Detroit - Coming Soon To Everytown, USA

Detroit, once the hub of Industrial America, is now in shambles. The average home price has fallen in the neighborhood of $18,000. Yes, that's $18000. It's so bad, prisoners don't wanna leave prison. Crime has fallen because, get this, there NOTHING left to rob. Unemployment is 21% and rising. An example, if there ever was one, of what the regime of fiat currency can do to the real economy. Many more cities in America are awaiting a similar fate, if not worse, during the coming/ongoing Greater Depression. Shocking, but true.

Here's one.

And here's another:



This is NOT what a "superpower" nation looks like.

America's Immigration Problems Solved!

What the US Govt. has not been able to do (or does not want to do), the US Economy is going to accomplish by all itself. This from an article that appeared in the New York Times yesterday:

Mexican shoppers with fists full of cash and long Christmas lists are pouring across the border into hotels, restaurants and shopping malls here, providing an economic boost in a downward spiraling economy.

Whaaaaaaaaaaat? Mexicans "stimulating" the US economy? We all thought there was no stopping the famed US Consumer. It also turns out that the much ridiculed Mexicans were, after all, smarter than the Americans:

Mr. Escalante said Mexicans are in a better position to weather economic turmoil because many own their homes outright and do not carry large amounts of credit card debt. “If we have it, we own it and we have already paid for it,” he said.

And get a load of this too:

Mr. Aguilar said he had also noticed a sharp increase in the number of Mexicans returning to Mexico with one-way tickets, particularly people from Phoenix. “They are going back to Mexico because they don’t have any job,” he said.

With the ongoing rapid collapse of the US economy, there is no more reason for Mexicans (or citizens from any other country really for that matter) to come to the US illegally, or legally as well (thus taking care of the huge backlog in the US immigration queue). No more harassment by pesky, racist immigration officers. Moreover, with the imminent collapse in dollar's value, and concurrently its purchasing power, there is no compelling reason for people in other parts of the world to leave their homes and families behind and work (slave) in the US of A just to escape poverty in their own countries. In fact, the cycle may be set to reverse as other currencies, such as those in Asia, appreciate against the dollar (assuming they are not poorly managed). Don't believe it? Here's a dose of reality. Its the Americans now who may need to immigrate to other countries now in search of a better life!

To borrow a phrase from Morpheus in the movie Matrix - "Fate, it seems, is not without a sense of irony".

Its NOT Japan, Its Argentina

What irritates me a lot these days is that many American commentators out there (probably the same people who said the economy was "strong" in 2007)are comparing the current situation in the US with that of Japan in the 90's. Sorry folks - ain't gonna happen. The US is in a whole lot worse position that Japan at the time. Argentina is more like it.

The strength (i.e., purchasing power) of the dollar since '71 is has been "artificial" - in the sense that it is not backed by the inherent strength, i.e., productive capacity of the US economy, but by oil. We only need look back to what happened to Argentina in the early 90's to see what this can do to an economy, which pegged its currency at par with the dollar at that time. This caused imports to get cheaper and decimated the domestic industry causing large scale unemployment and misery. Same thing has happened in the US, but it has been able to avoid massive unemployment (up until now, i.e.) by building a debt-based phony "service" economy. Formerly one of the richest countries in South America (and in the world, I think), the children in Argentina started dying of malnutrition; overnight, people's savings were cut in 1/4th due to devaluation of the currency, and many other such horrors. This is a documentary on YouTube regarding what happened in Argentina which I think will be instructive. Its a stark picture of what a financial crisis can do to the country. People think finance and economics is just some kind of academic wonderland that's irrelevant to them. Not so. It is the most integral part of your life - your survival depends on it.

How the US has Plundered the World - The Dollar Hegemony

This article is first in a series in which I will go into the reasons behind the current predicament of the global economy, for the benefit of my friends who are only now beginning to pay attention to what's happening.

The topic of this post was an inspiration from a recent news item in Reuters quoting an article published in the Chinese state newspaper People's Daily. Finally the world is waking up to the US's scam.

The biggest reason behind the current collapse in the world economy is the unstable and heavily mismanaged reserve currency system used for trade throughout the world - the US Dollar. So why is the supposedly most advanced and powerful nation on earth "mismanaging" its currency? Well, as we'll see, it's managed quite well from the perspective of those benefiting the most from it, i.e., the elite in the US economic and power structure, but mismanaged from the perspective of almost everybody else in the world. The mismanagement stems from the regime of irredeemable currency - a topic requiring a whole another blog post(s) by itself. Here I will talk about the historical context in which the dollar became irredeemable, i.e., delinked from Gold, and how this allowed the US to manipulate the currency to its significant advantage - a free lunch to US at the expense of the rest of the world.

Henry C K Liu of Asia Times has done a splendid job of explaining how it all happened and the mechanism of the dollar "hegemony" in this article "PART 2: The US-China trade imbalance". I am posting only the relevant part here, but the entire article is worth a read:

In 1950, the United States imported US$11.4 billion of goods and services and exported $12.7 billion, for a foreign-trade total of $24.1 billion, constituting a mere 7.3% of a gross domestic product (GDP) of $329 billion. There was no trade with China because of a Cold War embargo by the US. The US trade deficit for 1950 was $1.3 billion, which came to an insignificant 0.4% of GDP. It was an amount the US could easily sustain as World War II had left the country the richest and most productive economy in a war-torn world.

Also, at that time the US was the world's only creditor nation, with a gold-backed dollar serving as a reserve currency for international trade as mandated by the Bretton Woods international finance architectural regime. The gold-backed dollar with fixed exchange rates ensured that war debts incurred by US allies would be duly paid back without dilution. Thus a US trade deficit was quite necessary for restoring a world economy severely damaged by war. And the dollars that the surplus trading economies received were returned to the US to pay for war debts but not to buy US assets, as foreign-exchange and capital controls were the order of the time. The minor payments imbalance was paid with a transfer of gold holdings between the trading economies. There was no foreign-exchange market beyond government exchange windows. In that arrangement, dollar hegemony was not a serious problem, as cross-border flow of funds were strictly controlled by all governments and the US was obliged to redeem dollars with gold.

The end of the Cold War in 1991 enabled the globalization of deregulated financial markets to allow cross-border flows of funds to be executed electronically with no restrictions for most economies. Since then, a huge foreign-exchange market has grown to more than $2 trillion of daily volume around the benchmark of a fiat US dollar. The reserve-currency status of the dollar has not been based on gold since 1971, but only on US geopolitical prowess, which managed to force all key commodities to be denominated in dollars. Finance globalization since 1991 has allowed the US to become the world's biggest debtor nation, with the largest trade and fiscal deficits, financed by a fiat dollar that continues to serve as a key reserve currency for not only international trade but, more important, for international finance.

Imbalance of payments and debt bubble:

Dollar hegemony emerged after 1991 to allow the US to neutralize persistent trade and fiscal deficits that otherwise would lead to an imbalance of payments between it and its trading partners by erasing the payments imbalance from its trade deficit with a US capital-account surplus.

Separate from the trade deficit, the US fiscal deficit is financed by the Federal Reserve's monetary-easing policies to increase the money supply, causing an asset-price bubble that can absorb the rising debt without altering the debt-equity ratio, causing de facto but stealth inflation, renamed as "growth". This phantom growth is touted by neo-liberal economists as the reason foreign investment is attracted to US assets. What dollar hegemony does is to transform the dollar-denominated payments imbalance of the United States into a dollar-denominated debt bubble in the US economy. Holders of US debt and assets are rewarded with high nominal returns provided by a high growth rate reflecting rising asset prices denominated in money that constantly loses purchasing power.

World trade is now a game in which the US produces dollars by fiat and the rest of the world produces things that fiat dollars can buy. The world's interlinked economies no longer trade to capture a comparative advantage; they compete in exports to capture dollars needed to service dollar-denominated foreign debts and to accumulate dollar reserves to sustain the exchange value of their domestic currencies.

To prevent speculative and manipulative attacks on their currencies, the world's central banks must acquire and hold dollar reserves in corresponding amounts to their currencies in circulation. The higher the market pressure to devalue a particular currency, the more dollar reserves its central bank must hold. This creates a built-in support for a strong US dollar that in turn forces the world's central banks to acquire and hold more dollar reserves, making it even stronger. This phenomenon is known as dollar hegemony, which is created by the geopolitically constructed peculiarity that critical commodities, most notably oil, are denominated in US dollars. Everyone accepts dollars because dollars can buy oil. The recycling of petrodollars is the price the United States has extracted from oil-producing countries for US tolerance of the oil-exporting cartel since 1973.

Ironically, as oil-producing economies benefited from a suddenly rise in the price of oil denominated in dollars, they developed a need to preserve the value of the dollar. Thus three conditions brought about dollar hegemony in the 1990s:
#In 1971, US president Richard Nixon abandoned the Bretton Woods regime and suspended the dollar's peg to gold as US fiscal deficits from overseas spending caused a massive drain in US gold holdings (The US basically defaulted on its gold payment obligations to the rest of the world - GG).
# Oil was denominated in dollars after the 1973 Middle East oil crisis, followed by other key commodities.
# Deregulated global financial markets began to emerge in 1991 after the Cold War, making the cross-border flow of funds routine.

A general relaxation of capital and foreign-exchange control in the context of free-floating exchange rates made speculative attacks on currencies regular occurrences. All central banks have since been forced to hold more dollar reserves than they otherwise need to ward off sudden speculative attacks on their currencies in financial markets. And dollar reserves by definition can only be invested in US assets. Thus dollar hegemony prevents the exporting nations from spending domestically the dollars they earn from the US trade deficit and forces them to finance the US capital account surplus, thus shipping real wealth to the United States in exchange for the privilege of financing US debt to further develop the US economy.

The US capital-account surplus in turn finances the US trade deficit. Moreover, any asset, regardless of location, that is denominated in dollars is a US asset in essence. When oil is denominated in dollars through US state action and the dollar is a fiat currency, the US in essence owns the world's oil for free. And the Quantity Theory of Money dictates that the more the US prints greenbacks, the higher the price of US assets will rise. And by neo-classical definition, a rise in asset value is not inflation as long as wages lag behind. Thus a strong-dollar policy gives the United States a double win while workers everywhere, including those in the US itself, are handed a double loss.

Through dollar hegemony, the US, unlike many Third World nations with similar trade and fiscal deficits, has been granted immunity from associated penalties of payments imbalance by having its trade deficit finance its capital-account surplus. But instead of reforming the fundamental structure of the US economy that creates such trade and fiscal deficits, many in the United States are seeking painless yet pointless solutions to a non-existent payments imbalance by engaging in irrational disputes over the issue of currency exchange rates of its trading partners, first Japan and Germany decades ago, and now China.

On top of this monetary scam, the US wants to push the exchange rate of the dollar further down to erode the value of the massive dollar holdings of its trading partners, as the exchange rate of the dollar affects only those who live, operate in or visit non-dollar economies. Because the Fed can print fiat dollars at will under a dollar-hegemonic regime, a dollar-denominated US trade deficit does not present a balance-of-payments problem for the United States, as it does all other countries that cannot print dollars. Thus a US trade deficit, being not a balance-of-payments problem, cannot be cured through manipulation of the exchange rate of the dollar. The solution has to come from reducing wage disparity between the two trading economies.

So basically, after it stopped being Gold-backed in 1971, the dollar effectively became "oil-backed" - oil the USA did not own, as opposed to the Gold it did (really, though, it came to be "backed" by any commodity that was traded in dollars) which allowed it to maintain it's status as the world's reserve currency. This biggest single factor has allowed the US to maintain its supremacy (read Empire) over the rest of the world and usurp all the resources in the process, alongwith stealing (purchasing power) from workers everywhere.

Madoff Madness - People Are Catching On...

Apparently, I am not the only one who sees parallels between the Madoff operation and the US Economy (i.e., what the US economy has been turned into by the-powers-that-be - a giant Ponzi scheme). Peter Schiff too posted a commentary today drawing parallels between the two schemes. Another one was posted by Jesse of jessecrossroadscafe blog a few days ago. And here's another in a similar vein by J.S. Kim on seekingalpha.com. And last, but not the least (O.K. - the least), Mr. Krugman here, although he limits his discussion to "financial services industry", not perhaps realizing that today the entire US economy is based upon the same principle.

Madoff Ponzi Scheme - It's a Big One, But Not The Biggest

'Tis the time for collapsing Ponzi Schemes.

A Ponzi scheme, purported to be the biggest ever in financial history, was unearthed yesterday. The article states:

"On Thursday, the Federal Bureau of Investigation and S.E.C. said that Mr. Madoff’s firm, Bernard L. Madoff Investment Securities, ran a giant Ponzi scheme, a type of fraud in which earlier investors are paid off with money raised from later victims — until no money can be raised and the scheme collapses."

Hmmm...does that ring a bell? Oh yes! It also describes what we call "the US Economy" to a T. Now THAT is the biggest Ponzi scheme - ever. Both schemes share disturbing parallels too. Let's see:

a) The Madoff scheme, until it collapsed, never defaulted (the US Govt. has never defaulted on its debt).
b) It provided nice and stable returns over decades which made the investors think everything was hunky dory and made them plough in even more of their hard earned money into the scheme (Asian central banks, Middle Eastern sovereign wealth funds, etc. pouring money into Treasury debt and US Financial firms/hedge funds).
c) A few smart people, who knew it looked too good to be true, did their own due diligence and discovered that things didn't add up, smelled a rat and stayed away (Peter Schiff, Marc Faber, Jim Rogers, etc.).
d) Lax enforcement by government agencies such as the SEC (lax enforcement, deregulation, repeal of Glass-Steagall Act., etc.)
e) Hedge funds peddling crap to investors (Hedge funds peddling crap to investors).

It must also be pointed out that these are also exactly the kind of events that Nassim Taleb's "Black Swan" theory warns about. Decades of stable, decent returns followed by a complete wipeout.

The Blagojevich Arrest

So the Governor of the "Great" State of Illinois was arrested.

Now, and I think a lot of people will agree with me here, Blagojevich is certainly not the only high ranking politician today trying to take advantage of political office for personal gain. And most certainly, he is not the only one whose phones are wiretapped. I am pretty sure the various government agencies involved in surveillance of US citizens have alot of dirt on a lot of these politicos. The only question is: Who is targeted for decimation any particular point in time? Blagojevich seemed ripe for take-down in light of his making noises against one of the largest banking corporations in America - Bank of America - at a politically sensitive time, on a politically sensitive issue.

Now this may sound like a "conspiracy theory/tin-foil-hat stuff" to some of you (remember, fudging of stats like GDP, CPI, unemployment, etc. by the US Govt. is also considered "conspiracy theory" by some morons - hey, don't look at me, just ask Peter Schiff - the guy who was right about pretty much everything so far), but please bear with me here. The timing of the arrest certainly raises some questions. It was reported that Blagojevich was under surveillance/investigation for some years now. And from the language used by Blagojevich in the tapes, it appears that this is not his first infraction. Then why now? My guess is, explosive as the unemployment situation in the US currently is (and set to get a lot worse in the near future), the-powers-that-be, i.e., the banking cabal does not want to be the target of a popular uprising, not to mention the fact that (rightly) people may come to realize their true role in the demise of the US economy. Moreover, losing gobs of money by not being able to do business with the State of Illinois is not exactly their idea of fun, especially when they can least afford it. Of course, it's considered "dangerous" for politicians to "interfere" in commerce, except when the corporations are the beneficiaries of the "interference" (free TARP money anyone?).

I think they definitely have some dirt on Obama as well, with Fitzgerald (the United States attorney for the Northern District of Illinois), practically shouting from the rooftops that Obama had nothing to do with it, even though his associates' names appeared at least, by some accounts, 40 times in the complaint filed. I think it's an indirect warning to Obama, not to mess with the banking industry's stranglehold on the US economy and political system.