Why Your Dollars Buy Less and Less
Ever feel like your money doesn’t stretch like it used to? There’s a reason for that. And it’s more serious than you probably think.
The dollar’s value is plummeting. It has been slipping for years, but the trajectory is getting steeper. Against the world’s major currencies, the dollar has lost more than 14 percent of its value over just the past five years—and a shocking 32 percent in the last decade. In October alone, the dollar plummeted 6.5 percent. For the first time in history, the Australian and Canadian dollars both traded at parity with the U.S. dollar.
But the dollar rout is actually even worse than these numbers show. As the dollar has devalued, so have the currencies the dollar is compared to. When measured against hard commodities, the dollar crash is much more vivid. A decade ago, you could have purchased an ounce of gold for $275. An ounce of silver cost $4.80. Today you will pay around $1,400 and $28 respectively. But the dollar isn’t just plunging against precious metals; it’s crashing against virtually all commodities.
What’s going on here? Well, American politicians have spent the nation to the verge of bankruptcy. Total government debt (local, state, federal) now stands in excess of $14.7 trillion. However, this is only beginning to scratch the surface of America’s debt problem—despite the fact that it is already over 100 percent of America’s gross domestic product. Total debt in America was a gargantuan $57 trillion as of last April, according to the Grandfather Economic Report. If you include liabilities such as Social Security, Medicaid, Medicare and other pension plans, the government is on the hook for another $59 trillion or so in promises.
There is only one way America can pay its debt—and it is not an honest way. Central bankers know it, the world’s top financiers know it, and foreign nations are beginning to realize it too. The Federal Reserve calls it “quantitative easing.” The world calls it counterfeiting.
The only way America will be able to pay its debt is to simply print the money to pay the bills. But as the laws of supply and demand dictate, with every dollar created out of thin air, each existing dollar becomes worth less. Since we are talking tens of trillions, then over the long term the dollar is virtually doomed to depreciate in value.
Americans can feel the pinch. But it also puts the rest of the world in a mighty big pickle.
“U.S. Policy Is Clueless”
On November 12 and 13, the richest and most powerful nations descended on South Korea. It was the biggest G-20 summit of all time, attended by nearly 10,000 of the world’s most influential politicians, ceos of international organizations and corporate business barons. There was a good reason for that. Global currency exchange rates are in chaos. The world is locked near stall speed.
At the heart of the problem is America, the world’s biggest economy, executing a “beggar thy neighbor” policy to poach trade and boost economic growth. In response, other nations have adopted the strategy as well.
Tempers are flaring. The world is up in arms over what to do about the dollar!
The problem is enormous: America’s trade partners can either knuckle under, letting their currencies appreciate and risking severe recession—or they can stage a dollar revolt. This would upend the global economic system.
It’s in this precarious climate that the Federal Reserve, just prior to the G-20 meeting, raised the stakes. It announced that it would unleash a second round of “quantitative easing” to “stimulate” the economy—a move that is guaranteed to sink the dollar even more. The Fed’s hope is that by creating an additional $600 billion—out of thin air—to purchase U.S. government bonds, interest rates will fall and consumers will begin spending.
The world, however, took a more cynical view.
Some nations, like Germany, saw it as a blatant attempt to devalue the dollar and thus steal trade. Others, like China, worried that it was an attempt to stealthily repay America’s debt with fraudulent dollars.
But even if the $600 billion money-creation plan was solely implemented to stimulate the economy, the plan is doomed to fail. JP Morgan analysts estimate that $2 trillion might buy America 0.3 percent additional growth in 2011 and 0.4 percent in 2012. To get America on track, some analysts say upward of $6 trillion might be needed. One Goldman Sachs guru says that, considering the debt deleveraging and the wealth destruction the economy is still facing, it might take $30 trillion to do the job.
But for America, money has never been an obstacle. From the world’s perspective, though, that’s precisely the problem.
“They have already pumped endless amounts of money into the economy with extremely high budget deficits, and with a monetary policy which has already pumped in lots of money,” German Finance Minister Wolfgang Schäuble said. “The results have been hopeless. With all due respect, U.S. policy is clueless.”
That about sums up how the rest of the world feels about America too.
Politicians try to distract attention from America’s debt problem by pinning the blame on China. But it is the politicians who are the most culpable.
Yes, China is purposefully undervaluing the yuan to promote Chinese manufacturing at the expense of American jobs, but it has been doing so for decades and American politicians and academics have said and done virtually nothing.
Speaking from Beijing, Senate Finance Committee Chairman Max Baucus recently railed at China for not allowing the dollar to fall against the yuan. He said that if China allowed the yuan to appreciate to its true value, the result would be the creation of up to 500,000 new American jobs. Baucus might be right, but the bigger point is that 500,000 jobs is not even close to what America needs. Over 8 million jobs have been lost during this recession. And America needs to create around 150,000 jobs per month just to keep up with population growth.
America’s biggest economic problem is by far its debt problem—and now it is the world’s problem.
What Happens in a Dollar Revolt?
China, Japan, Saudi Arabia, Russia, Brazil, South Korea, Germany, India and other nations collectively hold more than $4.2 trillion in U.S. government debt. That does not count state or corporate debt, or the $6 trillion owed by U.S. mortgage giants Fannie Mae and Freddie Mac.
These countries have invested their money and their faith in America. But now they see the U.S. embarking on “quantitative easing” monetary policies that will pay them back with devalued dollars.
Dissatisfaction with the dollar is escalating. And America’s trade partners may be getting to the point where they actually do something about it.
A dollar revolt is brewing. And though the signs are increasingly obvious, America’s leaders act like they don’t see it coming.
If the world decided to abandon the dollar as a global reserve currency, living in America would change overnight. America would be engulfed in a dollar flood.
Dollars flooding back into America might sound like a good thing, but in reality it is the equivalent of the repo man coming to take away not only your F-150, but the leather couch, and all the copper pipes and wiring in your house too.
That may sound extreme, but ask yourself what a dollar bill really is. That piece of paper is nothing but a fancy iou. It is a debt instrument—a promise to pay. And America has issued them to the point that they have—literally—gone out of style.
What does this mean for Americans? It means that inflation is virtually guaranteed. It means that not only will the supply of dollars surge due to the government printing presses, but trillions more dollars that until now have been locked away in government vaults in China, Saudi Arabia, and elsewhere will also be released into the economy.
It means that foreign sovereigns are about to go on a shopping spree in Americans’ backyards.
Spend It While You’ve Got It
Foreign nations understand that the best way to preserve their wealth is to spend their U.S. dollar hoards—to buy something, anything—before it is too late and the dollar is worthless. And as this happens, the velocity of dollars zooming through the U.S. economy will suddenly accelerate too, causing imbalances, supply shortages, and drastic plunges in the purchasing power of the dollar.
The dollars are already heading home.
Across the country, indebted cities and states are auctioning off their best income-producing assets—at fire-sale prices—to plug budget holes.
In October, the state of California announced that it had sold floor space that was the equivalent of two Empire State Buildings to plug budget shortfalls. The state will receive $2.3 billion from a group called California First llc. Over $1 billion will go to repay a tiny portion of the state’s debt. The rest will be spent for general administration. The state will now rent back the buildings from the investors for the next 20 years! During that time, the state will pay $5.2 billion in rent, according to the Associated Press.
Just guess where all those billions in future rent will go? Not to Californians. California First llc sounds pretty American, but it doesn’t take much digging to find that it is just a front to make the deal more palatable to voters. One of the biggest investors is Antarctica Capital Real Estate—an opaque international hedge fund. Saudi Arabia? Russia? Who knows where that money will end up.
The liquidation sale is becoming commonplace in America. And the prices are dirt cheap because the country is broke and there is so much for sale.
The Parable of the Parking Meters
Consider the desperation of Chicago. To plug its spending holes, it sold the rights to all its parking meters—for 75 years!
Originally, the 36,000 meters were sold to a group of investors led by Morgan Stanley. This consortium, which goes by the innocuous-sounding name of Chicago Parking Meters llc, happily forked over $1.15 billion for the opportunity to extort parking meter fees from Chicago residents. Later, investigative journalist Matt Taibbi revealed that investors stood to gross about $5 billion over the life of the contract—for a cool $3.85 billion profit.
As Taibbi shows in his new book Griftopia, that is just the good part of the deal. Now, the new owners have changed the hours on the meters: Instead of allowing free parking before 9 a.m. and after 6 p.m., they collect between the hours of 8 a.m. and 9 p.m. One alderman wanted to keep the old hours for 270 of his meters and was told it would cost $608,000 over three years. So if the city wanted to pay for the privilege of keeping the parking hours the same as they were before the deal for just those 270 meters, over the next 75 years the city would be forced to pay the investors $2.12 billion—far more than the investors originally paid for all the meters in the first place.
If the city wants to close the streets for a festival, roadwork or any other reason, it has to pay out even more compensation. The meter rates have gone up too—from 25 cents per hour to over $1.25 in some areas. Take a guess at what meter rates will be in 70 years or so.
Chicago residents might also be surprised to find out who the new parking meter owners really are. When the deal first went through, Morgan Stanley’s investors were pretty benign-looking—either Americans or investors from nations with uncomplicated relationships with America, from places like Australia. Only 6 percent of the investors were from Abu Dhabi, for example.
But then, just two months after the deal was done, guess what happened: The ownership structure completely changed. Morgan Stanley sold its stake, and several other investors bailed to make way for new investors from Abu Dhabi, who now own 30 percent of the meters. Investors in another fund called Redoma sarl now also own 50.1 percent. And no one knows much of anything about Redoma except that it has an address in Luxembourg—a notorious tax shelter and flow-through for Middle Eastern investors.
To say the deal heavily favors the investors is an understatement. And if the dollar keeps falling in value, they can keep raising the meter rates.
For the next 74 years, Chicago meter revenue will flow to enrich wealthy oil sheiks and who knows who else. Chicago’s budget problems, however, will remain.
How will Chicago plug its budget gap next year? Sell some more city property. There will be plenty of dollar dumpers.
Revenge of the Creditors
Not that it is any consolation, but Chicago is far from alone. Parking meters have been sold in Miami, Pittsburgh, Los Angeles, and other cities. Toll roads in Indiana. The Chicago Skyway. A port complex in Virginia. A whole slew of infrastructure projects in California. Airports are also being considered. The Pennsylvania Turnpike was almost sold.
It is liquidation on a national scale.
Each day, more of America’s collective wealth is transferred to the bank accounts of foreign governments—because America is so corrupt and morally bankrupt that it cannot control its spending. Consequently, America’s income-producing assets are being auctioned off at an alarming rate. And increasingly to foreigners who no longer want so many dollars.
America is broke. It has run up a massive trade deficit and its economy is in travail. Foreigners hold trillions of dollars’ worth of U.S. debt, and now that money is coming flooding back into America to purchase strategic infrastructure. Instead of biting the bullet and cutting back its big-spending ways, America has decided to cheat and print money to pay for its spending.
And it is all leading to the destruction of the dollar.
In Habakkuk 2:6-8 God warns America of this exact predicament: “Will not all of these take up a taunt-song against him, even mockery and insinuations against him and say, ‘Woe to him who increases what is not his—for how long—and makes himself rich with loans?’ Will not your creditors rise up suddenly, and those who collect from you awaken? Indeed, you will become plunder for them. Because you have looted many nations, all the remainder of the peoples will loot you …” (New American Standard Bible).
A dollar revolt is brewing. Next comes the looting.