and now ECB policy is oriented on the far smaller export sector, to maximize trade surplus dollars, or to the big banks, to attract as many dollars as possible.

China plays a key role today

The biggest dollar surplus country today is China. Globalization is in fact just a code word for dollarization. The Chinese Yuan is fixed to the dollar. The US is being flooded with cheap Chinese goods, often outsourced by US multinationals. China today has the largest trade surplus with the US, more than $100 billion a year. Japan is second with $70 billion. Canada with $48 bn, Mexico with $37 bn and Germany with $36 bn make the top 5 trade deficit countries, a total deficit of almost $300 billion of the colossal $480 deficit in 2002. This gives a clue to US foreign policy priorities.

What is perverse about this system is the fact that Washington has succeeded in getting foreign surplus countries to invest their own savings, to be a creditor to the US, buying Treasury bonds. Asian countries like Indonesia export capital to the US instead of the reverse!

The US Treasury and Greenspan are certain that its trade partners will be forced to always buy more US debt to prevent the global monetary system from collapsing, as nearly happened in 1998 with the Russia default and the LTCM hedge fund crisis.

Washington Treasury officials have learned to be masters at the psychology of “monetary chicken.” Treasury Secretary Snow used an implied threat of letting the dollar collapse, after the Iraq war, to warn Germany about the risk of trying to be too close to France with the Euro. Some weeks after the dollar had fallen sharply, and German export industry was screaming pain, Snow reversed his stand and the dollar stabilized. Now the dollar again rises as foreign money flows back in.

But debt must be repaid you say? Does it ever? The central banks just keep buying new debt, rolling the old debts over. The debts of the USA are the assets of the rest of the world, the basis of their credit systems!

The second key to the Dollar System deals with poorer debtor countries. Here the US influence is strategic in the key multilateral institutions of finance—World Bank and IMF, WTO. Entire countries like Argentina or Brazil or Indonesia are forced to devalue currencies relative to the dollar, privatize key state industries, cut subsidies, all to repay dollar debt, most often to private US banks. When they resist selling off their best assets, tehy are charged with being corrupt. The growth of offshore money centers in the Caribbean, a key part of the drug money cycle, is also a direct consequence of the decisions in Washington in the 1970’s and after, to deregulate financial markets and banks. As long as the dollar is the global currency, the US gains, or at least its big banks.

This is a kind of Dollar Imperialism more slick than anything the British Empire even dreamed of. It is a part of the current America “Empire” debate no one mentions. Instead of the US investing in colonies like England to earn profits on the trade, the money comes from the client states into the US economy. The problem is that Washington has allowed this perverse system to get out of all control to the point today it threatens to bring the entire world to the point of collapse. Had the US instead promoted long-term policy of investing in the economic growth and self-sufficiency of countries like Argentina or Congo, rather than bleeding them in repayment of unpayable dollar debts, the world would look far less unstable today.

The internal debt bomb in the USA

The question is if the Dollar System is reaching its real limits? The Dollar System for the past 30 years has been built on growing dollar debt. What if the rest of the world decides it no longer wants to give its savings to the US Treasury to finance its deficits or its wars? What if China decides that it should diversify its risk by buying Euro debt? Or Japan or Russia? That day may come sooner than we think.

In addition to colossal debts to the rest of the world, the US internal debt burdens have reached alarming levels in the past three decades, especially the past decade.

The total US debt—public and private—has more than doubled since 1995. It is now officially over $34 trillion. It was just over $16 trillion in 1995, and “only” $7 trillion in 1985. Most alarming it has grown faster than income to service it, or GDP.

Since the Asia crisis in 1998, the US debt situation has exploded. The heart of the debt explosion is in US private consumer debt. And the heart of consumer debt is the home mortgage debt growth, helped by two semi-government agencies—Fannie Mae and Freddie Mac. Since 2001 and the collapse of the stock market wealth, the Federal Reserve has cut interest rates 13 times to a 45 year low.

US Households took on new home mortgage debt in the first six months this year at an annual rate of $700 billion, double the debt growth in 2000. Total mortgage debt in the US totals just under $5 trillion, double the debt in 1996. It has grown far faster than personal income per capita. That is larger than the GDP of most nations.

The aim has been to inflate a housing speculation market in order to keep the economy rolling. The cost has been staggering new debt levels. Because it was created with record low interest rates, when rates again rise, millions of Americans will suddenly find the burden impossible, especially as unemployment rises. Fannie Mae and Freddie Mac combined guarantee $3 trillion in US home mortgages. The US banking system holds much of their bonds. When the housing bubble collapses, a new banking crisis is pre-programmed as well, with JP Morgan/Chase, Wells Fargo and BankAmerica the worst.

The US economy has only managed to avoid a severe recession since the collapse of the stock market three years ago, by a record amount of consumer borrowing. “Shop until you drop” is a popular American expression. The Federal Reserve has pushed interest rates down to 1%, the lowest in 45 years. The aim is to keep the cost of the debt low such that families continue to borrow, in order to spend! Some 76% of the US economy GDP today is consumer spending. And most of that is tied to a record boom in home buying.

But the rate of new debt growth among families is rapidly reaching alarm levels, while the overall manufacturing economy continues to stagnate or decline. Today US factories only operate at 74% of capacity, near historic lows. With so much unused capacity, there is little chance companies will soon invest in new factories or jobs. They are going to China.

So Greenspan continues to rely on foreign money to prop up his consumer debt bubble, at low interest rates. Were foreign money to stop propping the US economy, now at some $2.5 billion daily, the Federal Reserve would be forced to raise its interest rates to make dollar investments more attractive. Higher rates would trigger a crisis in consumer debt, mortgage defaults, credit card and car loan failures. Higher rates would plunge the US economy into a depression. This may be about to happen, despite poor George Bush’s desires to get reelected.

There is a limit how much debt US families can pay to keep the economy afloat.

There is no US recovery, merely a debt spending boom based on this home buying explosion.

Total US household debt reached a high in June of $8.7 trillion, double that of 1994. Families are agreeing to longer debt payments for basics like homes or cars. The length of new car loans now averages 60.7 months, and the amount of car debt financed increased to $27,920, and the average new home costs $243,000.

With rapidly rising unemployment and a real economy that is not growing, at some point there will come a violent reality clash, as the market for home lending reaches its limit. At that point the danger is the consumer will stop buying, and the manufacturing economy will not be able to create new jobs and a real recovery. The jobs have gone to China!

We might already be at or very close to that point. In the past six weeks, US interest rates have risen sharply, as owners of US bonds have started to sell in panic levels, fearing the bonanza in real estate may be over, and trying to get out with some profit before bond prices collapse. The European Central Bank is advising member banks to not buy any more US Freddie Mac or government agency debts.

The problem is this process of creating debt, domestic and foreign, to keep the US economy going, has gathered so much momentum it risks destroying what remains of the US manufacturing and technology base. Henry Kissinger warned in a conference of Computer Associates in June, that the US risked destroying its own middle class, and its key strategic industries via outsourcing to China, India and other cheap areas. Today only 11% of the total workforce is in manufacturing. In 1970, it was 30%. Post-industrial America is a bubble economy about to pop.

Fed chief Greenspan even warned China about the rate of its trade increase with the US, pressuring China to upvalue the Renminbi to make its goods less competitive in dollar markets, and slow the job loss. But this is dangerous. China holds $340 billion in US Treasury bonds and other reserve assets. The US needs the Chinese dollar savings to finance its soaring deficits.

It is caught in its own web: American jobs, hi-tech jobs as well as factory jobs, are vanishing permanently as US factories source to China, India or other cheap areas. If Washington pressures China and others to cut back exports they risk to kill the goose that lays golden dollar eggs. Who will buy that growing Government dollar debt? Private bond traders are desperately trying to sell their US bonds. Germany can only buy so much dollar debt, also Japan.

The US waged war in Iraq not out of fundamental strength but fundamental weakness. It is economic weakness however, not military.

Oil and food, and money as strategic weapon

The fundamental reason for the Iraq war, beyond agendas of Richard Perle or other hawks, is hence, strategic in my view. US economic hegemony in this distorted Dollar System increasingly depends on a rising rate of support from the rest of the world to sustain US debt levels. Like the old Sorcerers’ Apprentice. But the point is past where this can be gotten easily. That is the real significance of the US shift to unilateralism and military threats as foreign policy. Europe can no longer be given a piece of the Third World debt pie as in the 1980’s. Japan has to cough up even more, as does China now.

Even ordinary Americans have to give up their pension promises. If the Dollar System is to remain hegemonic, it must find major new sources of support. That spells likely destabilization and wars for the rest of the world.

Could it be that in this context, some long-term thinkers in Washington and elsewhere have devised a strategy of establishing US military control of all strategic sources of oil for the one potential power rival, Eurasia, from Brussels to Berlin to Moscow and Beijing? The dollar vulnerability and debt problems are well known in leading policy circles.

As Henry Kissinger once noted, “Who controls the food supply controls the people; who controls the energy can control whole continents; who controls money can control the world.”

F. William Engdahl is a Global Research Contributing Editor and author of the book, ‘A Century of War: Anglo-American Oil Politics and the New World Order,’ Pluto Press Ltd. He has completed a soon-to-be published book on GMO titled, ‘Seeds of Destruction: The Hidden Political Agenda Behind GMO’. He may be contacted through his website, www.engdahl.oilgeopolitics.net.

Alex’s Notes: Interesting trend here. Anyone who thinks the world is not offloading dollar backed paper at breakneck pace perhaps needs another cup of coffee.

But what does that mean?

Could mean a number of things:

1. Continued upwards pressure on gold, silver, oil, and food commodities.
2. If we get to the point where foreign governments are unwilling to continue financing our ridiculous $2billion a day in loans we have to take just to keep operating our government, then of course our government could go bankrupt, and boy wouldnt that be a fun ride.
3. Dollars keep getting shed around the world and all of those $4 Trillion in greenbacks that are floating around the world could come home. For those of you who have spoken to me about this issue you already now what that means. Get ready for $9/gallon for gas.

This is just an excerpt, link for the entire article is at the bottom.

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Another story that caught my eye this morning concerned the diversification of assets by Middle Eastern governments. The Qatar Investment Authority has lowered the amount that its $50 billion fund has invested in the dollar to around 40% from around 99% over the past two years, according to the CEO of the Authority – who is also Qatar’s prime minister. We have been talking about this diversification of currency reserves for some time, and while Qatar’s fund isn’t large enough to move the markets, it further reinforces our views. Foreign governments will continue to diversify their holdings out of the U.S. dollar, putting more downward pressure on the greenback.

The Daily Reckoning