[wvns] Dollar in Deep Doo-Doo

Nations Abandoning Dollar
Wed Jun 6, 2007

More bad, bad news for the dollar.

The United Arab Emirates (UAE) is apparently moving away from the dollar.

Bloomberg reported that the UAE "may be the next Middle Eastern
country to stop pegging its exchange rate to the U.S. dollar,
according to trading in currency forwards."
Story continues below . . .

This is indeed worrisome in light of the fact several other nations
are severing their ties with the dollar.

Countries such as Iran and Venezuela have been joined recently by
Syria and Kuwait (which switched its currency peg away from the U.S.
dollar on May 20) in divorcing themselves from the dollar.

This move by the UAE should therefore not be confused and likened to
the dollar-dumping moves by countries such as Iran and Venezuela who
virulently hate America.

As our readers may know, the UAE (includes Dubai) is ruled by Sheikh
Mohammed bin Rashid al Maktoum, the Prime Minister of the UAE. Like
his late father, the legendary business entrepreneur, Sheikh Rashid,
he is extremely pro-West and pro-capitalism.

Kuwait and the UAE make no bones why they are severing ties with the
dollar. They say they are simply fighting inflation.

As we have said repeatedly here in MoneyNews and our sister
publication Financial Intelligence Report, the dollar has been wildly
inflated by the U.S. government - despite phony claims that official
CPI is "low."

[Editor's Note: Bernanke's Inflation Lie: Discover the Real Truth]
The rest of the world recognizes this inflation. That is why the
dollar continues to tumble, despite Federal Reserve rate increases.
And it is also why the global cost of commodities measured in dollars
continues upwards.

By turning away from the U.S. dollar, these nations are not just
hurting its international value, they are also undermining the
dollar's political power as the world's reserve currency.

This is a major threat to America's political "power multiplier" in
the coming world struggle for power.

It is also a major threat to America's global economic strength, and
most importantly your wealth as an American.

[Editor's Note: 4 Foreign Currency Plays to Beat the Falling Dollar.]
Our government has engaged in some of the most profligate spending yet
known to man, encouraging the creation of an unprecedented level of
falsely low cost liquidity, expanding our money supply at an alarming
rate, running up huge debts and borrowing (off balance sheet
obligations) against the earnings of future generations.

The sad thing is that this has been seen before - during the Roman empire!

In addition, it is our Congress that placed upon our Fed the
uncompetitive "ball and chain" of a dual mandate: to control inflation
and to encourage growth.

Today, both are mutually exclusive.

The Fed is unable to defend our dollar against the rising interest
rates of other nations. If Bernanke and the Fed raise rates, the U.S.
economy moves quickly into recession.

The bond markets appear to be indicating a 40 percent chance of a Fed
rate increase in June, up from zero percent in the last quarter of
2006. Perhaps the markets recognize the Fed will have to raise rates
to keep the dollar from collapsing.

===

Promoters of dollar hegemony had a bad day when Kuwait dropped its
dollar peg says David Galland and predicts a `domino effect' amongst
Middle Eastern nations...

KUWAIT BREAKS THE PEG
by David Galland
for The Daily Reckoning

Years ago, I recollect hearing a successful currency
speculator say that if you wanted to know what a
government is going to do with its currency, listen to
what they say they aren't going to do... then expect
the opposite.

On March 3, 2007, for instance, we had the following
report out of Bloomberg:
"Saudi Arabia, the United Arab Emirates and four other
Persian Gulf nations will discuss revaluing their
currencies' peg to the U.S. dollar before a proposed
monetary union in the region in 2010.

"The states would only change the dollar peg
simultaneously, U.A.E. Central Bank Governor Sultan Bin
Nasser al-Suwaidi told reporters today. The six countries
form the Gulf Cooperation Council and their central bank
officials meet next in April. The other countries are
Bahrain, Qatar, Oman and Kuwait.
"'We will not act unilaterally,' al-Suwaidi said in
Dubai, U.A.E."

On March 15, Bloomberg followed up with this...
"The dollar may also be buoyed after the six Gulf
Cooperation Council members, which include Saudi Arabia
and Kuwait, agreed not to revalue their currencies
against the U.S. currency.

"'We have no plans to revalue,' Hamad Saud al-Sayari, the
governor of the Saudi Arabian Monetary Agency, told
reporters in Dubai today. 'The U.S. dollar is still very
important to us.'"

Apparently, someone forgot to copy the Saudis on the
memo, because on March 20, Kuwait announced that it was
tossing the dollar peg over the side and replacing it
with a basket of currencies.

This will almost certainly lead to a domino effect in the
Middle East, a move that would likely be warmly welcomed
by the local citizenry there, and not so warmly welcomed
by those in the U.S. government charged with maintaining
the U.S. dollar hegemony.

And then there's China...

On announcing last year that it was forming a new agency
to help better manage its foreign reserves, China took
pains to assure the markets that they were not doing so
in order to begin unloading dollars. But then on May 18,
it announced it was going to invest $3.3 billion in
Blackstone, a private equity group.
Now, you can be assured that Blackstone is going to go
all out to impress their deep-pocketed new partner. And
it won't impress them very much if they only buy U.S.
stocks that have to then fight against the tide of a
depreciating dollar.

In our view, this is just the beginning of a much larger
strategy, the core of which will be trading out of U.S.
treasury bills and into all manner of other
investments... an international basket of stocks, natural
resource deposits around the globe... pretty much
anywhere and anything offers the prospect for a higher
return with lower currency risk.

Or, if the currency risk is going to be taken, then the
potential returns will have to offset those risks.
Earning a 4.5% yield on a Treasury bond while taking a
10%, 20% or even 30% risk on the dollar doesn't make a
lot of sense to us. And, we expect, neither does it to
the Chinese.

There are some very interesting implications in all of
this. For instance, if the Chinese slow down their buying
of Treasuries in favour of other asset classes, who is
going to step up to take their place?
Of course, at the right interest rate, far higher than
those on offer today, someone will. But then there's that
whole collapsing housing bubble thing.

The U.S. continues to be trapped on the horns of a
dilemma, wedged squarely between a rock and a hard
place. Raise interest rates to head off a devastating
mass exodus from the dollar and sink the economy... or,
lower interest rates to keep the economy afloat and
doom the dollar.

Or, simply continue printing money like there's no
tomorrow, steadily devaluing the $6 trillion in the hands
of foreigners, and hope no one will notice.

There are times, like today, that any reasonably astute
observer can look to the horizon and see what's coming. A
monetary crisis is headed in our direction, and the pace
of its arrival is, in our view, quickening.

Gold, and for more pep in your portfolio, gold stocks,
are no longer an option but a prerogative - even for
conservative investors.

Meanwhile, pay close attention to the comments of
high government officials about their intentions on
the dollar...

David Galland is the managing editor of
BIG GOLD, a new publication from Casey Research dedicated
to helping investors profit from the developing bull
market in precious metals - with an easy-to-maintain
portfolio of conservative mid- to large-cap gold
producers and near-producers.

===

When Social Security, Medicare, Medicaid, military and government
pensions are added in, the total national debt exceeds $51 trillion

Crisis towers over the dollar
W Joseph Stroupe
http://www.atimes.com/atimes/Global_Economy/FK25Dj03.html

Speaking Freely is an Asia Times Online feature that allows guest
writers to have their say. Please click here if you are interested in
contributing.

When analyzing such matters as the vulnerability of the US economy and
the chances of its collapse, it is vital to avoid the two extremes of
"calamity howling" on one hand and investing blind faith in the status
quo on the other. Unforeseen and unexpected attack-induced collapses
of grand proportions can and do occur. The sudden collapse of both
towers of New York's World Trade Center, for example, took everyone by
surprise - who could have foreseen that the two towers, which survived
the massive lateral impact of two huge planes, would, only minutes
later, collapse vertically upon themselves, their own massive weight
ensuring their demise?

Structurally, the two towers were impressive indeed. They had actually
been designed to take a lateral and direct impact of a Boeing 747
jumbo jet and survive without collapsing. Nonetheless, certain
fundamental structural vulnerabilities did exist in the towers. These
were not entirely evident before September 11, 2001, but were hidden
beneath their massive and stable outward appearance. When those
vulnerabilities were carefully targeted and exploited, down the
massive towers came within mere minutes of the attack.

Do similar deep structural vulnerabilities exist within the US
economy? Are these currently being exploited by the al-Qaeda and
others to cause a US economic collapse? Are the apparent strength,
stability and imposing size of the US economy deceptively masking an
imminent collapse, as the Twin Towers did? Have the initial stages of
an attack on the towering US economy, which might bring about a
vertical collapse, already begun?

Faulty Towers
The collapse of the Twin Towers was a harsh lesson in the realities of
the vulnerability of US infrastructure. In the case of the attack on
the towers, the planes struck near the top of the structures. Had they
struck nearer to the street level, there might have been a chance to
extinguish the resulting fires before the primary steel structural
beams weakened. Had they struck the top, the vertical collapses that
ensued would have been highly unlikely as the primary steel structural
beams wouldn't have been possible.

Fundamental vulnerabilities exist in the US economy too. But there
also exists a widespread consensus that there is little real chance of
a collapse, no matter what the attack might be. Even most contrarian
experts dismiss the possibility of an actual collapse. They generally
speak only of a prolonged "bear" period for the economy, not a
collapse. The towers also enjoyed such widespread confidence before
September 11. The previous targeting of the towers in 1993 and their
survival only reinforced this misplaced confidence.

Vertical collapse
Just before September 11, 2001, the US economy was also extremely
unlikely to be susceptible to a sideways hit. It did show its
resilience in the immediate aftermath of the attacks on its economic
infrastructure. But the key to the success of the attacks, from
al-Qaeda's perspective, was the igniting of the jet fuel and its
impact on the primary steel support girders. Hence it was not the
immediate result of the impact itself, but rather the delayed result
of the fire that counted. The steel girders were the actual framework
of the towers, around which the structures were constructed. When the
flames softened the framework, the whole structure caved in.

The US economy is also constructed around a fundamental framework -
its currency, the almighty dollar, and the apparently firm and
virtually unbreakable international support it enjoys. Similar to the
framework of the Twin Towers that supported their massive weight, the
dollar supports a massive load of debt, now totaling well over US$7
trillion in the public sector alone. Much of this debt load is, in
effect, tenuously suspended at the upper portions of the US economic
structure, where it places an undue load upon the lower, traditionally
more stable part of the economic framework. This is true for a number
of reasons.

Federal Reserve Board and government policies over the past 20 years
or so have been extremely shortsighted, leveraging the economy's
future stability and strength by means of large and perpetual deficit
spending. The US government, and its citizens as well, have acted as
if there would never come a day of accounting for the immense debt
being amassed, that somehow the amassing of such debt didn't matter.
Nothing could be further from the truth. And since the economic
slowdown of 2000, Fed and administrative policies have caused a
pointed and massive ballooning of very risky forms of public and
private debt, all built upon the structural framework we call the
dollar. One such form of debt is the massive selling of treasury notes
to foreign central banks - most notably to the big Asian economies.
Another is the Fed policy of "prolonged monetary accommodation",
meaning keeping interest rates at artificially low levels, printing
new money at the rate of nearly $1.5 trillion per year and the massive
creation of easy credit.

In the past three to four years, debt encouraged by such policies has
mushroomed almost beyond imagination. So, in effect, there now exists
a mountainous load of debt concentrated within the upper sections of
the US economy, where it cannot easily be neutralized to the ground
level in an orderly fashion. How much of such massive weight can the
framework, the dollar, carry and support before the structure caves in?

Is there already a fire in the immediate vicinity of that framework
and are the steel girders already beginning to soften? The traditional
international support for the dollar and the US government's foreign
and economic policies is beginning to waver. Why? Because al-Qaeda has
lighted a fire of sorts in the vicinity of the dollar framework. It
has succeeded in instigating the US to take economic and foreign
policy measures that have resulted in a loosening of the firm
"girders" of international support for dollar and US policies.
Al-Qaeda has indirectly lit the fires of controversy over the
rightfulness and permanence, and even the desirability, of continued
US global dominance in the diplomatic, economic and military spheres.

Now that fire is raging, and ferociously eating into the girders.
Controversial and ill-advised unilateral US economic and foreign
policies since September 11 are only fueling that fire. In the
immediate aftermath of the re-election of President George W Bush,
international support for the dollar and for related US economic and
foreign policies is noticeably weakening, at a time when it is most
needed to support an unprecedented and mushrooming mountain load of
debt. Recently, voices from within the government of Norway have
called for a switch from the dollar toward the euro for international
petro-transactions. The governor of the Bank of Japan has recently
stated that having the dollar as the sole global currency is a marked
disadvantage and danger, and recommended moving toward adopting the
euro as a global currency alongside the dollar. The appetite of the
big Asian economies to continue buying dollar assets is waning - last
month the US barely achieved the $60 billion of foreign cash inflow
required each month to keep it afloat. Hence the possibility of a Twin
Towers-like vertical collapse of the US economy is becoming greater,
not lesser.

The following highlight the extent of the mounting debt and the risk
involved:

The total US public national debt now exceeds $7 trillion.

When Social Security, Medicare, Medicaid, military and government
pensions are added in, the total national debt exceeds $51 trillion,
according to Fortune magazine - that's nearly five times the gross
domestic product (GDP) .

The current year's deficit alone approaches $1 trillion when you add
the off-budget items.

Derivatives (highly leveraged and enormously risky instruments such as
interest-rate futures, options and swaps) now total $180 trillion, 17
times the GDP. Warren Buffet calls derivatives "instruments of mass
destruction". Many financial institutions have become highly invested
in derivatives. Government-sponsored enterprises such as Fannie Mae
(the Federal National Mortgage Association) and Freddie Mac (the
Federal Home Loan Mortgage Corp) use derivatives heavily. Because of
the inherent nature of derivatives, these instruments and those using
them are extremely sensitive even to small and moderate interest-rate
increases.

The total US consumer debt is more than $8 trillion.

The Japan Times recently stated, "Stephen Roach, Morgan Stanley's
perceptive economist, drew attention to the fact that some of the
numbers are nothing short of frightening. The US currently has $38
trillion in debts, and there is a $54 trillion federal funding gap -
the difference between what the government is committed to pay out and
what it will receive in tax revenues."

The Fed has kept interest rates artificially low for long, thereby
creating enormous amounts of cheap and easy money and has also pursued
a policy of "monetary inflation" (declining the value of the dollar)
by printing nearly $1.5 trillion a year. These prolonged policies have
artificially created huge and growing (1) credit, (2) real-estate and
other asset and (3) stock-market bubbles. However, with interest rates
rising, the bubbles are about to burst.

The price:earnings ratio is at historic highs - a sure sign of a
general stock market bubble. "Smart Money" Warren Buffet has mostly
pulled out of the US stock market because stocks are so greatly
overpriced. What goes up must come down, and the US stock market is
way up, far higher than can be justified by reason and facts.

The troubled dollar
Is international support for the dollar and for US policies eroding?
Yes, it most certainly is. A powerful case can be made that it has
been US policies and actions since September 11 that have resulted in
a powerful upswing in terrorism worldwide along with an equally
powerful elevation in Middle East instability resulting in sustained
crude oil price hike and a resulting dollar decline, both of which are
threatening to render serious damage to the big Asian economies. Firm
international support for the dollar is certainly flagging. The
largest Asian central banks have gone on record that they are curbing
their purchases of US debt. And they are also diversifying their huge
reserves, steadily moving away from the dollar. The risks have simply
become too many and too serious.

International fears of a disorderly, or possibly even a catastrophic,
decline in the dollar have been pointedly heightened. Asian central
banks are being forced by the varied and serious risks to hedge their
bets, not wanting to be ill-prepared in the event of a disorderly
decline in the dollar. Russia is also steadily decreasing the
percentage of its reserves denominated in dollars, moving toward a
level of 50:50 split between dollars and euros. Russia is the key
player here, the one the entire world is intently watching. It alone
can play the key role in either restoring the flagging international
support for the dollar, or completely undermine its remaining support,
precipitating a vertical collapse.

President Vladimir Putin has stated both publicly and privately that
invoicing Russia's crude-oil and gas exports to the European Union in
euros instead of in dollars makes very good sense for both Russia and
the EU. Putin is known to have very close relations with "old Europe",
primarily Germany and France. His statements and those of German and
French leaders have even on occasion drawn attention to the fact that
US global dominance fundamentally rests on the fact that the dollar is
the international currency, and that if an exit from the dollar were
to occur in the sphere of global petro-transactions, the effect would
be seriously to undermine that global dominance. Furthermore, a number
of oil-exporting countries have already gone on public record as to
their preference to make an exit from petro-dollars in favor of
petro-euros. They have indicated that if Russia begins such a move to
petro-euros, they will rapidly follow Russia's lead. The net effect
would be a rapid international abandonment of the dollar as the
international currency, which would in turn "bring down the towers" of
the heavily debt-ridden US economy.

Al-Qaeda has recently mounted a second attack on the fundamental
framework of the US economy. Its clear strategy of attacking
oil-exporting infrastructure around the globe to tighten global supply
and drive up crude-oil prices is a further act of instigating a raging
fire in the immediate vicinity of the US economic girders. Al-Qaeda
knows crude oil is the economic lifeblood of industrialized economies.
And it also knows the fundamental fragility and deep imbalances that
exist in the US economy in particular. It fully understands that
international support for the dollar is weakening and that a sustained
elevated crude-oil price is the key to producing a set of
circumstances in which persistent inflation returns, requiring a set
of interest-rate hikes, which in turn will act like a needle to burst
the credit, real-estate and stock-market bubbles. The resulting
decline of the dollar will be steep and persistent, undermining what
is left of international support for dollar.

However, one huge problem that has been noted on the subject of
executing an exit from the dollar is the current enormous reserves
held by the big Asian economies - those reserves are largely
denominated in the US dollar. How can any of these Asian central banks
or Russia, which still holds a percentage of its $112 billion in total
reserves in dollar-denominated assets, execute an exit from the dollar
without simultaneously wiping out the immense value of their own
dollar reserves? On the surface, that problem seems virtually
insurmountable. But is it really?

If we look at Russia as an example, we learn that its central bank has
been moving rapidly over the past 15 months from a 75% holding of
dollars in its reserves to a 50% holding, significantly decreasing the
proportion of its reserves denominated in dollar. Significantly, it is
also well along in an effort to de-dollarize itself domestically in
favor of the euro, buying up its domestic dollars with windfalls
coming as a result of the elevated price of crude oil, and by that
means it is progressing steadily toward its stated goal of
"diversification" of its reserves away from the dollar. The rest of
the world is forced to watch what Russia does in that regard.

If Russia is perhaps positioning itself to make even a partial exit
from the dollar in the pricing of its petro-transactions, then the
Asian and other economies don't want to risk being left out in the
cold, unprepared, seeing the value of their own huge dollar reserves
undermined by a steep or chaotic decline in the value of the dollar.
They cannot afford to ignore Russia's moves. Hence as Russia moves to
decrease the percentage of its own holdings of dollars, so are the big
Asian economies, as well as many other economies around the globe. No
one wants to get burned in the event Russia moves to the euro.
Additionally, as the dollar continues to weaken and crude oil
continues to rise in price, having the dollar as the preferred
international currency for petro-transactions will become more of a
liability, especially for the big Asian economies, which are heavy
importers of crude oil. This fact will tend to further undermine
Asian, as well as the rest of international support for the dollar.

W Joseph Stroupe is editor in chief of Global Events Magazine, an
online geopolitical magazine specializing in strategic analysis and
forecasting.

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