Lawrence Summers: u2018Recession... For the Rest of This Decade and Beyond'

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Lately it seems
as though everyone wants to take a poke at the dollar. Last week,
it was the Brazilian supermodel who demanded euros for her jaunts
on the catwalk instead of USD. The week before that, hip-hop impresario,
Jay-Z, released a video dissin’ the dollar and praising the euro
as the "baddest Dude in the ‘hood."

Lambasting
the greenback has become trendy. It’s a favorite pastime of politicians,
too. At the November OPEC meeting in Riyadh, Iran’s president Mahmoud
Ahmadinejad asked the assembled finance ministers to “study the
feasibility of selling oil in another currency.” Ahmadinejad disparaged
the dollar as “a worthless piece of paper."

The fiery Venezuelan
President, Hugo Chavez, followed Ahmadinejad’s lead predicting that
the demise of the dollar would mean the “end of the Empire.”

Hugo may be
on to something. The dollar is America’s Achilles heel; if the dollar
tanks, so does the empire. That means the taxpayer will have to
foot the bill for Bush’s bloody-interventions in Iraq and Afghanistan,
rather than the Chinese. That also means that the US will have to
export something of greater value than Daisy Cutters and gulags.
That could be a tall-order, now that Bush has boarded up the factories,
hollowed out the industrial base, and outsourced 3 million manufacturing
jobs. We’ll have to scrape the rust off the machinery and get back
into the widget-making business like we were before the Free Trade
fiasco.

Central banks
across the globe are trying to figure out how to ditch their dollar
reserves without triggering a stampede for the exits. No one wants
to see that. But, then, nobody wants to be stuck with vaults full
of Uncle Sam’s green confetti either. So, the question arises; What
is the best way to divest oneself of $5.6 trillion (total USD held
overseas) before the Lusitania capsizes?

Kuwait, Venezuela,
Iran, Russia, and Norway have already opted to ignore the destabilizing
effects of “conversion” from dollars and are in some stage of divestiture.
Others will follow. The UAE, Bahrain, Qatar, Oman and Saudi Arabia
are considering switching from the dollar-peg to a basket of currencies
so they can hedge against the inflation that’s battering their economies.
It’s only a matter of time before the Petrodollar System — which
links the dollar to petroleum sales and creates a de facto “international
currency” — unravels completely, precipitating the final collapse
of Breton Woods.

Talk of America’s
impending currency disaster is no longer relegated to the Internet
blathershere. Mainstream journalists have joined the chorus and
are sending up their own red flags. The UK Telegraph’s economics’
editor, Liam Halligan, made this grim observation in his recent
article, “Bet Your Bottom Dollar Tensions Will Follow”:

“The importance
of “dollar divestment” cannot be overstated. At the very least it
means the greenback has much further to fall — plunging the US into
recession. But it begs a bigger, more alarming, question. How will
Washington react to the end of the US hegemony?”

The dollar
was savaged by the monetary policies of the Federal Reserve. The
Fed’s policies were designed to coincide with Bush’s Middle East
Crusade. They were supposed to work like two wheels on the same
axle. The administration believed that, by 2007, the military would
need only 30,000 or so troops to maintain security in Iraq. That
would give Bush’s legions the chance to turn east and push on to
the next target-state, Iran. If things went according to plan —
and no one thought the high-tech US war machine could be stopped
— the US would control two-thirds of the world’s oil. This would
allow America to keep writing bad checks on green paper for the
next century.

But then, of
course, the plan hit a snag. The Iraqi resistance mushroomed, the
US got bogged down in an “unwinnable” war, and the once-mighty dollar
shriveled into nothingness. Now we’re at a turning point and our
leaders are in a state of denial. Bush is still playing Teddy Roosevelt,
while Paulson and Bernanke are just plain shell-shocked. They probably
know the game is over. As the dollar continues to wither; the frustration
is beginning to mount in Europe. Liam Halligan sums it up like this:

“Europe has
finally had enough of America’s “benign neglect” dollar policy.
As a large economic area, with a floating exchange rate, the eurozone
suffers most. Over the past seven years, the single currency has
risen by a shocking 82 per cent against the greenback. That’s hammered
eurozone exports — provoking serious trade disputes between the
EU and US, the world’s two biggest trading blocks. No wonder French
President Nicolas Sarkozy describes America’s drooping dollar as
“a precursor to economic war." (UK Telegraph, “Bet Your
Bottom Dollar tensions Will Follow”)

Sarkozy is
leading the charge for “intervention”; the buzzword for shoring
the greenback through exchange controls and buying up billions of
dollars. But it’s a risky business; especially when net capital
inflows — which are the monthly purchases of US-backed securities
and Treasuries — have gone negative for the last two months. That
means the US isn’t attracting enough foreign investment to finance
its trade deficit. So the dollar will have to fall to compensate.

So, how much
loot is Sarkozy willing to put up to keep the dollar from slumping
further — $100 billion, $500 billion, $1,000 billion? And where’s
the bottom?

The fact is,
the greenback took a “header” down the stairwell and by the time
it picks itself up, it could be eye to eye with the peso. Who knows?
Maybe its time we all learned Spanish?

More than two-thirds
of all sovereign foreign exchange holdings are denominated in dollars.
When those dollars are converted into back into foreign currencies
and start recycling into the US; we’re in deep trouble. Inflation
will soar. Surely, the Fed must have known this day would come when
they were pumping trillions of dollars into subprime mortgages and
complex debt-instruments which served no earthly purpose except
to fatten the bottom line for rapacious bankers and hedge-fund managers.
The Fed also knew that the nation’s wealth was not being “efficiently
deployed” for capital improvements on factories, technology or industry.
Oh, no. That would have ensured that America would remain competitive
in the global marketplace into the new century. Instead, the money
was shoveled into the bottomless sinkhole of stucco homes with composition
roofing and toxic credit default swaps.

The stock market
lost another 237 points yesterday; the third 200-plus slide in a
week. Now all three indexes are down more than 10% since their record
high on Oct 9. Treasury yields are plunging as investors flee the
stock market looking for safety. That means the Fed will have to
slash rates again at its December 11 meeting to provide more low
interest crack for the investor class. Traders see an 82% chance
that Bernanke will cut the Fed Fund’s rate by another quarter point
to 4.25%. All that is likely to do is put the dollar into free fall
and send food, oil and gold prices to the moon. It won’t pay off
the overdue mortgage payments and it won’t remove the billions of
dollars of debt from the banks’ balance sheets. It’s pointless.
The US is headed for a “hard landing” and its dragging the rest
of the world along with it.

Harvard Economics
professor, Lawrence Summers offered this sobering warning yesterday
in an article in the Financial Times, “Wake up to the dangers
of a deepening crisis”:

“Three months
ago it was reasonable to expect that the subprime credit crisis
would be a financially significant event but not one that would
threaten the overall pattern of economic growth. This is still
a possible outcome but no longer the preponderant probability.
Even if necessary changes in policy are implemented, the odds
now favor a US recession that slows growth significantly on a
global basis. Without stronger policy responses than have been
observed to date, moreover, there is the risk that the adverse
impacts will be felt for the rest of this decade and beyond. Several
streams of data indicate how much more serious the situation is
than was clear a few months ago.”

We’re doomed.

November
29, 2007

Mike Whitney’s
[send him mail] lives
in Washington state.

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