Special Analysis: The Long Twilight of Economic Empire

No fewer than six e-mail messages have come to me since yesterday evening concerning what apparently started as a claim on the Hal Turner Show. The gist of the claim is that Monday, December 18, 2006, the Chinese government is going to dump one trillion greenbacks onto the global currency markets in its on-going effort to reduce its holdings of American dollars. The claim was repeated on a thead at the Rigorous Intuition message board.

Worries about the stability of the current international economic regime are not unique to breathless doomsayers. The continuing, unstoppable budget deficits being run up by the Republican-controlled U.S. government have caused great concern among both astute private observers and global currency traders. The U.S. dollar has lost a tremendous amount of value, having now reached a 14-year low against the British pound sterling and a 20-month low against the euro.

But while longer term prospects appear bleak, the short-term outlook is certainly not pointing to any kind of end-time on Monday. Metals prices have backed off, and the overall market outlook is good going into the new week. While some might argue that traders are at the gates of the cemetery preparing to whistle as they take the Monday morning tour, little if any evidence can be found that otherwise cravenly greedy capital markets and their participants are willfully positioning themselves for a relatively calm Monday knowing that they're going to get slaughtered by doing so.

However, setting aside what is not likely to happen tomorrow, the long-term economic indicators do not point to an endless road to riches for the American Empire; and no amount of cheerleading by the Bush Administration, the mainstream media, or the residue of Republicans with their heads in the sand can change the fact that the underlying substrate of economic factors points to a serious and near-permanent re-alignment of currency exchange rates wherein the U.S. dollar will be worth far less against other major currencies than it has been in many decades. These indicators in their scope are telling, but the most damning of all is the chain of federal deficits the United States government has been running: these deficits represent revenue shortfalls that simply cannot be stanched because the American people are so completely ingrained to very low marginal tax rates, and the U.S. is committed for years to come to unchangeable patterns of outlays, both in terms of social programs like Medicare and of military commitments like the Global War on Terror. Draconian as any budget cuts might be in the coming years, they will be a drop in the bucket compared to non-discretionary spending to which the federal government is unavoidably bound. It is those budget deficits that have fueled an otherwise inexplicably robust economy for these past five years, while it is the accumulation of those deficits as national debt that has been digging the grave of the American economy as pre-eminent in the world of the 21st Century.

Last Friday, a post by Jersey Cynic at BlondeSense asked the question, "Do Deficits Matter?" to which I offered a comment with links to previous articles I have written on the subject:

...I have written a number of articles about the subjects of budget deficits, trade deficits, and their interrelationship. I believe the last major pass I made at it was in my article, "Foreign Trade and Debt"; but before that, one of my earlier articles on the subject was, "Seven Principles of Macroeconomics." I also took a pass at the issue of budget deficits of the Clinton and Bush Administrations in a lambasting I did of Bush's former budget director in the article, "Treasury Secretary Calls Clinton Budget Surplus 'a Mirage'."

The folks who promote nonsense about how budget deficits don't matter should be required to read the above articles...

Jersey Cynic came back with a follow-up question:

I read all of your posts...

You say in your link

"Now, the only place the Chinese can spend all those greenbacks they gather is in the country of origin of the currency—the United States of America"

What do you mean by that?

they can only spend (?buy) things in the US and nowhere else. We spend our dollars in other countries, don't we? Don't you just exchange the dollars for whatever currency that country uses?

Why couldn't China say for example, take those dollars and invest in oil exploration and production in say Canada? Bite the bullet, take the loss on the conversion of the money and make it back via investments elsewhere?...

Is it because of the large amount of money were talking here?

Can't they unload some here and some there?

My response, edited and expanded here, was as follows:

...You answered your own question. The Chinese would have to exchange the greenbacks they've earned in trade were they to want a currency other than the greenbacks. In other words, as long as they hold greenbacks, they have to use them in the country of issuance. If they want, say, euros, they'd have to enter the euro/dollar currency market and sell dollars to buy euros.

But let's say they did that. As they sold the dollars, the supply of those greenbacks on the world market would surge, which would drive down their price. At the same time, because the demand for euros was skyrocketing, the price of euros would go up. Thus, were the Chinese to do a wholesale dump of dollars to get euros, they would end up shooting themselves in the foot because they would crash the value of all their dollar-denominated (i.e., American) holdings, while making the value of euro-denominated assets (i.e., things they wanted to buy in Europe) rise to nose-bleed prices.

The short-term rational strategy for the Chinese is to continue to hold the dollars and use them to invest in the United States. Most of those "investments" are in the form of loans to the U.S. Treasury to support the deficit spending of the Bush Administration and its congressional Republican allies. In the longer term, the Chinese can slowly move their dollar-denominated holdings to a more diversified portfolio that includes assets denominated in other currencies; but this has to be done carefully lest world currency markets and the traders therein get skittish and start to "lead the plunge" by selling their dollars first and using them to buy euros, which would drive down the price of greenbacks and drive up the price of euros before the Chinese could unload theirs.

The Chinese have to keep their smiles very tight and act like there's nothing in the world they want more than to get more and more greenbacks because they don't want anyone to jump ahead of them in line for a wholesale dump.

The problem is that small versions of this cascade of devaluation are already happening. Currency traders are already skittish, and they act on visceral instincts. Every time they even so much as smell some desire by the Chinese to re-denominate their portfolio of holdings, those traders do a round of sell-offs.

The central banks of the developed nations do what they can to stop these potential death spirals, so nothing really ugly has happened so far. However, in a seriously ugly scenario, the world currency markets could easily, if the conditions were right, swamp any coordinated efforts by the central banks to defend the dollar, and everyone knows that.

This is why it is crucial for everyone to act like we really can defy gravity and walk miles above the true price level of the dollar for as long as possible. If and when the end comes, it could be spectacular.

More likely, though, is a long-term draw-down scenario, the world finance version of the U.S. dollar going out, not with a bang, but with a very quiet whimper.

Truth of the matter is, that whimper will probably be so quiet the average American won't even hear it. Joe Sixpack and Jill SelfAbsorb will simply wake up one morning and wonder why the American dog is lying tits-up in the global finance swimming pool.

And a lot of those Joes and Jills will be all kinds of receptive to the Right-wing idiots who will tell them that it was the liberals and the secular humanists who drowned the dog.

Sadly, the dog won't be around to tell them that it was the neo-cons who gurgled the pooch.


The Dark Wraith will hold a brief yet tasteful memorial service for the bloated mongrel once it's been drained back down to reasonable proportions.

Returning now to the specific claim that Monday will be the day China unloads a trillion U.S. dollars, such predictions, along with a few others swirling around the Internet, need to be taken out and shot. It's not going to be as simple and swift as some B-grade Economic Apocalypse Now! movie extravaganza.

It is true, as some are claiming, that the United States has issued rules that limit the amount of money in greenbacks that can be converted; and despite one representation or another by the government that this is some kind of counter-terrorism measure, it isn't. It's a circuit breaker intended to limit the amount of self-fulfilling financial collapse that could happen if there were a run on the currency. If too many people started to panic all at once about the soundness of U.S. dollar and tried to exchange large sums of those dollars for euros or some other currency, there would not be enough of those other currencies readily available to immediately fulfill all of the requests, and this would look to the average person like global currency markets were suddenly rejecting the dollar as a medium of exchange. That would serve to "prove" to people that the dollar had become worthless, and then everybody would be trying to unload their dollars, which would exacerbate the situation to the point where banks and other financial intermediaries would have to close their currency exchange windows and eventually their doors as people tried to pull their money out and exchange it for anything commodity-related, like gold, cans of food, or even (God forbid) bullets.

An all-consuming flash-fire of economic panic would be bad, and a limit on the amount of U.S. currency that can be converted in any given period of time is in place to keep that from happening, even though the rule is, in and of itself, a very grim sign of the times. It is not, however, a sign that December 18, 2006—or any other specific day, for that matter—is going to be a good day to stay in bed with a loaded gun, a bag of gold, and an extra-large box of chocolates.

Monday will not be a day of catastrophe for the dollar. Even though it could very well slide further, as I noted in my quoted comment to Jersey Cynic above, the Chinese would be destroying their own portfolio by dumping a trillion U.S. greenbacks in a single trading session. And as far as the slide of the dollar is concerned, the Chinese are as responsible for that as any country since it has in part been their portfolio adjustments that have rippled the markets, even as they continue their long-standing game of undervaluing the yen to boost their own economy while sucking ours dry. The trade talks between the U.S. and China last week weren't particularly fruitful for the American side. The Chinese gave the American authorities a long-winded lecture about the "special" circumstances of China, along with a particularly fatiguing review of 5,000 years of Chinese history. Needless to say, all that fluff resolved nothing, and that was precisely the objective.

The Chinese know exactly what they’re doing: they’re spinning the Bush Administration amateurs around and around just to keep the Chinese economic juggernaut/gambit going, while the Bush Administration officials twirl around getting dizzy and altogether frustrated, unable to do anything worthwhile about the abuse because the Republicans have been on such an irresponsible low-tax, high-spend orgy for the past six years they have no moral platform from which to stand up to the Chinese.

Were we to have actual professionals—maybe even competent ones, at that—running this country, we might be able to do something. As it is, though, we’re on a blood-letting gurney on the slow track to a Second World currency, and there’s nothing we can do about it. We have, as a nation and as individuals, been spending far beyond our means. We borrow money, and we care not a bit from whom we are borrowing. The federal government will accept bids from any country with the money to buy U.S. Treasury debt instruments; and as individuals, we borrow based upon need and terms of repayment without even the slightest concern for exactly who or what is the real source of the money. We bitch about jobs going overseas, and yet we buy the foreign imports with their low-low prices, and we gleefully accept the loans that are made with the very same money we sent overseas. Yes, that's where all that debt capital is coming from: it's coming from us. We are handing China, Saudi Arabia, Japan, and a host of other countries the very knife with which they are gutting the domestic holdings of equity in the U.S. economy. (See, for example, my graphical post "A Walk-Down Primer on the U.S. Trade Deficit with China.")

George W. Bush and his miserable, incompetent, war-mongering ilk are not the cause of what is happening; they are, instead, the last and greatest of the opportunistic infections pouring into a body that has for a long, long time been cutting itself open with greater and greater gashes to mask the withering of a real, equity-based growth engine of individual and national prosperity.

We had our chance. It was called the Clinton Administration, which had not only slowed down the deficits that had been the legacy of Republican Administrations going clear back to Ronald Reagan, but had finally reversed the trend and was running surpluses during Clinton's last years in office. Maybe that was too much for an American people who, in their heart of hearts, do not want a government with more fiscal discipline than they, the people, can expect in their private lives.

The truth of the matter is that, despite the continuing refusal by some liberals to recognize Mr. Bush as the genuine winner of Presidential elections by the will of the People, his ascendancy to the highest office of the land is nothing more than a reflection of the rise of the profligate, corrupt Republican Party to majority control of the federal legislature and of the even broader desire of Americans to seek the easy, feel-good way forward. Even when skyscrapers come down, massive federal budget deficits return, poverty rates rise, wars turn into quagmires, and international financial markets start to turn against the American Economic Empire, what happens? Why, we get the election of 2004, complete with another two years of Republican control of Congress and another four years of blistering, demonstrated incompetence elected to the Presidency.

Will the Chinese continue their portfolio re-alignment on Monday? Sure. So, too, will some other countries. That does not mean Monday is Kids Eat Free Day at the American Economic Armageddon Smorgasbord. The big banquet comes later; and for the most part, the vast majority of Americans won’t exactly notice that something’s really wrong when America is the featured special at the carving station. For those who do, there will be the usual line-up of Right-wing pundits and ignoramus mainstream commentators telling everything but the truth about who was responsible for the knife coming down through the meat of the United States High-Speed Debt-Powered Consumption Express.

People don't want to hear that the end was their own doing, both through their personal economic decisions and through their choice of leaders. More extensively, though, people haven't the wherewithal to hear the complicated story of how their over-reliance on debt was the result of decades of earning power erosion that forced them like herded cattle into that over-reliance on borrowed money. Americans of today have been no different from people of almost any country and any era: they wanted to believe that every today was better than the past, and the material goods and services of modernity were theirs to have as tangible evidence of growing prosperity. For a while—in fact, for a decent run of generations—the system and the debt that fueled it were an unbeatable duo; but as time went on, the engine had to be sustained more and more by the very debt that would one day make the days of the future decidedly not so good.

We are not quite yet at the time when most Americans notice that the sky is permanently and decidedly darker than it once was: dusk comes and the twilight of Empire falls not with the swift fury of a hammer, but instead with the false whisper that each moment to come will be as bright as every moment that has already passed.



The Dark Wraith has spoken.