Dollar Hegemony / Garbage Data

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.

1. 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. 
   
   

2. 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.
   
   

3. The End of Dollar Hegemony - US Rep Ron Paul (R-Texas) speech to Congress retracing the history of “dollar diplomacy” in the 20^th 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.
   
   

4. 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.
   
   

5. 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.
   
   
6. 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.

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.