In response to overnight comments
from the G7 nations, the U.S. dollar plunged to a three-year low against the
Japanese yen, a six-year low against the Australian dollar and an eight-year
low against gold. New six-year lows in key European currencies seem only days
away, as well. This potential change in Japanese dollar policy is perhaps the
single most significant event baring on the U.S. economy and U.S. financial
markets. The fact that only moderate declines in U.S. stock and bond prices
resulted is further evidence of the complete ignorance among rank and file investors
of the potential risks to the U.S. economy if monetary support from abroad is
not maintained at current levels.
The American economy is based on
consumption, which, in turn, is made possible by access to low-cost foreign
products and financed by inexpensive and overly-abundant foreign credit. Without
the support of foreign governments, foreign savers will become increasingly
unwilling to lend to Americans on such favorable terms. The dollar will plunge,
sending interest rates and consumer prices soaring and our consumer-driven U.S.
economy will collapse like the house of cards that it has become. As industries
built around retail sales, real estate, and consumer credit implode, unemployment,
defaults, bankruptcies and foreclosures will become wide-spread. State and federal
budget deficits will explode well beyond their already outrageous levels, and
a self-perpetuating spiral of accelerating inflation, rising interest rates,
collapsing stock and real estate prices, and severe recession shall ensue.
China, and its continued willingness
to artificially support the dollar, is now the main factor sustaining the U.S.
economy and preventing this dire scenario form unfolding. It is ironic that
American politicians are now attempting to jawbone China into pulling that plug
by floating its currency. Perhaps they are so fearful that the Chinese might
actually float the yuan, thereby sinking the U.S. economy, that they feel the
only way to prevent such an action is to demand that the Chinese abandon their
peg. This bit of reverse psychology would force the Chinese to continue the
peg so as not to appear to be caving in to American pressure. However, I have
a hard time attributing that much intelligence and foresight to our elected
American inventors, oblivious to
the underlying perils of the U.S. economy and embracing an imaginary economic
recovery of their own creation, have once again bid equity prices up to dazzling
heights. As I have been writing for some time now, the window for getting out
of U.S. dollar assets continues to slowly close and the prospects of a spectacular
stock market crash loom larger with each passing day.