DEVALUE THE DOLLAR, KICKSTART AMERICA

Dollar Devaluation To Fix The Great Recession
Frank Beck, Forbes Magazine, 12.09.08, 1:00 PM ET

What began as government social tinkering—with implied threats to banks and mortgage companies to extend home loans to even the most marginal of borrowers&@151;led to a greed-blinded mortgage banking business and the meltdown we are experiencing today. Now we are asked by the same congressional leadership to go along with taxpayer-funded bailouts of the very banksters who, while making millions, created the mess..

Despite the trillions of dollars already expended recapitalizing banks, there is very little, if any, progress to show. Will a few trillion more do the trick? That seems to be the consensus among Congress and the banks. "They are simply too big to let fail," or are they really just too big to save? We can go back to "Plan A" and buy the toxic assets. If so, at what price? What if a few trillion does not remove enough toxic waste from the system or doesn't get credit flowing again and the economy bustling?

Some argue that it is time to help Main Street, not Wall Street. So, we should "forgive" some of the mortgages for those who are 90 days or more behind on their payments. Have you quit paying yet?

If we are to save bankers, shouldn't we at least distinguish between those who possess the intelligence to renegotiate their loans to workable terms? If we are to save homeowners, should not we first define the term "homeowner?" Perhaps it is not only someone who agreed to and signed a mortgage and is living in a house. Just perhaps, it should also include the stipulation that this individual paid some amount of a down payment: 20%, 5%, a dollar. I can tell you who is not a homeowner. It is not someone who paid zero down and ridiculously low payments for two years; that, my friend, is a renter.

The problem with all these ideas is the money is only directed at those who created or benefited from the problems. Why not attack the situation in a manner that will benefit most everyone, an approach that has been successful before and, when compared to the current course, has little downside?

Here it is. Stand back. World currencies should be devalued overnight.

It can be done on a country-by-country basis, but a coordinated devaluation would work best. A devaluation of 30% would raise the dollar value of all assets by 43%. A $200,000 home with a $230,000 mortgage would become a $286,000 home with the same mortgage. Presto! The homeowner who was $30,000 upside-down now has $56,000 equity and a good reason to make his payments. Both the homeowner and the bank are immediately better-off.

It would even benefit those who purchased their homes responsibly, as the value of their homes would rise by the same 43%. The current course of throwing trillions of dollars at the culprits is without any benefit to those who acted responsibly.

Admittedly, this is not a solution without the price of inflation, but the inflation would be short-lived. The current course will ultimately cause massive inflation that cannot be accurately estimated, and it may not even solve the problem.

Currency devaluation proved effective in ending the Great Depression. In 1930, Australia was the first to leave the gold standard, immediately devaluing the aussie by more than 40%, and the economy quickly recovered. New Zealand and Japan followed suit in 1931, each with the same result. By 1933, at least nine major economies had enacted a devaluation of their currency by removing it from the gold standard, all of whom emerged from depression.

In 1933, through a series of gold-related acts, culminating in the Gold Reserve Act of 1934, America realized a dollar devaluation of 41% when the price of gold was adjusted from $20.67 per ounce of gold to $35 per ounce. America, like the others before, had its economy bottom and recover as a result. Of the larger economies, only the French and Italians continued to adhere to the gold standard, and their economies remained depressed until finally, in 1936, they allowed their currencies to devalue, and their economies then recovered.

I see no reason to believe we would have any different result today. Only debt would remain the same. All other assets would immediately be worth more (in nominal terms), whether it be a home, a stock, an ounce of gold or a used car. Bank balance sheets would immediately improve, as many loans would be moved from non-performing to performing status. Banks would be paid with devalued dollars, but they made millions creating the mess. The current use of government stimulus through the creation of dollars will certainly lead to a similar or worse devaluation, so this is likely a net gain for the banks too.

Businesses would instantly become more profitable, and workers' pay would increase, allowing each to pay their debts more easily, even while sending more tax dollars to Washington, without raising tax rates. As assets are sold, the capital gains would send even more taxes to Washington. States and locales would receive more revenue via sales and property tax, improving the fiscal condition of school districts and local governments. The national debt would effectively be reduced by the same 25%, giving future generations a chance. Combine the move with a congressional pledge to only raise the budget by half the devaluation, and we could be on track for a balanced budget and paying down the debt.

As the old Saturday Night Live skit said, "Think of inflation as your friend. Wouldn't you like to wear $1,000 suits and smoke $100 cigars?" I know I would.

Frank Beck is Chief Investment Manager of Capital Financial Group and ProPlayer Investing in Austin, Texas, an affiliate of Partnervest Securities of Santa Barbara, Calif. Mr. Beck may be reached at Frank@FrankBeck.com.

A FEW DOLLARS SHORT

A FEW DAYS AGO Press Secretary Robert Gibbs stated that the $100M dollars in cuts the White House is requesting being made is a LARGE sum of Money.

Yet, a short while ago we were told 8 Billion dollars in earmarks is a small amount. And Mr. Gibbs even restated this just a few weeks ago. So, can someone please demonstrate or explain how $100 million is larger than eight billion dollars? I am sure if someone can come up with the answer, it will make an interesting mathematical equation...

CHINA CAUTIONS AGAINST DEVALUATION

Hello America? Were you paying attention as you bought all that cheap garden equipment? China owns part of you. Saudi Arabia has scrambled for whatever's left. You, however, still get to speak English, for now.

CHINA IS TELLING THE US to be careful, not to overspend and keep an eye on the dollar. "There are risks that China cannot control, so they're depending on the U.S. to maintain fiscal prudence and keep the dollar reasonably stable." said Kelvin Lau, regional economist at Standard Chartered in Hong Kong.

Analysts estimate China keeps nearly half of its $2 trillion in foreign currency reserves in U.S. Treasuries and notes issued by other government-affiliated agencies.

"Inside China there has been a lot of debate about whether they should continue to buy Treasuries," said Frank Gong, chief China economist for JP Morgan.

Beijing is trying to increase its leverage at the London G-20 meeting by reminding its partners of its role in financing U.S. spending, Gong said.

"Without China's buying (Treasuries) and continuing to fund U.S. deficit spending, interest rates could have been much higher. That could be very destabilizing in this very recessionary environment," he said. "By attracting a lot of attention to this issue, China is already increasing its influence ahead of the G-20 meeting."

Read it all.

U.S. TRADE DEFICIT WORSENING

RIGHT UP UNTIL THE COMMODITY bubble burst this summer, there was the ridiculous theory going around that the world was now "decoupled" and that European and emerging markets would somehow avoid being affected by the US slowdown. These decoupling theories disappeared as oil dropped like a rock, only to be replaced by an equally ridiculous idea: that the world's economic pain would be spread evenly. This is wrong. Although the entire world is going into a recession as a result of the credit crisis, some economies are better prepared than others to weather the storm.

Durable and capital goods
The US's manufacturing sector is concentrated in industries most vulnerable to an economic downturn, durable and capital goods. Durable goods are products that last for more than three years like SUVs, motor/sail boats, et cetera. These items are the first areas where consumers cut back spending, which is why the big three are in so much trouble. Capital goods are equipment and machinery used in creating other goods, and the biggest demand for these products has come from emerging markets with their growing manufacturing sectors. With emerging market manufacturing now in contraction, demand for these capital goods is set to disappear, which leaves the US in a disastrous situation:

We make mining equipment at a time when commodity prices are crashing and mines are shutting down.

We make construction equipment (caterpillars, pickup trucks, etc…) at a time when global construction is grinding to a halt.

We make civilian aircrafts at a time when global trade and travel is quickly contracting.

Cheap consumer goods
At the other end of the spectrum from durable and capital goods are the cheap consumer goods found in retailers like Wal-mart. Demand for these lower-end consumer products tends to hold through the severest of recessions, because they are absolutely essential to our modern standard of living. While some current shoppers at Wal-Mart might be forced to cut spending on these essential items, new spending from shoppers who are downgrading from higher end stores will pick up a lot of this shortfall. For example, as more American's lose their jobs, there will be a lot of consumers downgrading from designer clothes to Wal-Mart's cheaper clothing. The resiliency of Wal-Mart is bad news for the US, as virtually all the retailer's cheap goods are imports from Asia.

The trade deficit
A quick look at where the US's trade deficit is concentrated reveals just how grim the outlook is. We are running huge deficits in consumer goods and industrial supplies (oil), which we desperately need, and the only category with a sizable surplus is capital goods (civilian aircrafts, mining equipment, etc), for which global demand is crashing. This explains why the US trade deficit grew in October.

Implications for the dollar
While imports to the US are falling, US exports are falling even faster. Exporting nations still have to finance our massive trade deficit, but are now getting less benefits from it. If this trend continues and the US economy keeps shrinking, Asian nations will begin abandoning their dollar pegs and start focusing on stimulating domestic demand instead. The dollar will quickly lose all its value when this happens.

by Eric deCarbonnel

THE DERVISH DANCE OF THE DOLLAR

Our conservative friend Tony Blankley of the Washington Times has written an opinion piece in which he puts several menacing questions to the candidates currently still in the race for the toughest job in the world—the US presidency. Now we realize that many of our friends perched on the Left want no part of an America that sustains ANY SORT of advantage, temporary or permanent, over anybody else, being all-gracious selfless players in the eternal game of life that they purport to be (at least in their own minds, intellectually that is, because the material requirements of just making it in the USA are just too overwhelming to bypass for far too many of them for us not to notice), but here is one question that does nor presume that the rest of the world automatically confirms to his idea of goodness because he wishes it so, but by hard work, and intelligent design (not to be confused with that theological mess formerly known as creationism):

"...are you for a strong dollar or will you continue Mr. Bush's policy of letting the dollar sink? Some presidents think that a weak dollar helps trade and we should do little to support the dollar. But today, for the first time in living memory there is a risk that the dollar, if it continues to slide, would be replaced by the Euro as the global store of value. The United States benefits from the dollar's unique role in the world. It has permitted us to have influence in many ways, such as disrupting financial flows to adversaries like Iran and North Korea. With international contracts denominated in dollars we gain unfair advantage over all other currencies. Are you prepared to protect the dollar and drive its value up (again, working closely with the Fed chairman) or not?

Fourth, and flowing from the previous question: As noted by Benn Steil (director of international economics at the Council on Foreign Relations) to protect the dollar's value, we cannot let the Federal Reserve, by itself, try to solve the financial crises by flooding the market with dollars. If we are to strengthen the dollar, then we need the president and Congress to directly fund "on the books," the hundreds of billions of dollars the Fed is creating to help at risk financial institutions.

Of course, if you protect the dollar and fight inflation you won't have money for new spending programs. Mr. and Mrs. presidential candidates, please tell us now—before we vote—what your priority will be in this painfully difficult decision."

THE NEW CHINA'S BIG STICK

Chongqing, China

AS WE HAVE BEEN predicting for several years now, this nation's economy is facing assaults from not just the jihadists but on several other fronts as well, particularly Saudi Arabia and China and their war on the dollar.

China roiled financial markets around the globe yesterday when it asserted that the dollar is losing its luster as the world's reserve currency and that Beijing will swap some of its $1.4 trillion in reserves out of U.S. dollars and into stronger currencies like the euro and Canadian dollar.

China's verbal assault on the dollar helped trigger a 360-point plunge in the Dow Jones Industrial Average and came as French President Nicolas Sarkozy warned in a speech to Congress that the "disarray" caused by the dollar's steep fall could lead to "economic war."

We must stop this trade surplus misery right now, George Bush. Fair trade, not libertarian-styled free trade is the ticket for global stability. With the euro soaring against the dollar, the Europeans themselves are feeling the same painful assault on their economies but for different reasons. Presently, they are feeling the pinch of not being able to sell their suddenlly higher priced goods, stagnating their own economies. Meanwhile China and Saudi Arabia are running the table with a host of unfair practices from A to Z.

Read it all.

FINANCIAL COLLAPSE IN THE WORKS?

Industrial freshness in oil rich Qatar

The ME state of Qatar has upped its share in the London Stock Exchange to nearly 24 per cent, giving the gulf state and its neighbour Dubai a controlling stake of nearly 52 per cent.

The Islamofanatics (sic!) are nothing if not superb Machiavellian practitioners of black intrigue. What better way to drop the equivalent of an electromagnetic pulse on an entire economy than with the weapon of stock exchange ownership? This is from the same playbook as the Dubai ports deal. Go after Western critical strategic non-military assets, control them and then put the economic squeeze on us. They did it with oil and they are using that as an example for further exploitation; but now they will use economic force to propagate Islam.

The bureaucrats in London, Washington, and New York should set aside their copies of Adam Smith and think about what is happening here. This litany of incidents were major direct attacks on our nations' financial systems in an area where we have no line of defense. Once economic control has shifted into "enemy" hands, Washington becomes irrelevant.

The Secretary of the Treasury and the Chief of Economic Advisors should be revolting against this stealth takeover of Western markets. They should forget about this globalism crap and throw out Queensbury rules, returning to WWII economic controls on enemy assets. The Islamofanatics only abiding rule of engagement is doing whatever it takes to win, to establish a world caliphate. They cannot win with a direct confrontation against a carrier group or an infantry division, but they can win with an economic ax threatening Wall Street which could easily slam into and paralyze the country's economic backbone. Only teeth-gnashing Marxists can cheer at this news. Make no mistake. They are cheering.

However, it is also true that Muslims owning a stock exchange is not the end of the system, not yet anyhow. What exchange ownership can control is which company to list or unlist. But even here there's a ball & chain of regulation to abide since all exchanges operate by local laws. I understand that a "Stock Exchange" is simply a trading space. Remember the Dick Grasso scandal? In fact, an exchange is a company by itself. If one falters or grows unstable or unfriendly there is always market space for another trading space company to spring into place, although by most accounts, the London Exchange is arguably the centerpiece of global trading.

Dubai has control of the Nasdaq also. The Saudi's are "playing" around with the US dollar. They have their tentacles in our media, they control the oil and now this. Now, where did I put all those "The End is Near" signs I rescued from a dumpster oh so many years ago?

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