[NYTr] A Yanqui Dollar the Size of a Postage Stamp

[All the News That Doesn't Fit]

[A decent piece, though it's not clear why anything the sexist ex-Pres
of Hahvad, Larry Summers, has to say is so significant.  And if ONLY
people would stop referring to Hugo Chavez as "fiery," a "firebrand" and
a "self-styled" socialist or revolutionary. You can expect this from
the Romero-Forero twins and their ilk in the mainstream press, but
c'mon. It's getting really old and hackneyed, guys. Let's try to expand
our vocabulary, OK?  -NY Transfer]

Counterpunch - Nov 27, 2007
http://www.counterpunch.org/whitney11272007.html


A [Yanqui] Dollar the Size of a Postage Stamp

Even Larry Summers Predicts Doom

By MIKE WHITNEY

Lately it seems as though everyone wants to take a poke at the dollar.
Last week, it was the Brazilian supermodel who demanded euros for her
jaunts on the catwalk instead of USD. The week before that, hip-hop
impresario, Jay-Z, released a video dissin' the dollar and praising the
euro as the 'baddest Dude in the 'hood'.

Lambasting the greenback has become trendy. It's a favorite pastime of
politicians, too. At the November OPEC meeting in Riyadh, Iran's
president Mahmoud Ahmadinejad asked the assembled finance ministers to
"study the feasibility of selling oil in another currency." Ahmadinejad
disparaged the dollar as "a worthless piece of paper".

The fiery Venezuelan President, Hugo Chavez, followed Ahmadinejad's
lead predicting that the demise of the dollar would mean the "end of
the Empire."

Hugo may be on to something. The dollar is America's Achilles heel; if
the dollar tanks, so does the empire. That means the taxpayer will have
to foot the bill for Bush's bloody-interventions in Iraq and
Afghanistan, rather than the Chinese. That also means that the US will
have to export something of greater value than Daisy Cutters and
gulags. That could be a tall-order, now that Bush has boarded up the
factories, hollowed out the industrial base, and outsourced 3 million
manufacturing jobs. We'll have to scrape the rust off the machinery and
get back into the widget-making business like we were before the Free
Trade fiasco.

Central banks across the globe are trying to figure out how to ditch
their dollar reserves without triggering a stampede for the exits. No
one wants to see that. But, then, nobody wants to be stuck with vaults
full of Uncle Sam's green confetti either. So, the question arises;
What is the best way to divest oneself of $5.6 trillion (total USD held
overseas) before the Lusitania capsizes?

Kuwait, Venezuela, Iran, Russia, and Norway have already opted to
ignore the destabilizing effects of "conversion" from dollars and are
in some stage of divestiture. Others will follow. The UAE, Bahrain,
Qatar, Oman and Saudi Arabia are considering switching from the
dollar-peg to a basket of currencies so they can hedge against the
inflation that's battering their economies. It's only a matter of time
before the Petrodollar System---which links the dollar to petroleum
sales and creates a de facto "international currency"---unravels
completely, precipitating the final collapse of Breton Woods.

Talk of America's impending currency disaster is no longer relegated to
the Internet blathershere. Mainstream journalists have joined the
chorus and are sending up their own red flags. The UK Telegraph's
economics's editor, Liam Halligan, made this grim observation in his
recent article, "Bet Your Bottom Dollar Tensions Will Follow":

    "The importance of "dollar divestment" cannot be overstated. At the
very least it means the greenback has much further to fall - plunging
the US into recession. But it begs a bigger, more alarming, question.
How will Washington react to the end of the US hegemony?"

The dollar was savaged by the monetary policies of the Federal Reserve.
The Fed's policies were designed to coincide with Bush's Middle East
Crusade. They were supposed to work like two wheels on the same axle.
The administration believed that, by 2007, the military would need only
30,000 or so troops to maintain security in Iraq. That would give
Bush's legions the chance to turn east and push on to the next
target-state, Iran. If things went according to plan -- and no one
thought the high-tech US war machine could be stopped -- the US would
control two-thirds of the world's oil. This would allow America to keep
writing bad checks on green paper for the next century.

But then, of course, the plan hit a snag. The Iraqi resistance
mushroomed, the US got bogged down in an "unwinnable" war, and the
once-mighty dollar shriveled into nothingness. Now we're at a turning
point and our leaders are in a state of denial. Bush is still playing
Teddy Roosevelt, while Paulson and Bernanke are just plain
shell-shocked. They probably know the game is over. As the dollar
continues to wither; the frustration is beginning to mount in Europe.
Liam Halligan sums it up like this:

    "Europe has finally had enough of America's "benign neglect" dollar
policy. As a large economic area, with a floating exchange rate, the
eurozone suffers most. Over the past seven years, the single currency
has risen by a shocking 82 per cent against the greenback. That's
hammered eurozone exports - provoking serious trade disputes between
the EU and US, the world's two biggest trading blocks. No wonder French
President Nicolas Sarkozy describes America's drooping dollar as "a
precursor to economic war". (UK Telegraph, "Bet Your Bottom Dollar
tensions Will Follow")

Sarkozy is leading the charge for "intervention"; the buzzword for
shoring the greenback through exchange controls and buying up billions
of dollars. But it's a risky business; especially when net capital
inflows -- which are the monthly purchases of US-backed securities and
Treasuries --have gone negative for the last two months. That means the
US isn't attracting enough foreign investment to finance its trade
deficit. So the dollar will have to fall to compensate.

So, how much loot is Sarkozy willing to put up to keep the dollar from
slumping further -- $100 billion, $500 billion, $1,000 billion? And
where's the bottom?

The fact is, the greenback took a "header" down the stairwell and by
the time it picks itself up, it could be eye to eye with the peso. Who
knows? Maybe its time we all learned Spanish?

More than two-thirds of all sovereign foreign exchange holdings are
denominated in dollars. When those dollars are converted into back into
foreign currencies and start recycling into the US; we're in deep
trouble. Inflation will soar. Surely, the Fed must have known this day
would come when they were pumping trillions of dollars into subprime
mortgages and complex debt-instruments which served no earthly purpose
except to fatten the bottom line for rapacious bankers and hedge-fund
managers. The Fed also knew that the nation's wealth was not being
"efficiently deployed" for capital improvements on factories,
technology or industry. Oh, no. That would have ensured that America
would remain competitive in the global marketplace into the new
century. Instead, the money was shoveled into the bottomless sinkhole
of stucco homes with composition roofing and toxic credit default swaps.

The stock market lost another 237 points yesterday; the third 200-plus
slide in a week. Now all three indexes are down more than 10% since
their record high on Oct 9. Treasury yields are plunging as investors
flee the stock market looking for safety. That means the Fed will have
to slash rates again at its December 11 meeting to provide more low
interest crack for the investor class. Traders see an 82% chance that
Bernanke will cut the Fed Fund's rate by another quarter point to
4.25%. All that is likely to do is put the dollar into free fall and
send food, oil and gold prices to the moon. It won't pay off the
overdue mortgage payments and it won't remove the billions of dollars
of debt from the banks' balance sheets. It's pointless. The US is
headed for a "hard landing" and its dragging the rest of the world
along with it.

Harvard Economics professor, Lawrence Summers offered this sobering
warning yesterday in an article in the Financial Times, "Wake up to the
dangers of a deepening crisis":

    "Three months ago it was reasonable to expect that the subprime
credit crisis would be a financially significant event but not one that
would threaten the overall pattern of economic growth. This is still a
possible outcome but no longer the preponderant probability. Even if
necessary changes in policy are implemented, the odds now favor a US
recession that slows growth significantly on a global basis. Without
stronger policy responses than have been observed to date, moreover,
there is the risk that the adverse impacts will be felt for the rest of
this decade and beyond. Several streams of data indicate how much more
serious the situation is than was clear a few months ago."

Summers is not the smartest guy on the block. If he was he wouldn't
have said men are smarter than women and he'd still be president of
Harvard. But he's a capable economist and he can sniff disaster as it
comes stampeding round the corner. 

[Mike Whitney lives in Washington state. He can be reached at:
fergiewhitney at msn.com ]