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Knee-Capped by Capitalism

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I look forward to the day when I can sit down at this keyboard in the morning and, looking ahead, write a column while humming "Zippity Do Dah, Zippity Day."

Instead I find myself spending a lot of time worrying. Of course, that's hardly news to regular readers. I am worrier -- a persistent pessimist.

My condition is not inherited, but a learned response. At a young age I discovered a simple truth: pessimists are rarely disappointed, but often pleasantly surprised. Optimists, on the other hand, live the flip side of that rule.

I only mention this because lately the focus of my worries has been the economy. Not the US economy, but the global one. Since it became just that, "global," just focusing on the US economy is like worrying about you tire pressure but never checking the oil.

And what I see has me about as worried as I get. Avoiding a lot of economic la de da, here's what's got me fretting:

* The value of the US dollar is dropping like lead turd -- which is about how our creditors (read China) are see it these days

This is why the price of gold and other commodities (also known as "real stuff," has soared in recent weeks. More and more countries, investors and those with "real stuff," like oil, to sell are looking for other ways to price their stuff fearing that a dollar they take in payment today will w ether away in value before they can convert it into some kind of other real stuff.

All this is mighty dangerous for America, and Americans, right now. Sure a devalued dollar makes US goods and services cheaper overseas. And in normal times that can be a nice advantage to have. But not now. Not when pretty much half of every dime the government needs to fund everything from the military to health care to bank bailouts has to be borrowed from a handful of other countries... particularly China.
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Which is why every time the dollar dips another few percentage points in value, Chinese finance ministers put out an emergency call for fresh underwear. China is now sitting on more than three-quarters of a trillion in US, dollar-denominated, debt, and the last thing they want is to be repaid with dollars worth a fraction of what they bargained for when they lent us the dough.

And those worries could not come at a worse time for the US government. In 2008 the US budget deficit was $455 billion. But this year that deficit will be more than $1 trillion, and we're gonna need to borrow a lot of that from an increasingly nervous China. (See Chart)

* Which brings me to devaluation.

Devaluation of national currencies has always been the refuge of last resort for nations that get themselves in over their heads. Simply reneging on an international debt would be fiscal suicide for a nation. But when world markets are allowed to discount a nation's currency based on the fundamentals then the debtor nation can claim, "We didn't do it. They did it."

Too many nations got themselves in over their heads, not the US. And it often only takes a small disturbance to trigger an avalanche in conditions like these. Say hello to tiny Latvia.
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Latvia's Woes Rise as Auction Fails
Latvia's halting austerity program and its proposal to modify mortgages are causing "another wave of distrust" to roll over the Baltic nation, the central bank said Wednesday, issuing a warning for the country hit hardest by economic strains across Europe... Under EU rules, countries must keep budget deficits below 3% of GDP. According to the commission, the EU's executive arm, 20 of the bloc's 27-member countries are on track to break that limit this year. The commission blamed falling tax revenue coupled with exceptional state spending to help the unemployed, prop up ailing banks and stimulate economic recovery.Latvia's government is on the verge of giving up on a central tenet of its austerity program by allowing a devaluation. That could goose the economy by making exports more attractive, and it would eliminate the expensive process of buying lats to maintain the currency's peg against the euro.

Devaluation would have serious consequences. The Swedish banks that made euro-denominated mortgages would see foreclosures surge as fewer borrowers would be able to make payments.

Ah, if only it were only Latvia:

In addition to Germany and Italy, the commission warned Austria, Belgium, the Czech Republic, the Netherlands, Portugal, Slovakia and Slovenia about budget deficits. (Full Story)

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Stephen Pizzo has been published everywhere from The New York Times to Mother Jones magazine. His book, Inside Job: The Looting of America's Savings and Loans, was nominated for a (more...)

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"Knee-capped by Capitalism" should really be title... by Dennis Spain on Sunday, Oct 11, 2009 at 3:44:55 PM