Events over the past
few years have caused many informed observers to be concerned over the increased
precariousness of our strategic horizon. In addition to natural disasters-such
as Hurricane Katrina-and the continuing terrorist threats promising a major
sequel to “9/11,” and the probability of rogue nuclear attacks of various kinds,
anyone who is relying on smooth waters over the next 12-18 months is simply
among the ranks of the under-informed.
To prepare for potentially volatile
uncertainties, some years ago we published a series of suggestions, which we
called “The Vortex Strategy,” and in view of our current horizon, it seems
appropriate to review some of those ideas.
The next major terrorist event could prove to
be an even more impacting sequel than “9/11”-whether it is an Al Qaeda plot of
some kind, or an EMP attack which threatens to plunge the U.S. back into the 19th
century. But without indulging in speculations regarding the challenges that
Homeland Security presently faces, many experts are also anticipating a possible
upheaval to emerge from the current debt debacle of the United States. What
would be the consequences to you and your family if America’s economic
foundation was ripped out from under you? We individually can’t change the
probabilities of such an event, but what is your action plan to protect yourself
and your family?
The Impending Monetary Crisis
We need to understand the precariousness of
the U.S. dollar and its role in the international monetary markets: two-thirds
of world trade is conducted in dollars; over 70% of central banks’ reserves are
held in the American currency; and, the U.S. dollar is the sole currency used by
international institutions such as the International Monetary Fund (IMF).
This has conferred on the U.S. a major
economic advantage: the ability to run a trade deficit year after year. It can
do this because foreign countries need dollars to repay their debts to the IMF,
to conduct international trade, and to build up their own currency reserves. A
move away from the dollar could have a disastrous effect on the U.S. economy as
the U.S. would no longer be able to spend beyond its means.
Worse still, the U.S. would become a net
currency importer as foreigners would seek to spend back in the U.S. a large
proportion of the estimated three trillion dollars which they currently own. The
U.S. would also have to run a trade surplus-the first time in a
century-providing the rest of the world with more goods and services than it was
receiving in return.
The Oil Exporters
Up until the early 1950s, the U.S. dominated
world oil production, so sales of oil and natural gas on international markets
had been exclusively denominated in dollars. The U.S. in those days accounted
for half or more of the world’s annual oil production. That, of course, has
drastically changed: we are entering a period in which we need to import almost
70% of our requirements!
The tendency to price in dollars was
additionally reinforced by the 1944 Bretton Woods agreement, which established
the IMF and World Bank and adopted the dollar as the currency for international
loans. The “gold exchange standard” was also established: the U.S. dollar was to
be convertible to gold by foreign governments. However, by the 1970s foreign
dollar holdings had grown to five times the available gold. So, in August 1971,
President Nixon suspended all gold payments. Today, depreciating paper dollars
are backed only by the “reputation” of the U.S. Government
The Quiet Game
While the denomination of oil sales is not a
subject that is frequently discussed in the media, its importance is certainly
well understood by governments. For example: when President Nixon took the U.S.
off the gold exchange standard, OPEC considered moving away from dollar oil
pricing, as dollars no longer had the guaranteed value they previously did. The
U.S. response was various secret deals with Saudi Arabia in the 1970s to ensure
that the world’s most important oil exporter would stick with the dollar. What
the Saudis did, OPEC followed.
The Think Tanks Warn
Countries switching to euro reserves from
dollar reserves will bring down the value of the U.S. currency. Imports would
start to cost Americans a lot more… As countries and businesses convert their
dollar assets into euro assets, the U.S. property and stock market bubbles
would, without doubt, burst…
-The Foundation for the
Economics of Sustainability
The dollar’s position is already on the decline in
many countries.
-Federal Reserve Bank of San
Francisco
China has officially declared that it will
diversify a part of its foreign exchange holdings into oil by building a
strategic petroleum reserve. The construction of huge storage tanks has begun
and will take several years until completion.
On January 24, 2007, Kuwait announced that it
is considering abandoning pegging its dinar to the dollar for fear of an
anticipated slide in the value of the dollar. Last year, the central banks of
Italy, Russia, Sweden, and the United Arab Emirates had announced similar shifts
out of the dollar and into other currencies, or gold, citing the United States’
“twin deficits” (federal deficit and the trade deficit) as the reasons for the
expected fall in the dollar’s value.
Our Trade Balance
We buy more than we sell (we always have). We finance
our purchases with debt currency and our current imbalance (deficit) grows $850
billion per year!
Our Federal Deficit
Our government spends more than it raises (in
taxes, etc.), so we finance our government programs with debt. The Bush
administration is forecasting that the federal deficit for the 2007 budget year
will total $244 billion (a slight improvement from the $248.2 billion actual
deficit in 2006). However, the improvement this year is likely to be short-lived
as tax revenue growth slows and spending begins to rise to deal with increased
Social Security and Medicare payments as the 78 million baby boomers start to
retire. Thus, the U.S. Treasury must borrow:
Federal deficit: $250 billion/year
Trade deficit: $850
billion/year
$1,100 billion/year
That’s $3 billion per day! It’s going
to be interesting to see who is willing to pick up those notes (and what
interest and incentives we’ll have to offer)!
Consumer Debt
Mortgage companies are knocking on doors,
sending letters and making phone calls with a simple message for struggling
homeowners: They’d rather modify your loan than foreclose. New foreclosures hit
their highest ever level in the fourth quarter of 2006, according to the
Mortgage Bankers Association. With home values falling in some parts of the
country, none of the finance companies want to be stuck owning a house that has
depreciated in value.
Critics say lenders made loans to borrowers
who weren’t credit worthy with terms that would be impossible for them to meet.
Whether the current wave of workouts will merely postpone foreclosures-and delay
bad loans hitting lenders’ books-is an open question…
David Walker
David M. Walker, Comptroller General of the
United States, has publicly expressed his professional opinion that the American
public needs to tell Washington it’s time to steer the nation off the path to
financial ruin. The “accountant-in-chief” spoke on a Fiscal Wake-Up Tour panel
during a meeting at the LBJ School of Public Affairs in Austin, Texas, on
September 28, 2006:
What they don’t talk about is a dirty
little secret everyone in Washington knows, or at least should. The vast
majority of economists and budget analysts agree: The ship of state is on a
disastrous course, and will founder on the reefs of economic disaster if nothing
is done to correct it.
-David Walker
His basic message is this: If the U.S.
government conducts business as usual over the next few decades, a national debt
that is already $8.5 trillion could reach $46 trillion or more, adjusted for
inflation. A hole that big could paralyze the U.S. economy; according to some
projections, just the interest payments on a debt that big would be as much as
all the taxes the government collects today. And every year that nothing is done
about it, the problem grows by $2 trillion to $3 trillion (yes, that’s with a
“t”). It doesn’t take a genius to recognize that an economic upheaval is in the
making.
There are four traditional measures of the
nation’s money supply: the M0, M1, M2, and-the most comprehensive-the M3. The M3
is the primary “report card” of the nation’s money management. However, the Fed
is no longer publishing the M3, which economists have traditionally used to
monitor the liquidity of the U.S. [Congressman Ron Paul introduced H.R. 4892 in
an effort to reinstate publication of M3.]
U.S.
Financial Report
On December 15, 2006, the Treasury issued the
Financial Report of the United States as released by the U.S. Department of
Treasury. The 2006 federal budget deficit was $4.6 trillion, not a previously
reported $248.2 billion. The difference is that the typical report of the
federal budget deficit is on a cash basis, in which all tax receipts are applied
to current liabilities when received.
The Financial Report of the United States is
calculated on a GAAP (“Generally Accepted Accounting Principles”) basis, which
includes accruals made for current year changes in the net present value of
unfunded liabilities in social insurance programs, such as Social Security and
Medicare. This official report showed that the GAAP accounted negative net worth
of the federal government has increased to $53.1 trillion, while the total
federal obligations under GAAP accounting now total $54.6 trillion, taking into
account the present value of future Social Security and Medicare liabilities.
Put simply, this report shows that “arguments that the U.S. government is
bankrupt have increasing merit...” (their words).
Hyperinflation Ahead?
The threat of hyperinflation isn’t just
theoretical. Germany, in 1920, saw food prices double every 49 hours (a loaf of
bread in 1920 cost 1 mark; in 1923 a loaf of bread cost 726,000,000 marks). (My
grandparents sold a restaurant which, when the escrow was opened was worth
enough to retire on; yet, by the time escrow closed, the proceeds could only
purchase a loaf of bread.) In the 1990s, Russia’s currency devalued from 100/rubles/dollar
in 1994 to 30,000 rubles/dollar in 1999.
The United States is now the largest debtor in
the world ($48,000,000,000,000 in debt instruments). These obligations will
ultimately have to be met with much cheaper dollars.
The rich ruleth over the poor, and the
borrower is servant to the lender.
Proverbs 22:7
This cursory review hasn’t dealt with the
leveraging effects of the substantial “financial derivatives” currently being
employed, which would accelerate a potential crash even further! Your personal
stewardship plans need to maintain surveillance on the likelihood of serious
inflation ahead, and perhaps worse.
The Plot Thickens
There are serious people attempting to
engineer the creation of a “North American Union,” and the establishment of a
consolidated North American currency called the “Amero.” Some of the milestones
which have been published would have no feasibility except under conditions of
extreme urgency; however, those specific extreme circumstances may be
deliberately being positioned for just such a purpose! Is our current debt
debacle simply mismanagement? Or is it being engineered with a stratagem in
mind? “Stay tuned. Film at eleven.”
* * *
Next Month: “The Vortex Strategy: Part 2.”
This series will include steps you can take now to help prepare for the
uncertainties ahead.
