Azilal, Morocco: To Americans living abroad, the slow sickening slide of the Dollar vs. every other currency has been a visceral painful spectacle, whether you were converting to Rubles, Crowns, Euros, or currently, Moroccan Dirhams. But looking at my current bank statement was a shock: the 2000 Dirham ($273) ATM withdrawal was $6 more than the same amount 10 days before- could the dollar have dropped that much? Yep- from 0.6896 Euro to $1, to only .634, or a breathtaking 8% drop in 5 weeks. I meant to argue that this may be the Apocalypse, with gold near $1000/oz and oil $119/barrel but events with the vaporizing Bear Stearns and Carlyle Capital have graphically demonstrated it. (The "blue chip" Bush/Reagan administration Carlyle Group affiliate was investing with only 3% actual equity, or recklessly gambling with a 33 fold margin!). The exaggerated prices of staples is largely due to US instability.
To someone who'd spent time in Russia in the early 90's, watching the steady strengthening of the Ruble against the Dollar was like seeing water flow uphill. It's hard to explain how expensive it is in Euroworld; they use a Euro like a 50 cent piece (now $1.56), and round to the nearest 10 Eurocents, throwing away 7 US cents on every second transaction. One can't get tea and a banana for less than $9, about the minimum to sit down it any cafe. The Euro has been a decidedly mixed blessing: predictably prices in expensive countries didn't drop to Greek or Portuguese levels; they went up to 50% above the most expensive country. From Rome to Amsterdam to Paris to Valencia; the story is similar- since the advent of the Euro in Jan. 2002, prices have roughly doubled.
Everything is 3-8 times the US price; I hunted for a little roll of duct tape for weeks, and finally found it at $8. In Amsterdam, Saturday late night kids in a deli get only fries at $2.80 because it's the cheapest thing by far on the menu. They foolishly have coins for up to $3- the smallest bill generally used is $16 (10), which psychologically devalues any currency- it's simply so easy to spend coins, with often over $18 worth in ones pocket.
The proximate cause for the current US misery is the rupture of the housing bubble and the sub-prime mortgage crisis, but the base cause of the dollar's collapse and much of the current instability has been George Bush 2 giving $4-5 trillion of tax rebates to the rich, corporations, and funding his wanton war. To fund this reckless deficit spending after the Clinton balanced budget, we've borrowed some half a trillion a year (with all the off-the-books spending) from Japan, China, England, Brazil, OPEC by selling them US bonds, in effect printing money. We are the rich guy on the hill with a drug problem that goes down into the shanty towns to borrow money, and we've vastly distorted the world's economic situation with our practices. The Democrats dabbled in this, but the Republicans have, since Reagan, been closeted in their psychedelic room blasting trickle-down rock, and mainlining debt by stealing from their children. Their unholy obsession with deregulation has created this financial Wild West disaster of complex junk financial instruments that no one understands, let alone controls. These worthless derivatives were supposedly worth more than all the real stocks and bonds put together.
Congress, seeing America's problems only in isolation, thinks Americans don't have enough money, rather than stupidly spend every penny (including ones they don't have), so have fabricated an election year giveaway tax credit, but that fuels the deficit that is the root of the problem. It's a "Tinker Bell market" , says Wall St. sage Allan Sloan, dependent on huge amounts of cheap easy credit, now "vanished like pixie dust... which could exist only as long as everyone agreed to believe in it." UBS Bank wrote off $37 billion of losses, Merril Lynch, Citigroup, and HSBC lost another $41 billion, and Japan could be sitting on $300 billion of our worthless investment "vehicles". A collapse by any major player could create a chain reaction of falling dominos. Desperate to prevent that, the Fed injected $500 bil just to save Bear Sterns and stabilize things. The oil crunch, food price rises, and incipient civil war in Iraq (which will cease the 2.4 million barrels/day flow) all contribute to the danger of an unprecedented meltdown. With our reckless diversion of crops to alcohol, now fuel=food.
The world only bought our treasury bonds because the dollar was stable and strong. With Bush's conversion of our greatest surplus into our greatest deficit, those days are gone. In Bush's first year, the dollar was 1.19 Euros, now it is only 0.63 , a 47% drop in the trillions of dollars of the American Dream that our foreign creditors and investors hold: long term bonds, stocks, real estate. All they have to do to provoke a worldwide economic crisis is just start buying Eurobonds rather than ours (forget selling ours). That's started, with the Chinese threatening to dump ours in response to our pressure to revalue their Yuan, the South Korea talking of diversifying their holdings, Iran switching their trade in oil from dollars to Euros (and Putin threatening to), and the Japanese warning of "enormous capital flight" from the dollar. Once the image of American financial invincibility is breached, flight from our bonds could become a flood.
To keep countries buying (funding our habit), bond interest rates will have to be jacked way up- causing interest rates to rise across the board (instead they've been cut, depressing the dollar more), and causing an avalanche of bankruptcies by firms and people bloated by cheap credit. If you think the mortgage crisis is bad, you ain't seen nothing yet. Out of survival, the world is shifting away from dollars, and the ultimate result could be a global economic collapse, because America is overextended way past the cliff, the net is disappearing, and a sinking America will drag down the world.
7 months ago I urged my friends and acquaintances to sell all their holdings and buy gold (then $740/oz) because a catagory 6 financial hurricane was coming. Well, it's here.