Global Economic Crisis

If anyone really believed that Federal Reserve Chairman Ben Bernanke was not deliberately destroying the intrinsic value of the American dollar through his recklessly loose monetary policies, the current downward spiral of the greenback is abundant evidence to the contrary. Most telling, despite severe fiscal problems in the Eurozone, even the wobbly euro is gaining strength in significant measure against the U.S. dollar.

It is not only against the basket of foreign currencies, including those considered weak, that the American dollar is winning the dubious race to the bottom. Commodities across the globe have risen sharply against the dollar. This is reflected not only in the price of known hedges against price inflation and currency manipulation such as gold and silver. A diverse range of resource commodities, including oil and natural gas, minerals and basic foodstuffs have increased in their dollar price. With the U.S. dollar remaining (for now) the global reserve currency, the morbidly inverse ratio between the plummeting value of the dollar and rising cost of commodities has had severe negative repercussions across the globe, both economically and politically. The current unrest sweeping the Arab world is at least in part due to rising food prices precipitated by Bernanke’s deliberate policy of eroding the value of America’s dollar.

My read of this situation is that the Federal Reserve is in a panic. They know that the American fiscal imbalance is unsustainable, and it seems Bernanke and company are deliberately eroding the value of America’s currency in order to default stealthily on the nation’s massive foreign debt, which the Fed knows can never be repaid, at least in terms of real value as opposed to nominal repayment. Inflation is the direct outcome of the Fed’s quantitative easing and monetization of the debt. The American taxpayer and consumer is being sacrificed, at whatever the cost, in order to inflate away that portion of the U.S. national debt which cannot be repaid.

The fools at the Federal Reserve really believe that China, OPEC and other foreign creditors are going to accept the destruction of their investment in U.S, Treasuries lying down, and that the U.S. dollar will forever remain the world’s reserve currency. I think that sooner rather than later future developments will render inoperative all the flawed assumptions of Ben Bernanke and his wrecking crew, otherwise known as the Federal Reserve.

Two contradictory financial trends are in evidence, in effect the Ying and Yang of the global economic crisis. The NYSE has experienced a steep Bear Market rally from its March lows, setting the stage for the Dow Jones to pass above the 10,000 level. On the other hand, the American greenback is plunging to new lows, having previously demonstrated impressive strength as a safe haven when the global economy imploded after the demise of Lehman Brothers.

Actually, there may be less of a contradiction than meets the eyes. If the U.S. national debt and annual budget deficits continue to expand with reckless abandon, it is inevitable that global market forces, especially the bond market, will set in stage a deep contraction in the U.S. dollar’s relative value. The apparent replacement of the Japanese yen by the U.S. dollar as the preferred vehicle for the carry trade seems to point in the direction of growing weakness. In that scenario, equities may, for a time, become the new flight to safety for investors.

The rise in equity prices may reflect an inverse relationship to the decline of the value of the American dollar, as opposed to a realistic market appreciation of economic fundamentals. Now, when the value of both the dollar and the Dow Jones plummet, what would that convey?

A global economic depression, most likely. At present, however, the inverse relationship of the U.S. dollar and NYSE merely reflects a synchronized global recession.  The dangerous moment will come when the world’s central banks begin to engage their long-speculated exit strategies. Then, I think, we will witness volatility with both the American dollar and equity prices.

Russian President Dmitry Medvedev, who hosted the BRIC summit, had told journalists prior to the meeting that present policies which maintain the role of the U.S. dollar as the world’s reserve currency ” have not managed to perform their functions.” Senior economic advisors from other BRIC nations, especially China, have also expressed the viewpoint that the status of the U.S. dollar as the only global reserve currency can no longer be unchallenged. It is therefore no surprise that the BRIC summit addressed the greenback in its official communique.

“We also believe there is a strong need for a stable, predictable and more diversified international monetary system,” the BRIC leadership tersely stated. Reading between the lines, the BRICs largely blame the United States for the global financial and economic crisis and believe that the malfeasance of U.S. fiscal and regulatory policies has abrogated the previously unchallenged status of the U.S. dollar as the standard reserve currency.

The BRIC has just held its first summit, and has emerged with a pointed gun aimed at the U.S. dollar. Not that this newly formed geopolitical bloc will immediately seek to diminish the U.S. dollar, considering in the short-term they themselves would be negatively affected, China in particular, which holds nearly a trillion dollars of U.S. dollar denominated Treasury bills. However, the handwriting is on the wall. With a growing perception among key economic players across the globe that the U.S. budget deficits are raging out of control and will inevitably spark high levels of inflation, this new power bloc is already planning for the day after the supremacy of the once might American greenback has been terminated.