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Dollar
Hegemony / Garbage Data
| Dollar Hegemony seems
to be a forbidden term in the financial press. It is rarely if
ever mentioned by pundits, journalists, or Wall Street analysts
yet as a force of nature it has been a cornerstone as to why the
US has remained the omnipotent global financial power in the
modern age. Put simply, the US has been blessed with the lowest
cost of capital of any nation on earth by virtue of the
dollar’s status as the world’s reserve currency. |

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Few understand exactly how it came to be or how it
endures despite our ever escalating trade and budget deficits.
We want to change that.
We all shouldn’t,
yet perhaps we do take for granted the dollar’s reserve status
because it’s the only thing we have ever known. Today, the ice is
cracking right beneath our feet as the US Dollar Index (the basket of
major foreign currencies vs. the dollar) has declined substantially in
recent years from 122 in 2002 to 72 today. Why? Because foreign
capital credits have opted for other currencies of countries offering
higher yields and not as encumbered with the staggering liabilities as
the US. This was facilitated primarily through the Euro, which now
offers global investors a bona fide proxy for a store of wealth. In
fact, the high exchange rate and relative stability of the USD for
decades are magical creations of a petro-dollar
hegemony condition that mandates that all oil produced anywhere
in the world by anyone must be paid for in US dollars. This mandate is
now eroding and should continue to put further pressure on the USD for
some time to come as Iran and other Arab nations begin to defy the
mighty US mandate.
Consider the
implications for a moment- most of the oil produced on earth has been
between non-US producers and consumers yet MUST be bought in US
dollars. This travesty was schemed in the early 70’s when foreigners
became weary of the accepting US dollars from a nation whose gold
reserves became depleted from our fiscal deficits. US
debts were in fact so substantial President Nixon was forced into a
deal that allowed OPEC to substantially raise and control oil prices
going forward as a cartel but mandated a monopoly of all purchases of
oil be paid for in USD. This
allowed the US to initiate a fiat currency program and get off the
gold standard of $35/oz to allow both gold and currencies to float
with the market. Naturally, gold went from the fixed $35 for many
decades to $850 in just a few short years and oil and gas prices
surged in price permanently. This
arrangement was worked out well for the OPEC nations, whose wealth has
risen trillions, and for us as well in a strange way, enabling the US to
incur trillions of dollars of debt to foreigners to finance our
deficit spending for the past several decades. Petro-Dollar hegemony
has served to insure that these large sums of foreign capital continue
to be repatriated back into dollar denominated assets (US government
securities). This cycle of repatriation of US Government securities is
what actually provides the “full faith” in the legal tender of our
currency and we would suffer tremendous consequences without these
foreign buyers. Few realize that the US simply prints paper backed by
our “word” that is paid back years later in ever-depreciating
dollars that have the effect of exporting inflation to the world as if
it was a commodity being loaded on a tanker. This scheme has worked so
well because of dollar hegemony, but what happens when the music
stops? Who wants to be holding dollars then? How do all Ponzi schemes
work out in the end?
Some countries, such
as Kuwait, have begun to peg their currencies away from the dollar and
many OPEC nations have formal plans for a new Arab currency backed by
oil to diversify out of the USD. These developments all underscore the
debilitating nature that our deficits are having upon our nation’s
wealth and sovereignty, and understanding the nefarious and
confounding nature of dollar hegemony is necessary to understanding
how these powerful yet subtle forces are impacting us today just below
the surface.
To that extent, I
have selected articles that can best explain those forces of dollar
hegemony so we can see how dependent our economy and way of life is on
maintaining the sanctity of the US dollar.
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US Defaults on Debt
- This two part series from Minyanville.com was selected for its brevity and clarity in explaining the complex loop surrounding dollar hegemony, fiat currency, and the approaching Kondratieff Winter. Each one is a mere two pages yet therein much is revealed. Part one focuses on an aspect of the exploding federal deficit that gets no attention in the mainstream press whatsoever- the daunting task of rolling over trillions in US government debt. Most troublesome about our debt is not the staggering levels but rather the urgency of its rollover. At present 71% of our debt is due within five years and 39% is due within one year! Think about that for a minute if you dare. In late 2000, the average maturity of US government debt was 70 months and in March of 2008 it was measured at a mere 53 months. This supports my previous rantings that the most daunting problem we face is not in our stock and bond markets but in our government debt market. Surely the looming rollover will have to be done at interest rates that are much higher than today.
The second part of the series explores the nefarious circle of dollar hegemony and fiat currency as they relate to our deficits and the status of the dollar as the world’s reserve currency. It asserts, as I have numerous times throughout this site, that foreign banks are forced to repatriate their US dollar holdings in US government securities to protect their own currency. They conclude as I do that the game is almost up and that the dollar would be far weaker vs. the yen and the Euro if not for their own foibles. This is precisely why gold should outperform all asset classes for many years as investors rue all Western fiat currencies not backed by anything of substance.
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How
does the US Dollar Defy the Law of Gravity? - A
lengthy (29 pages) article that outlines the basic forces that
account for the longstanding artificial strength in the US dollar
(Arab petrodollar monopoly and Chinese exports) through an
elaborate process of extrapolating the economic aspects of our
major trading partners to the price movements of their underlying
currencies. It explores the actions of the central bankers in
support of their policy directives and how those actions continue
to generate severe imbalances between these countries. Through
this examination a framework is presented to reflect how
vulnerable the US dollar is to maintaining its currency reserve
status it has enjoyed
for so long.
The
End of Dollar Hegemony -
US
Rep Ron Paul (R-Texas) speech to Congress retracing the history of
“dollar diplomacy” in the 20th century and how it
morphed into today’s unsustainable condition of dollar hegemony.
He lectures skillfully and objectively, parsing a wide range of
subjects including fiat currency, inflation and perhaps most
importantly on the essence of the “recycling” process of US
dollars which has been long ignored by his colleagues or the
financial press. Such candor on such a delicate subject is
especially noteworthy of an elected government official.
US
Dollar Hegemony Has Got to Go -
Though
written in 2002, it is nonetheless just as relevant today because
it examines why currency hegemony of any kind is detrimental by
its very nature. It explores the range of systemic faults
including the lack of global wage standards, fiat currency,
aversion to comparative advantage, and more.
Hysteria
Over Iran and a New Cold War with Russia: Peak Oil,
Petrocurrencies and the Emerging Multi-Polar World -
This
58 page expertly reports on all issues relating to the petrodollar
to frame the world we live in today in terms unlike you will hear
from the mainstream press. He recounts the establishment of the
petrodollar monopoly with the House of Saud and explains in great
detail how the enabling forces of central bankers, multi-national
oil companies, and sovereign governments work together to maintain
the hegemony. It is a fascinating look into a reality known as
common knowledge to few.
Rogers Says Dollar to be “Devalued”
- Commodity guru Jim Rogers recently weighed in on his two favorite
subjects- the US dollar and commodity prices, which of course are inversely related because all commodities are priced in US dollars and
rise when the dollar plunges.
He is now calling for a halt soon in the incredible rally seen by the USD
in recent months and a resumption in the secular bull uptrend across the
board in commodity prices. This view conflicts with the present market
mindset that assumes continued dollar strength from purchases of US
Treasury notes and bonds and continued weakness in commodities from
weaker global demand coupled with the ongoing de-leveraging by hedge
funds. While Rogers is known for his contrarian stances in the market,
his reasoning this time around is much different than before.
He is bluntly asserting that going forward our de-facto government policy
fully intends to debase our currency to jump start our weak economy,
never mind that such a perverse policy would destroy the purchasing
power of our citizens and could induce a hyper-inflationary environment.
While many would argue that our government would never tacitly support
such a policy, Rogers has made his mark by knowing better than the herd
and may be ahead of the herd once again.
Garbage
Data
| The basis for
consumers and market participants to make decisions regarding
the purchase of goods and services or capital deployment rests
to a large extent on the perceived conditions of that
environment that are visible to us on a basic level from what we
witness each day. Naturally, we also require timely, accurate,
unbiased and reliable economic data measures to guide us. While
we do indeed receive volumes of such data metrics from our
government on a regular basis, they are neither timely, factual,
unbiased nor reliable. |
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Some of the key
economic indicators are skewed by a garbage- in, garbage-out montage
of disinformation synchronized to further a more enduring objective-
namely to justify loose monetary policy permissible only under the
perception that inflation remains modest.
It is the opinion of
this author that the data provided exclusively by the government on
such key economic measures such as inflation, budget deficits, jobs,
etc. are factually untrue to the point of being false and misleading
in their public perception. This happens because the key criteria
assumed is so fatally flawed that it serves to distort its value
altogether. Take or example, the approach used with measuring
inflation, the data point most examined by the markets. By design it
excludes energy and food in its measure because supposedly their price
fluctuations move in patterns diverging from the rest of the economy
and net out over time. However we all know that both, especially
energy prices of all forms- oil, gas, electricity, natural gas, etc.
have all spiked much higher for many years now and thus represent a
“core” inflation rate much, much higher than they would have us
believe. These increases are real and tangible yet not accounted for
in the model. The ramifications for such a low-balling of these
metrics are quite significant since even a tiny upward revision to the
perceived measure has quantum implications in the all the capital
markets (credit, stock, commodity and currency) and throughout the
economy. The rationale for the current method is inherently flawed and
does understate the real rate.
Also disturbing is
the confounding manner that our fiscal deficits are reported to the
public. Ignored are tens of trillions in liabilities accruing on the
books in the form of entitlement programs such as Social Security,
Medicare, etc. In fact funds from these entitlement accounts are
“borrowed” to
replenish current deficits. If the fiscal budget deficits were
subjected to the same principles required under GAAP standards for
corporations then the public perception would obviously
be more negative. Close scrutiny of the government’s intermediate
and long term financial condition would indicate a severely distressed
credit not worthy of the
AAA rating our Treasury notes have commanded for years
As explained earlier
in the section on Dollar Hegemony, the US Treasury has always had a
captive market for their debt despite its deficits because their
petrodollar hegemony forced foreigners to repatriate their sizeable
oil purchases in dollar denominated assets and to date the primary
venue of that repatriation has been through US government securities
issued at the lowest market rates. The US government has good reason
to desire that the status quo perception endures because for every
degree that our credit rating falls we are forced to pay higher
interest rates on these debt securities which are now held by
foreigners in sums of several trillions of dollars and growing each
month. Given this predicament, it is ever more prudent to scrutinize
the methodology of the data gathering metrics provided by the federal
government and challenge assumptions that don’t pass the smell test.
To that extent, the articles below will display evidence of the
troubling discrepancies in some of the various economic data
metrics provided by our government agencies. Given their scale
and potential impact on the aggregate economy, public ignorance or
indifference to these measures could very well contribute to the
conditions that allow severe market dislocations to occur.
1.
MUST READ
Behind
the Falsification of US Economic Data - This article from
Globalresearch.ca traces the molestation of the reporting of the most
key economic data from the Kennedy administration to the present,
showcasing the exemplary contributions of each administration in their
role in the current deception. In each case, the reader will see how
the government sought to obfuscate the truth in a manner that would
benefit their agenda to the detriment of the people and the sanctity
of our financial markets. Written in a straightforward style heavy on
details and light on hyperbole, it offers an accurate and damning
portrayal of deception by our government over the years hiding in
plain sight.
2.
Numbers Racket
- Featured recently in Harper’s magazine in May, “Numbers
Racket” warns their readers of what they refer to as America’s
“opacity crisis” that hides the true state of our economy. It does
a marvelous job of integrating each of the key statistical delusions-
inflation rate, the jobs report, and GDP- against the backdrop of the
gigantic US public debt to showcase its relevance into the big
picture. It traces the evolution of our “Pollyanna creep” from the
1960’s that has morphed into pure delusion today. It redefines some
basic economic terms, such as unemployment, more clearly so that the
reader can better grasp exactly how it is not being properly measured
today. They conclude that the current unemployment hovers between
9-12%, that inflation is really between 7-10% and that GDP growth
rates are far below advertised. This nine page article is an easy and
compelling read for a broad audience, and I am pleased that mainstream
magazines not devoted to finance such as Harper’s are giving this
crucial matter the attention it deserves.
3.
Shadowstats.com - This
subscriber site offers superb content and analysis regarding the
substantial discrepancies evident in the key economic data provided by
the federal government on inflation, deficits, jobs, etc. that always
seem to be revised later in the same direction- downward. Can we
conclude that they are so mangled they offer no reliable basis for
meaningful interpretation?
4.
Real Inflation
Measurement: The Core CPI Spread - this blog underscores the
absurdity of using the core rate (excluding food and energy) to
measure inflation through a graph
showcasing the escalating divergence between core and headline
inflation that correlates precisely with the Fed’s loose monetary
policy under Greenspan.
5. The
Great Inflation Cover Up - CNN Money takes a swipe at the lunacy
of the government’s inflation measures in a refreshingly unique
fashion. By using one person’s crude method of gauging real
inflation through the menu of his upscale steakhouse they are able to
frame the inflation quandary in real and personal terms. It attacks
the price volatility myth now used to exclude food and energy from the
core rate and concludes naturally that these trends are now so
established they should count. If so, current inflation is over 4%
even without accounting for the dollar decline. The significance of
this fallacy cannot be overstated and is sure to fuel dissention and
debate for some time to come.
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