Banana Republic without bananas – or a republic
By
Bill Bonner Feb 13, 2008
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Both Bernanke’s rate cuts and Bush’s ‘tax rebate’ plan have a fruity odour to them. The tax ‘rebates’, for example, will not return any money to its rightful owners. Instead, cheques will go out to 117 million people – including many who never paid any tax in the first place, encouraging those who have already spent too much to spend even more.
Where will the money come from? The Bernanke/Bush team isn’t saying. They’re so eager to avoid a serious correction that they are throwing caution to the wind. And the dollar too. Let it fly wheresoever it will – as long as it goes down.
Besides, who cares? Most of the world’s dollar reserves are held by foreigners. And foreigners don’t vote in US primary elections. “It may be our dollar,” Treasury Secretary John Connelly once shrewdly observed, “but it’s your problem.”
But overseas dollar holders are beginning to notice the tropical flavour of US finances. The dollar has lost 30% of its purchasing power during the last seven years. Against gold, oil and other key commodities – and other major currencies – it is down much more.
In many places with shady finances, this must seem all too familiar. The ‘banana republics’ did business this way themselves – running up huge debts to overseas lenders…selling off their capital assets to foreign savers… printing money by the boatload… and generally making themselves look ridiculous. Now, the kvetchers are labelling the US as “the world’s largest banana republic”. One calls the dollar a “Bernanke peso”. Another says the US is following “Zimbabwe economics”.
Here at MoneyWeek, we have been critical of the US economy in the past. But today, we rise not to carp and criticise, but to defend it: the US has little in common with a banana republic. It has no bananas. It is not a republic. And its weather is not as good.
That said, there are similarities. Real wages for men are lower today than they were 37 years ago. Robert Reich, former Secretary of Labor, writing in the FT, explains that Americans have only been able to increase their standard of living by putting their wives to work, putting in more hours on the job and, finally, going deeply into debt. In the last seven years of the Bush administration, the federal debt increased by two-thirds while US household debt doubled.
Despite all this extra spending, median real incomes have continued to go down. Practically all new jobs have been created either by government, or in housing, health care, bars or restaurants. Jobs in manufacturing are now at levels not seen since just after World War II.
“This is the profile of a third world economy,” says former Under Secretary of the Treasury, Paul Craig Roberts.
How does an economy like this keep going? It depends on the kindness of strangers and the stupidity of friends. Who but a fool or a friend would buy a US 30-year Treasury bond at a 4.28% yield? This number is only a few basis points from the number for annual increases in consumer prices, 4.4 %. So, if all goes well, investors can expect to make a return of zero on their investment over the next 30 years. And if all this talk of Zimbabwe economics and banana republic finances turns out to be true, they can expect to suffer another round of losses – measured in the trillions.
And why shouldn’t it be true? The American Empire is a bit like General Motors, says Martin Hutchinson. It has heavy fixed costs, an ageing workforce, wornout equipment, mammoth debts, and it is losing market share. At immense cost, America maintains its legions in more than 100 overseas garrisons. At home, the mobs call for bread. And every candidate for office – save Dr Ron Paul – offers more of it.
GM, of course, cannot print money. But as Ben Bernanke himself put it, the US, like Zimbabwe – where inflation is running at 150,000% – “has a technology called the printing press”. What can you expect? We would modestly predict that those 30-year T-bonds, sometime between now and 2048 when they mature, will become worthless.
Maybe sooner rather than later. Because both friends and strangers are wising up. The Gulf States have the largest foreign currency reserves in the world. But at the end of November, Sultan Nasser al-Suweidi, governor of the central bank of the UAE, told The Wall Street Journal that “the connection to the dollar has contributed much to our economy… in the past. Nevertheless, we come to a bifurcation…” Kuwait has already made a move; for its reserves it now uses a basket of currencies.
China is said to have 70% of its $1.53trn pile in dollars, but not for much longer. Cheng Siwei, vice-president of the Popular National Congress: “In terms of the structure of our international reserves, we must take advantage of the appreciation of strong currencies in order to offset the depreciation of weak currencies.” ‘Sell the buck’, he must have whispered to his broker.
And in even the formerly weak currency zone of Latin America – home of the real ‘banana republics’ – the dollar is wilting. According to Mario Bodersohn, in the Buenos Aires paper La Nacion, there’s “no precedent for such an intense sell-off of a reserve currency”. Usually, it’s their own pesos, real and colons that people laugh at. Now, it’s the gringo notes that get the punchlines.
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