• If the U.S. economy is going to fail, it’s going to have to wait. Stocks are going up. Oil is going up. U.S. bonds are going up. What isn’t going up? The dollar.
Warren Buffett says the dollar is going down further.
“The evidence grows,” says the Sage of The Plains, “that our trade policies will put unremitting pressure on the dollar for many years to come.” His company, Berkshire, made more than half of its 2004 pre-tax profits from betting against the dollar. Buffett thinks there is more money to be made selling the dollar:
“There are deep-rooted structural problems that will cause America to continue to run a huge current-account deficit unless trade policies either change materially or the dollar declines to a degree that could prove unsettling to financial markets….
“Our country that is now aspiring to an ‘Ownership Society’ will not find happiness in — and I’ll use hyperbole here for emphasis — a ‘Sharecropper’s Society.’ But that’s precisely where our trade policies, supported by Republicans and Democrats alike, are taking us.”
• The trade deficit last year came to $617 billion, up from $495 billion the year before. It is rising as fast as the money supply…and as fast as California houses. Alan Greenspan told Congress that this represented no “crisis,” just a “serious problem.” He is right. It is a serious problem on its way to becoming a crisis. Greenspan hopes it doesn’t get there before next January, when he leaves office.
Like so many of the other things that Greenspan tells the politicians — the Fed chairman’s remarks on America’s trade/current account deficits were carefully crafted to deceive. He told the pols, for example, that even though deficits must be funded from overseas, it makes little difference if foreigners or Americans themselves lend the nation money. It makes little difference to God, we suspect. But it makes a big difference to Americans. If we borrow $50 from our children, the family’s net financial position is unchanged. But if we borrow it from an outsider, the family has a $50 obligation beyond the family itself. Each time we make an interest payment, the money passes to outsiders and we are that much poorer.
Likewise, he says we needn’t worry about the deficits because America’s economy is so “flexible” and so able to “deal with shocks.” He must know, but does not mention, that its flexibility is only in its credit joints — which stretch remarkably. Each time the country is threatened with an economic shock, since Greenspan has been at his post, the reaction has been to stretch credit. The shock has not really been dealt with; it has only been made worse, and postponed. The crisis will still come; it will be even more severe because people owe more money.
• From colleague, Dan Ferris:
“A quote I came across that might appeal to you guys watching the real estate bubble. This, from Chief Flying Hawk who died in 1911:
‘The Tepi is much better to live in; always clean, warm in winter, cool in summer; easy to move. The white man builds big house, cost much money, like big cage, shut out sun, can never move; always sick.’
“That about sums it up, doesn’t it?
Well, if we all lived in teepees, Fannie Mae might now have gotten into such a pickle…even more severe accounting problems have been uncovered at the mortgage giant, raising their total of estimated losses up $2.8 billion to almost $12 billion dollars!
This is starting to seem more and more like Enron, Part Deux every day…
Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century.