ARGENTINIZATION OF THE US
By Arno Schmidt
[This article published in May 2009 is translated from the German on the German-English cyber journal Telepolis,
http://www.heise.de/tp/blogs/8/print/139555.]
American borrowing has assumed dimensions that suggest an Argentinization of the US. This is almost an insult to Argentina considering the measures of the US Federal Reserve to counter the enormous inflation of the federal deficit. This comparison only refers to the Argentinean crisis years from 1998 to 2002. What happened at that time?
The two high-water marks of the Argentinean crisis were a bad recession in 1998/99 and the subsequent collapse of the financial system in 2001/02, which led to the resignation of President Fernando de la Rua and a period of great political instability. During the crisis, Argentina’s gross domestic product shriveled 21%. A similar development may soon await the US. The immense expansion of the M1 money supply will have a massive inflationary effect sooner or later. A downgrading of US government bonds could trigger a crash on the bond market and a striking rise of the long-term interests.
The greatest victim of this development may be the dollar, which is susceptible to crash. Everything done in the last months by the Fed and the US government only seemingly restored trust in the financial markets. As soon as the eye of the hurricane passes, the stock- and bond-markets could pass into their final downward spiral at whose end will be a hyperinflation and a possible state bankruptcy of the US.
PONZI AS GLOBALIZED SOLUTION
Even with government bonds, all big industrial nations have relied on a Ponzi scheme in which a repayment of the funds spend by the state will never occur. Therefore China has started to exchange its dollar reserves for raw materials and this trend may intensify. A small switch of only $750 billion that China invested in US government bonds or a partial sale of the $2 trillion in US currency reserves could become a complete fiasco or failure for the dollar. In the long-term, the higher interests carried out in the last days will mean the release of US government bonds.
After the great killing of the bison, the basic food of Indians, the great killing of the US dollar, the basic food of today’s credit-junkies, could be imminent. High inflation dispossesses the middle class more and more and will lead to their complete ruin. Leaving behind trillions in bailouts leads to massive state debts and to a drastic loss of trust in the underlying currency sooner or later.
DEBT EXPLOSION
It may be in the interest of the US to cancel debts through a currency crash. However this would be a fraud on all worldwide creditors. For the fiscal year ending September 30, a record deficit of $1.75 trillion is forecast; nearly four times the last fiscal year 2008. If the average debt growth was 5.4 percent from 1971 to 2008 [1], the amount is almost 3-times higher in the current fiscal year. A deficit amounting to nearly 13% of the gross domestic product is more than four times what was established as the convergence criterion for states of the European Community entering the euro zone.
If this pace continues in the next years, the public debts of the US may exceed the gross domestic product in a few years by a factor of 2. It is already obvious today that the US is taking a dangerously wrong way regarding price stability, the financial situation of the public authority, the price level of the US dollar and long-term interest rates.
THE UNAVOIDABLE BOND CRASH
After Standard & Poors set Great Britain on a watch-list for downgraded creditworthiness, it may only be a question of time until the US loses its “As.” US government bonds will accelerate their journey toward junk-bond status.
US Treasury Timothy Geithner announced lowering the state deficit. However like all announcements of the Fed, this is only eyewash to divert from the real problem of excessive state indebtedness. The incredible explosion of US state indebtedness leads to a gigantic refinancing need on the bond markets estimated at $2.5 trillion for 2009 alone. The increasing over-supply in securities forces up the yields of ten-year and thirty-year government bonds and the danger that the mother of all bubbles, the bond bubble, could soon burst. This would suddenly catapult interests upwards and shatter all hope for a moderation of the depression. Falling bond prices with long-term yields of 6 to 7& would put degenerate US banks under massive pressure and undermine awarding credits in an already ailing economy. The consequence would be a mass unemployment that the world has not seen since the 1930s.
CURRENCY WAR BREAKS OUT
Fear of dollar devaluation. The bailout of banks could have painful consequences: inflation. Many countries fear a dollar crash. The Chinese are already alarmed.
By C. Hoffman
[A currency war rages. The price for bailing out banks could be inflation. This article published in: sueddeutsche.de, 6/3/2009 is translated from the German on the World Wide Web,
http://www.sueddeutsche.de/finanzen/297/470841/text/print.html.]
Until a few weeks ago, fear of catastrophe had a boom season. The stock market crash followed the banking crash. The collapse of the world economy may not be long in coming. In the past months, all the financial markets have fallen into severe turbulences – whether transacting stocks, loans or raw materials. A calm prevailed only on the currency markets. This could be a calm before the next storm – an assault on the US dollar.
The price of the euro rose to a new yearly high on Wednesday. The community currency spiritedly reached 1.43 dollars and was higher than ever. Since the middle of April, the euro has continuously risen. “If this movement continues, the price could rise to 1.60 or 1.70,” said Eugen Keller, currency expert at Metzler Financial Markets. The weakness of the greenback is reflected in the charts, more than the strength of the community currency.
FEAR OF INFLATION
Investors are increasingly skeptical whether the increasing indebtedness of the US and extraordinarily lax monetary policy will not flow into inflation. These speculations affect the dollar. The government in Washington can also feel the worries of investors. Buyers of long-term American government bonds including many foreign central banks demand higher yields today.
The dollar falls; the fear of inflation expands. This also pushes up the price of gold, which could pass the $1000 mark this week. On Wednesday, the yellow precious metal cost $976.25 per ounce. The price for raw materials also climbed. According to calculations of the Organization of Petroleum Exporting countries, a barrel of oil (159 liters) now costs $66.87 – almost twice as much as in December. Oil, gold and other raw materials profit when investors fear inflation on account of deregulated monetary policy and ensure themselves against a dollar crash by buying tangible assets.
The quick change of heart on the markets may be surprising. Will not deflation soon be the great danger for the world economy? The deficit of the US state budget will amount to 14 percent of its gross domestic product in 2009 – more than in Japan, Great Britain or the euro zone.
The increasing state indebtedness leads to a great financing need on the bond markets, estimated at $2.5 trillion for 2009 alone. The worry about an oversupply of securities drives the yields of ten-year US government bonds ever higher. This endangers the hoped-for upswing.
The purchase of government bonds and other securities by the US Fed goes hand in hand with the liberal spending policy of the US government. The Fed has already acquired securities for $1.75 trillion. This inflates the money supply. “The Fed gives the state the money for its economic programs. The price for this may be a higher inflation,” says Andreas Rees, chief economist of the Hypo-bank. This undermines the value of the dollar. Investors fear the US will relieve its pressing debt burden through inflation.
CHIINESE ARE ALARMED
All this does not suit the Chinese at all. They sit on US government bonds worth $1.5 trillion and have no pleasure watching the value of their currency wealth melt away. Therefore Asia’s most important central banks attempted on Wednesday to brake the decline of the dollar. The heads of central banks protest – notwithstanding all creditworthiness risks – and withhold buying US government bonds. This helps the US currency in the short-term but cannot continue in the long run. The currency war has broken out.
RELATED LINKS:
www.webofdebt.org
www.capitalismhitsthefan.com
www.socialistproject.ca
www.informationclearinghouse.info
www.buzzflash.com
www.worldfuturecouncil.org
www.baselinescenario.com
“The American Empire is Bankrupt” by Chris Hedges:
http://informationclearinghouse.info/article22836.htm