Dollar Going Down

The financial house of the United States, courtesy of newly reelected Bush & Co., is on the brink of catastrophe. I’ve written several times in the past two years of the dollar’s impending collapse, and I haven’t been alone. Anybody who’s even remotely connected to the investment business is aware of this theme.

There was a brief respite earlier this year when it appeared that Bush might not win reelection. Now that he has, the dollar has quickly resumed its downward trajectory in anticipation of four more years. Bin Laden mentioned in his recent video that he intends to bankrupt the United States. With Bush in office, the Al Qaeda plan is set to succeed.

My old friend, Dan Denning at Strategic Investing, captured the problem clearly in a November 5th note to clients:

What is confusing is how ANY U.S. asset prices can rise with the massive structural problems in the U.S. economy. The problems are legion. But the chief sins are:

-Chronic federal deficits ($477 billion this year) and a monstrous federal debt ($7 trillion)

-A current account deficit nearing $600 billion annually

-$9 trillion household debt, including $2 trillion in credit card debt.

These financial sins will lead to the END of the dollar standard and a global currency realignment. It’s not difficult if you put it in moral terms; You cannot spend more than you earn and get rich. You cannot consume more than you produce and accumulate wealth. You cannot borrow today and force other generations to pay without ushering in a day of reckoning.

As I said, the financial community has had its finger on this danger for years now. But when the mainstream newspapers start writing about it, you know it’s looming. Lo’ and behold, look what I found in the Washington Post this morning:

Even the possibility of a dollar crash should give Mr. Bush cause to rethink his tax policies — if the prospect of burdening his children’s generation with a massive national debt is not cause enough. Mr. Bush’s budget deficit is so big that there aren’t enough savings in the country to soak up the bonds he’s issuing: The tax cuts are the prime reason for the expansion in the nation’s overall savings deficit from 4 percent of gross domestic product in 2000 to almost 6 percent now. That gap has to be plugged by importing foreign capital, and if foreigners hesitate to provide it, the dollar falls until U.S. assets become cheap enough to lure them. This does not matter too much if the dollar’s decline is gradual, as it has been so far. But the real worry is that investors may come to see a falling dollar as inevitable, precipitating a crash.

Economists have warned of a dollar collapse for several years now, and so far their alarmism has proved wrong. But some of them also warned of a stock market bubble in the 1990s, and after suffering some years of derision they were eventually proved right.

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