“The U.S. government racked up a gaping shortfall in the first two months of this fiscal year after posting a record budget deficit last year,” reported Reuters recently.
Just in the first two months of fiscal 2010 – which began in October – our federal government managed to incur a budget shortfall of $292 billion. Alarmingly, the gap for the first two months of this fiscal year was wider than it was during the same period of last year, which ended with with a record deficit of $1.42 trillion. If this present trend continues, the government’s shortfall by the end of this month will match Bush’s 2008 spending record of $455 billion.
Here is something to ponder: In barely three months of this fiscal year, Barack Obama will manage to equal the outlays of George W. Bush during the whole of the most financially profligate year of his presidency.
The left used to bemoan bitterly the financial overindulgence of the Bush administration. Justifiably so. It is just too bad that they do not apply the same standard to the current administration. With Obama in charge they see nothing wrong with mind-boggling financial excesses and waste. They, in fact, clamor for more. Not content with the $786 billion pork-ridden outrage which they speciously called “stimulus,” they now demand another rescue package.
Liberals across the ranks – from Paul Krugman through Nancy Pelosi to Howard Dean – are calling for more money to be pumped into the moribund economy. One should not be wholly surprised at this, as the big spenders have repeatedly shown themselves singularly adept at stirring taxpayer money to themselves and their friends. Last week it was revealed, for example, that two firms ran by Hillary Clinton’s pollster Mark Penn grabbed nearly $6 million from the stimulus allotment.
In his speech at the Brookings Institution last week President Obama promised what amounts to a new round of massive spending. Among other things, the president proposed “a boost in investment in the nation’s infrastructure beyond what was included in the Recovery Act,” “incentives for consumers who retrofit their homes to become more energy efficient,” and expanding “select Recovery Act initiatives to promote energy efficiency and clean energy jobs.”
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The announcement by the Dubai State Corporation that it was unable to pay interest on its debt sent shock-waves through global markets. Stocks and weak currencies dropped as traders and investors feared that this could usher a new episode in the world’s economic travailing.
One reaction in particular offered a revealing insight into just how uncertain things really are. Reported the UK Times:
Nervous traders transferred the focus of their anxieties from the risk of companies failing to the risk of nation states defaulting. Investors owed money by Mexico, Russia and Greece saw the price of insuring themselves against default rocket.
This should tell us much about the fragility of the world’s financial system. The debt of the Dubai’s state-owned corporation is approximately $80 billion. Even though it is a substantial figure, it is not very large in the grand scheme of things. To give a sense of proportion, Dubai’s debt comes roughly to one tenth of President Obama’s stimulus package.
And yet the possibility of default by Dubai World immediately sent investors scrambling to insure themselves against default by whole countries. Their fears even extended to nations such as Russia, a country which in a comparatively good position thanks to its large energy revenues.
This shows how little confidence the international financial community has in the system. The world’s money people fear that even a relatively small event can set off a chain reaction that would bring down nation states. Being part of the action, they are in the position to know what so many on the main street have suspected all along – things are not well. In the words of noted financial commentator Bill Bonner, they fear that “the ripples stirred up in Dubai” could quickly “turn to Tsunami waves elsewhere.”
Despite what Barack Obama, Ben Bernanke and Timothy Geithner tell us, the problems that brought the global financial system to the brink in 2008 have not been fixed. They have only been papered over with massive amounts of freshly printed cash and cheap money in the form of near-zero interest rates. But too much money and easy credit were at the root of the problem in the first place. The measures that have been taken have only provided a temporary relief. Sooner or later the underlying problems will resurface again. The finance elites sense this, which is why even a relatively small failure makes them so nervous. They know that the seeming return to normalcy is only surface deep.
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“Société Générale has advised clients to be ready for a possible ‘global economic collapse’ over the next two years,” reported the UK Telegraph in a recent story.
Headquartered in France, Société Générale (SG) is one of Europe’s largest financial services companies. One of the oldest banks in France, it is also a quintessentially mainstream institution whose leadership is largely blind to the shortcomings of the world’s current monetary regime. As so many other mainstream outfits, SG failed to see the coming of the current crisis and had to be rescued to the tune of billions of dollars. Much of it, paradoxically, came from the American taxpayer via the AIG bail out.
One can get a good sense of how bad things must be if an institution like this is preparing its clients for the possibility of a “global economic collapse.” Given the present state of affairs, the bleak outlook is more than justified.
To begin with, many governments currently find themselves on the verge of bankruptcy. Having tried to spur economic growth through vast injections of new money, they have contracted immense public debts. “High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt,” concludes Société Générale in its report.
Leading the way is the United States which posted a deficit of nearly 10 percent GDP during the last fiscal year. The Obama administration projects that America’s national debt will exceed its annual economic output in the 2011 fiscal cycle. It will then continue expanding as far as the eye can see, reaching 107 percent of GDP in 2019. It should be remembered that these are the administration’s own figures, which almost always tend to be too optimistic. The reality is likely to be worse.
The deep indebtedness of western governments raises serious questions about their financial viability. Ambrose Evans-Pritchard, the Telegraph’s International Business Editor, puts it bluntly: “Almost all western governments are insolvent… we are bust.” Evans-Pritchard is correct. The level of indebtedness is unsustainable. Unable to squeeze much more from taxes, sooner or later western governments will have to start defaulting. The default will very likely take the form of high inflation as governments will try to print away their immense debt burden. This will, of course, have dire economic repercussions.
Dire as Société Générale’s report is, it still does not do full justice to the dept of our predicament. When discussing America’s fiscal plight, for example, it fails to take into consideration the biggest drag of all – entitlements. Estimated at more than $100 trillion, this astronomical figure represents the largest financial obligation in the history of the world. More than one and a half of the world’s current economic output, entitlements are a millstone that will pull America down into financial ruin. Needless to say, the rest of the world will also be caught in the vortex. With Social Security going into the red perhaps as early as this fiscal year, the “global economic” collapse may occur sooner than later. Western government officials, however, appear unconcerned about the black clouds on the horizon. Rather than trying to rein in spending, they blithely pile on even more debt. Oblivious to the impending financial crack up, they instead worry about thenon-existent anthropogenic global warming.
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“The Gulf single currency is not happening tomorrow or the day after,” saysKuwait’s Finance Minister Mustafa al-Shamali. “Sufficient time” is needed to prepare for such a move the minister told the Kuwaiti parliament last week.
Al-Shamali’s statement is startling in how matter-of-factly it reveals the intent of the Gulf states to abandon the dollar. Last month, veteran British journalist Robert Fisk filed a story titled “The Demise of the Dollar” in which he claimed that the Gulf countries were secretly working to set up a new currency to be used for oil trade. The report shook the markets and provoked a furor across the globe with many accusing Fisk of posting sensational stories based on obscure sources.
It turns out that Fisk was right. If anything his article understated how far along the Gulf countries had come in their quest to replace the dollar. So much so that they had set the beginning of the next year as the start of the new monetary regime. And even though they will not be able to meet the ambitious deadline, its very existence underscores the earnestness of those countries to decouple themselves from the dollar framework.
Such a move would have devastating repercussions for the United States, because it would deal a major blow to the dollar’s status as the world’s reserve currency. Once the dollar loses that special standing foreign central banks and investors will no longer be willing to continue purchasing Treasury bonds at low interest. Deprived of the ability to borrow cheaply from abroad, the American government would be forced to monetize portions of its debt in order to obtain cash for its expenditures. This would lead, among other things, to runaway inflation.
Perhaps the most telling thing about the ongoing effort of the Gulf states to drop the greenback is that none of them is an outright enemy of America. The United Arab Emirates, Kuwait, Bahrain, Qatar and Saudi Arabia maintain – for the most part – friendly relations with the United States. Their effort is thus not driven by some insidious desire to harm the US, but by the reckless monetary and fiscal policies of our own government. The spectacular growth of our national debt and the rapid expansion of the money supply have debased the dollar which has been dramatically losing value. It is all too understandable that resources-rich countries do not wish to trade their national wealth for an increasingly valueless currency.
There may still be those who think that all this is just a plot by Arabs to weaken the United States by sabotaging our currency. Arabs, however, are not the only ones trying to decouple themselves from it. Tuesday last week, Dominique Strauss-Kahn, the managing director of the International Monetary Fund, made a sobering speech in which he said:
The imperative of greater global currency stability means the world can no longer rely, as it has done since the end of the gold standard, on a currency issued by a single country.
The “currency issued by a single country” is, of course, the dollar which has been the foundation of the global monetary system ever since the Bretton Woods conference which took place in 1944. The statement of Strauss-Kahn clearly indicates that IMF leadership is of the view that the dollar era is coming to an end. This is not so surprising given the dollar’s deteriorating condition. For world finance and trade to function smoothly, a strong and stable medium of exchange is required. The dollar no longer possess these qualities and its fall is wreaking havoc all across the globe.
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A Reuters story titled “Wall Street jumps on renewed risk-taking after G20” touches on a startling fact: a recent summit in Scotland of finance ministers and central bankers of the G-20 countries gave impetus to another binge of risk-taking on Wall Street.
How can this be? How can a gathering of the very people who have pledged to rein in Wall Street’s reckless wheeling-dealing inspire the very thing they seek to curb?
To understand it, we need to look at the meeting’s resolution. In their final communique, the participants jointly agreed to continue with stimulus measures in order to support what they see as a fragile recovery:
The recovery is uneven and remains dependent on policy support… To restore the global economy and financial system to health, we agreed to maintain support for the recovery until it is assured.
To coincide with the summit, the International Monetary Fund (IMF) issued a report intended to lend further credence to the central bankers’ strategy. Its premise is contained in this statement: “Premature exit from accommodative monetary and fiscal policies could undermine the nascent rebound.”
As most people know, those “accommodative monetary and fiscal policies” consists primarily of near-zero interest rates and massive cash injections into the economy. What the G-20 meeting did is, in effect, guarantee for the foreseeable future the availability of cheap loans and easy money. This makes for a temptation to engage in unhealthy risk-taking, because it invites Wall Street to take out cheap loans and then invest the borrowed money in assets that promise a higher rate of return. The difference is profit.
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Eamon Javers of Politico recently wondered why Matt Drudge, the proprietor of the widely-read Drudge Report, so frequently links to stories detailing the decline of the dollar. In the first three weeks of October, he noted, Drudge linked to such stories eighteen times. Javers suggests that Drudge’s interest in the subject may be politically motivated:
“What Drudge is doing is relentlessly hammering the continuing point which is linking Barack Obama’s administration and what some see as their failures on spending and their agenda on the economy, linking that to the declining value of the dollar. And what we see is the dollar becoming extremely politicized in the debate over whether this is Obama’s fault.”
The quote is revealing in more ways than one. For one thing, it lays bare the mindset of the mainstream media. Javers is only one of a legion of mainstream journalists who automatically assume that any story that reflects badly on the president must be an act of political gamesmanship. It apparently does not occur to them that Matt Drudge may be highlighting those items, because they are intrinsically newsworthy. So intent are they on pushing Obama’s agenda that they have failed to notice one of the most important stories of our time – the ongoing disintegration of the US dollar.
The repercussions of this are immense. Once the dollar collapses, it will take down with it the world’s monetary regime, which has the dollar as its foundation. This will impact all of us in profound and life-changing ways. But rather than reflecting on this situation, the journalistic elite merely wonders whether those who bring this matter to public attention have a political ax to grind with the president.
They would do well to consider that the story of the falling dollar is decidedly not the invention of Matt Drudge or some right-wing attack machine. It is financial market’s verdict on the fiscal mismanagement in Washington, DC. Last week Bloomberg – one of world’s premier business news agencies – opened one of its wires with the revelation that “The dollar reached a 14-month low versus the euro.” On Monday yet another report opened with this: “The dollar slid against high-yielding currencies, led by the Australian dollar.”
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Late last week the Associated Press featured a photo of House Speaker Nancy Pelosi jubilantly pumping her fist after introducing the sweeping health care legislation that she and her fellow Democrats had just rolled out.
But while Pelosi and her friends celebrate the 1,900 page monstrosity, Americans have every reason to feel outraged. The bill, which promises to provide healthcare coverage for 96 percent of Americans, would quickly morph into the largest entitlement program in American history. As such it promises to be a boondoggle of unprecedented proportions.
In the accompanying statement, Democrats estimated the bill’s cost at around $900 billion over ten years. Claiming it would “lower costs for every patient,” they contend it would not increase federal deficits. President Barack Obama said that the proposed legislation “clearly meets two of the fundamental criteria I have set out: It is fully paid for and will reduce the deficit in the long term.”
This is as great a lie as has ever been told.
Years of experience show that the cost of every entitlement program widely exceeds initial estimates. Less inclusive entitlements such as Social Security and medicare, which only affect a limited portion of the population, are projected to grow so costly as to be financially unmanageable. Some experts now estimate that the inherent liabilities of these two programs currently exceed $100 trillion. It is almost certain that the price tag for universal governmentally-run healthcare would eventually make the cost of these programs seem like change in comparison.
It cannot be otherwise. Such is the nature of bureaucracy that it is not possible for government to run anything well or expeditiously. We know from practical experience that every governmentally-managed project ends up mired in waste and inefficiency. The larger the scope of the project, the greater the resultant mess. It is a universal truism that government bungles everything it touches. Those who may think this an exaggeration should try to think of one government program that has been run efficiently or that has saved money.
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The Associated Press noted last week that the federal deficit reached a record $1.42 trillion for the fiscal year that ended September 30. Up until now, most of the mainstream media have either ignored the exploding deficits or declared them a good thing, since they were supposed to lift us out of the recession. But now that the full figures have come in even some Obama-friendly media stalwarts are struck by their enormity.
This awakening is heartening. The AP report does a good job of putting the deficit number against some other figures to give a sense of scale. The government’s shortfall last year, AP notes, is larger than the whole economy of India and more than the combined deficits during this country’s first two hundred years. It is, in fact, almost as large as the yearly economic output of Canada. AP quoted Kenneth Rogoff, former chief economist for the International Monetary Fund, who pointed out that “The rudderless U.S. fiscal policy is the biggest long-term risk to the U.S. economy.”
Rogoff only states the obvious. The gravest threat to this country’s economic well-being is the policies of this government. A Harvard professor and a Keynesian through and through, Rogoff is no right-wing conservative. But after surveying the grim economic picture, even liberals must recognize that the reckless spending of the Obama administration is taking us toward fiscal Armageddon.
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A remarkable piece of news came out of London last week. Harrods, one of Europe’s best-known department stores, has begun selling gold bullion.
This unprecedented move by the famous retailer reflects the rapidly growing appetite for investment-grade gold, which has been enjoying a bull run even as the world is bogged down in a global recession. Used as a hedge against currency weakness, especially the dollar, gold has been trading at record highs. Many analysts think this is no temporary spike, but a long-term surge that will continue as the word monetary system is pulled down by the mismanaged and collapsing dollar.
Swiss-based financial newsletter Daily Bell puts it bluntly:
“We are in a bull market cycle for money metals because fiat money is all but dead, including most importantly the American dollar.”
Simone Wapler, the editor of MoneyWeek agrees:
“Gold is being re-monetized. All the world’s paper monies are losing value – and credibility. There’s a race to the bottom as they try to devalue their currencies.”
Until quite recently, money was backed by gold. That changed after World War II, when Western powers set up a monetary system with the dollar at its center. The dollar was partially backed by the metal until 1971 when President Richard Nixon took it off the gold standard altogether. At that point, the dollar became pure paper money.
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“The world is changing, and the dollar is losing its status,” said Fabrizio Fiorini in an interview with Bloomberg this week. As one of those in charge of the $12 billion Aletti Gestielle SGR in Milan, Fiorini cannot be dismissed as some anti-American crank.
But Fiorini is only one of a legion of financial experts lamenting the dollar’s bleak prospects. So obvious and profound is the dollar’s predicament that CNBC’s Lawrence Kudlow recently felt compelled to pen a piece plaintively titled “Save the Greenback, Mr. President.” On Tuesday Reuters ran an article by James Saft headlined “Dollar Faces a Long Journey Downward.”
The roots of the dollar’s trouble are not difficult to trace. The main culprit is the breathtaking fiscal irresponsibility in Washington, D.C. With deficit spending completely out of control our government has been contracting obligations it cannot meet and the world is catching up with the fact. The fear is that the American government will do what governments almost always do when they find themselves facing an insurmountable debt: They inflate their currency to lighten the burden. This is, of course, a dishonest way to dispose of one’s obligations, because investors are paid back with debased money.
Faced with the prospect of holding increasingly worthless dollars, players around the world are looking for ways to unload the greenback. They have every reason to do so.
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“In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil,” reported the UK Independent last week. According to the story, a number of secret meetings have already been held to hammer out the new monetary framework. The news sent shock-waves around, and understandably so, given the potentially cataclysmic implications of this development. Should it succeed, it would portend nothing less than the collapse of the global monetary regime which has for more than six decades rested on the dollar as its pillar and foundation.
As expected, the countries involved issued prompt denials once the story broke. Their protestations notwithstanding, there is every reason to believe that the story is, in fact, true. For one thing, it was penned by the Independent’s long-time Middle East correspondent Robert Fisk, one of Britain’s most respected and credible journalists. The recipient of more awards and prizes than any other British foreign reporter, Fisk is not known for putting out stories based on unverified hearsay. But even more importantly, the move away from the dollar would be the logical culmination of the stream of warnings and complaints which have been heard in recent months from experts and finance officials of foreign nations.
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Reporting on the recent protest march in Washington, the AP interviewedTerri Hall, a participant, who said that she “felt compelled to become political” because of her concerns about government spending. Hall thinks that America’s deficits are out of control, which, in her view, is “putting the country at risk.”
Terri Hall is but one of millions of Americans awakening to the fact that their country is in serious fiscal trouble. What most have not yet grasped is just how dire the situation really is. To put it plainly, the US is bankrupt. This is no hyperbole, but a reflection of the fact that the federal government has contracted more obligations than it can possibly make good on.
The federal government’s overall indebtedness is essentially the sum of two figures. The first is the national debt, which currently stands at $11.9 trillion. The second is the amount of implicit obligations inherent in entitlement programs. These are conservatively estimated to be in the area of $55 trillion. This makes for the sum total of at least $66 trillion.
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“Neocons are leftists in disguise,” claimed William H. Calhoun in an article a few years ago. The first impulse would be to dismiss the assertion with indignation. Surely few things could be more unpalatable or offensive than being called a leftist.
The more one reflects on the recent past, however, the more one realizes that Calhoun’s statement — an exaggeration though it may be — is not entirely groundless. If by a leftist we mean someone who expands government and the state, then surely we neoconservatives have displayed some leftist tendencies of late.
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