At the Mercy of Serial Bubble Blowers

By May 7, 2012, 8:16 AM Author's Blog  

The shrinking dollar is a modern problem. The U.S. dollar has been shrinking since the inception of the Federal Reserve — the very crew assigned the task of maintaining its value. Of late, the decline is accelerating at an alarming rate.

For many Americans, the suggestion that the dollar is losing value is unthinkable — even unpatriotic. The problem is not simply a lack of understanding about the nature of wealth and investment used to sustain it.

Our policy makers and economists make no distinction between wealth created through savings and investment in the real economy versus “wealth” created in the markets through asset bubbles brought about by credit policies.

When I tell people this, I feel like I’m addressing a meeting of folks who want to lose weight at the local burger joint. We as individuals — and as a nation — are addicted to cheap, easy credit. What the government gives, we’ll take. We spend at a high level, and we want to accumulate wealth on the same fast track.

Forget hard work, we’d rather our house go up in value like magic! Traditionally, economists recognized that it took time to build an estate. People and countries could build wealth slowly. Those days are far, far behind us. Now we are at the mercy of what I call serial bubble blowers.

All the U.S. economy’s so-called improvements stem from one main reason: all economic growth during the “recovery” since 2001 can be traced to a seemingly endless array of asset and borrowing bubbles.

First, we saw the stock market bubble, then the bond bubble, then the housing bubble, then the mortgage refinance bubble, then the commodities bubble. Now another bond bubble approaches.

In between, we haven’t seen a single sign of stable, sustained growth. And that makes sense; consumer spending has been surging in excess of disposable income for years. That’s not real growth.

Right now, Washington thinks that another round of stimulus will solve the problem. That’s like saying that overeating will eventually lead to serious dieting. Consumer spending isn’t juicing the economy.

Meanwhile, since the government is broke, all the borrowing they do to fund stimulus, tax cuts, and anything else to save the economy puts us at the mercy of foreign investors. If and when they decide to slash their investments in U.S. dollars or Treasury securities, we’ll have a crash landing worse than anything we’ve seen yet.

It’ll be far worse than Lehman Brothers’ collapse, far worse than 2008’s aftermath.

We depend on foreign investors for everything. Be they private, institutional, or governmental, we need them. If the dollar’s fall frightens foreign owners, they will sell from this immense stock of dollar assets.

But how big are these foreign holdings? You rarely hear about this on financial news channels, so you probably don’t think it’s a big deal. In fact, it’s a big fat deal.

We’re sitting on $15.4 trillion in debt. How is it going to get paid? And by whom?

Back before 1970, foreigners held a 5 percent slice of U.S. public debt. Today foreigners hold nearly half the pie. And the government owes a bunch of it to itself — $4.6 trillion — including what it’s borrowed from the Social Security trust fund.

Is Washington at all alarmed? While the end of 2011 did culminate in near-monthly government shutdown threats, we expect the debt ceiling to go on being raised as it was under every presidency since, well, 1917, when we had a World War to finance.

At last count, it’s been raised 74 times. And lest you believe the crisis came to a head in the Obama administration, we’d like to point out that he’s only raised it three times so far. Famed fiscal conservative Ronald Reagan raised it a whopping 18 times. So you see borrowing to spend is everyone’s favorite game. Darn all the consequences.

By Addison Wiggin and Samantha Buker

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