The Fed faces a choice: suffocate the economy or destroy the dollar. Foreign lenders head for the door.Robert Morley. Columnist
Most Americans have no idea what is happening to the economy. Many people think America is emerging from a vicious little recession, and will soon be back on the road to prosperity. America always has, so it always will, is the common reasoning.
Yet this time, things may turn out very different.
On January 8, cnbc reported that the U.S. Federal Reserve purchased an unprecedented 80 percent of all U.S. treasury securities issued in 2009.
This is earth-shaking, game-changing news with possibly lethal repercussions. Here is why.
During 2009, the federal government ran a $1.4 trillion deficit—the largest deficit in the history of both America and the world. It was over three times the size of the previous year’s record-breaking deficit. And if the government has its way, 2010’s deficit may be even greater.
Since Americans save so little money, foreigners have come to provide almost all of the federal government’s borrowing needs in recent years. They accomplish this by purchasing U.S. treasury bonds. This was something foreign nations were happy to do since they earned interest on their money. Plus, big-spending Americans tended to spend the borrowed money purchasing foreign-made goods, so a good proportion of the money cycled right back to them.
Not wanting to give up their standard of living, Americans too willingly went further into debt, even as American industry and other wealth-producing sectors of the economy were being shut down and shipped overseas.
For example: From 2006 through November 2009, Beijing lent $527 billion to America through treasury purchases alone. Hong Kong lent an additional $100 billion. Other countries like Japan lent hundreds of billions more. Then there was the hundreds of billions of dollars they lent to government-sponsored entities like mortgage giants Fannie Mae and Freddie Mac.
During this time, American industry was being hammered. Jobs were being outsourced and offshored by the millions to places like China and India. In 2004, the Boston-based consultancy Forrester estimated that a relentless 15,000 jobs per month were moving out of America. Forrester predicts that America will see another 3.3 million jobs offshored over the coming 15 years.
But now it is as if the foreign nations see the writing on the wall. They are beginning to realize that America is addicted to debt and that their loans might never get repaid.
Now, all of a sudden America’s most important source of lending is drying up.
For five months in a row, not only has China stopped lending money to the federal government, it has actually sold some of its treasuries. Is China trying to quietly get out as much of its money as possible while it can? Even oil-exporting nations like Saudi Arabia, Qatar, Iraq and Venezuela have been net sellers of treasuries since March. Thus, two of America’s four most important foreign creditors are awol. And Japan, one of America’s other most important creditors, has massively curtailed its lending to America.
All things being equal, this exodus of foreign money would have caused massive credit contraction capable of smothering America—interest rates skyrocketing into the double digits, zombified Wall Street banks with broken business models, small businesses unable to roll over their debts, a housing market in a renewed free fall, soaring consumer bankruptcies, and unemployment far worse than the Great Depression.
But so far, this has not happened. Why? Faced with the above list of catastrophes, the Federal Reserve decided to risk the biggest catastrophe of them all in a forlorn attempt to avoid the inevitable financial reckoning.
To save the economy, the Federal Reserve would risk sacrificing the dollar.
The Federal Reserve began doing the one practice anathema to all fiat-currency-based economic systems: It began creating money by divine right. With foreigners unwilling or unable to provide the money the U.S. government needed to pay the bills, the Federal Reserve simply created more dollars from nothing by adding additional bookkeeping entries to its logs.
Remember that $1.4 trillion deficit that America ran this last year? Eighty percent of that—$1.12 trillion worth—was funny money. The U.S. government needed money, so the Fed simply turned on its digital printing presses and electronically sent over some 1s and 0s.
But the Fed didn’t just print up money to give to the government to spend. It also created close to $1 trillion to prop up asset prices in America. It printed up money to give to the big banks and to purchase toxic mortgages from Fannie Mae and Freddie Mac.
It was theft and highway robbery on the grandest of scales because the Fed did nothing to earn this money—it simply said they had the money, and it was so. Consequently, all other money in circulation became worth less. The Fed now has over $2 trillion worth of assets on its balance sheet. This is mostly money that the Fed willed into existence over the past year.
No wonder foreigners are beginning to flee the dollar. The Fed is doing what every failed fiat currency system in the history of paper money has done. When push comes to shove, the temptations of the printing press are too great. Governments always take the seemingly easy way out—simply printing up whatever money is needed, and with disastrous results that always end the same way.
Once you start down the money-printing road, it is almost impossible to turn back. The history of money printing says the dollar is doomed. It is a lesson of history that the Fed has failed to learn.
Maybe that is why the Chinese have dumped their Fannie and Freddie investments. During 2009, they took the Fed’s newly created money and ran, while the dollars still had some value remaining.
America’s foreign financial partners are beginning to abandon it. And for good reason. The dollar has lost almost a third of its value over the past decade.
But did you know that this exact scenario in which America finds itself was prophesied thousands of years ago?
Speaking of the modern nations descended from ancient Israel, of which America is currently the most geopolitically prominent, the Prophet Jeremiah warned that a time would come when America’s trade partners would abandon it despite America’s best attempts to pretty itself up and make itself look good. “And when you are plundered, what will you do? Though you clothe yourself with crimson, though you adorn yourself with ornaments of gold, though you enlarge your eyes with paint, in vain you will make yourself fair; your lovers will despise you; they will seek your life” (Jeremiah 4:30; New King James Version).
America has two choices. Raise interest rates to try and attract its economic lovers back to lend more money (which means that America’s debt payments would mushroom, potentially derailing the economy), or continue to destroy the dollar to pay off the bills. Neither option is a good one. Expect America’s foreign lovers to continue voting with their feet—as they head out the door.
