Global Report
The Global US Dollar Showdown

William (Bill) Buckler
Captain of The Privateer
Oct 24, 2007

Extracted from the Late October Issue of Bill Buckler's "Global Report"

The October 19 meeting of the G-7 Finance Ministers and Central Bankers in Washington which takes place in the wings of the IMF/World Bank meetings stands as one of the pivotal post WW II meetings. The European Union appears to have had its fill of false American protestations to the effect that the US has a "strong Dollar policy". The US has had no such policy for a long time. The US Dollar has been falling since early 2002 and the Bush Administration has done nothing to support it.

The Word from Europe is "Extreme":

On October 15, the President of the European Central Bank came out and said that he was paying "great attention" to American statements in support of a "strong US Dollar". The previous week he had said that he was paying "extreme attention". This is not so "coded" speech to the effect that the US Dollar is in danger of losing EU support.

A Matter of Balance - A Matter of Scale:

Over the past six years, Europe has added jobs at a faster rate than has the US. It has had a much lower budget deficit than the United States and is now posting higher productivity gains and a $US 3 Billion annual trade surplus as well as a global current account surplus. The US stands with a current account deficit of $US 860 Billion annually, about 6 percent of GDP. It is the US which is out of balance with the world, not Europe.

The Bernanke Fed's recent interest rates cuts while the US Dollar hovered near all time historical lows shows that the international value of the US Dollar is today only being held up by the courtesy of others - mainly Europe. Japan is not helping while it holds it official interest rates at 0.5 percent and fosters the "carry trade". China is holding down its currency.

The Importance of True Global Scaling:

The European Union (EU) stands with a $US 16 TRILLION plus economy and is the largest trading bloc in the world accounting for nearly a third of the global economy. The $US 13.8 TRILLION US economy accounts for 27 percent, Japan 9 percent and China less than 6 percent. Europe is the creditor nation, the US is the debtor nation. Unless this fact is kept firmly in mind, the events surrounding the G-7 meeting which starts on October 19 will, on the surface, not make any sense at all. The US, of course, will maintain the facade that it is still the number one in the world, at least for internal consumption. The Europeans will see straight through this as empty and hollow blustering. What the EU wants to see is direct and concrete US actions to rein in its ongoing internal credit expansion.

The US wants to reaccelerate that same credit expansion. There is a huge collision ahead.

Listen to the US Dollar - TIC, T-I-C:

August was the turn of the tide. The latest US monthly net TIC (Treasury International Capital) flows include all non-market flows, short-term securities and changes in banks' US Dollar holdings. This measure of US net foreign capital outflow(!) was $US 163 Billion in August compared with an inflow of $US 94.3 Billion in July. This is a net turnaround in the money flows across US borders of $US 257 Billion! This is what The Privateer has analysed and forecast would happen if the US continued on its present course. The fact that this outflow is now happening is, of course, to be seen by the huge fall in the international value of the US Dollar as well as the global increases in US Dollar commodity prices. The US Dollar is now falling against most currencies, against most global commodities and against Gold.

The Data of this US Turn is Drastic:

The August US TIC flow compares with the $US 57.59 Billion trade deficit during the month as reported last week by the Commerce Department. Foreign official institutions such as Central Banks sold a net $US 29.7 Billion of Treasuries, up from net sales of $US 6.9 Billion during the previous month.

For US equities, net foreign sales totalled $US 40.6 Billion in August, compared with purchases of $US 21.2 Billion the previous month. For US corporate bonds, net foreign sales were $US 1.2 Billion in August versus purchases totalling $US 4.5 Billion in the previous month. Net foreign sales of long maturity securities accelerated to $US 85.5 Billion in August, following sales of $US 2.7 Billion in July, according to the US Treasury Department report. Foreign official holdings of US Treasury bills, notes and bonds fell to $US 1.428 TRILLION in August from $US 1.453 TRILLION in July.

Japan remained the largest holder of US Treasury securities, though its holdings fell to $US 585.6 Billion in August from $US 610.4 Billion. China was still the second largest world holder of US Treasuries. Its holdings declined to $US 400.2 Billion from $US 409.0 Billion. Great Britain remained in third place, with holdings increasing to $US 244.0 Billion from $US 210.6 Billion. The US has to borrow $US 2.1 Billion a day to finance its huge trade gap. But the money outflows from the US have begun. The US cannot even gain the funds internationally to cover for its own monthly trade deficits. Something has to give. The main item which is "giving" and will "give" more is the international value of the US Dollar.

Washington - October 19, 2007:

As he prepares to host the G-7 Finance Ministers and Central Bankers in Washington on October 19, US Treasury Secretary Paulson has had his ability to fight back undermined. He cannot point to a strong US economy as mortgage defaults and foreclosures roll like a threshing machine across the US economy. He cannot point to a "strong US Dollar" as its fall in the 12 months through September has caused US import prices to increased by 5.2 percent. Over the past year, US producer prices rose 4.4 percent, compared with a 2.2 percent rise in the 12 months through August. He cannot point towards US corporate earnings, as S&P 500 earnings estimates have dropped significantly since the beginning of the quarter. In the aggregate, US corporate earnings are now expected to have increased only 0.7 percent during the third quarter. He had also better not call attention to either the Dow or the S&P 500 as good places to invest. The US "price to book ratio" of the S&P 500 index is now at 4.04 - compared with 1.73 in 1987.

Have NO doubts whatsoever. The other G-7 Finance Ministers and Central Bankers have already looked at all the numbers that you have read on this page. They all know that the US cannot handle this.

The other G-7 Finance Ministers and Central Bankers know that the US cannot keep doing what it has done over recent decades. A continuation will inescapably lead to a massive fall in the US Dollar.

That is why THIS G-7 meeting in Washington on October 19 is of true world changing importance.

Resetting - A Subprime US or a US Foreclosure:

Geo-monetarily as well as geo-financially, the US is now, in principle, in the same position as any American who has had a subprime loan at low teaser interest rates for some years. In the case of the US, the "subprime" loan goes back decades during which the ever climbing debts owed were easy to carry because of the very low interest rates. But now, these low international interest rates which the US has had to pay are going to be reset at much higher rates. Either that, or as the economic inverse of same, the US Dollar is set to fall massively if the international interest rates the US pays are not raised drastically.

There is only one alternative to this. It is that the US as the borrower, and the other G-7 members as the lenders, sit down at their Washington meeting and jointly agree to a bail-out plan for the US. This will in the first instance require a real currency swap from the EU, Japan and others (perhaps with China participating) of gargantuan proportions. A currency swap at this level, the Central Bank level, is essentially a swap of two currencies with the US Treasury getting a huge sum of Euros from the ECB and other Central Banks and the ECB (and the other Central Banks) getting a matching sum of US Dollars. The US Treasury signs up for its side of this swap, in effect a huge international Euro loan, and uses the borrowed money to support the international value of the US Dollar.

It does this with conditions. While supporting its Dollar, the US also acts to bring its federal budget into balance with revenues and then into a real fiscal surplus. This US surplus is then used to pay down the Euro currency swap. Inherently such a US currency swap with the EU has to be long-term, taking into account the enormous US debts owed. Meanwhile, the US Dollar maintains its value against the Euro.

Also inherent in such a huge Euro currency swap is the dire necessity for the EU (and the other participants) NOT to sell any of the enormous amounts of US Dollars received in the swap. After that, it is incumbent on the US Treasury that these US Dollars now held by "foreigners" will NOT lose their international purchasing power. Otherwise, a situation arises where the US once again defaults on its international debts through a currency depreciation. But such a gigantic bail-out of the US has some chance to work IF the US does its part. With the stabilisation of the international value of the US Dollar, other nations will have less incentive to sell it into oblivion in a US Dollar global panic. Of course, the US doing its part would make necessary a global geo-strategic pullback from all its 760 odd military bases around the world. This would include those now in Iraq, in Afghanistan, in Europe, in Japan, in South Korea and in many other nations. This is by no means historically unique. It is precisely what happened to Great Britain after its failed attack on Egypt in 1956. President Eisenhower simply moved to end the US credit line to Great Britain. Since Britain was then in a position where it could no longer borrow from the US, it could also no longer funds its own empire. Great Britain spent the next decade folding its former global empire up and withdrawing its armed forces.

Regrettably, with President Bush in charge of the US, the chances of THIS currency swap are next to nil.

The Alternative is Foreclosure USA:

Nothing better demonstrates the vehement denial of plain facts by the US Political Establishment than its recent moves to raise the official US debt ceiling by $US 850 Billion to almost $US 10 TRILLION as well as cutting US official interest rates by 0.50 percent! To follow that by going out and borrowing more is absurd. But that is what the US Political Establishment intends to do. That points the US and the rest of the world which has to lend the US the money towards an international version of foreclosure.

Foreclosing on the US not only means that the rest of the world stops lending more of its money to the US but also that the rest of the world starts showing up in the US and demanding repayment of all the past loans! This has now started happening as shown by the "TIC" data already reported. The US financial system will not be able to handle a situation where the world demands that they begins to repay debts. US market interest rates would soar, as would US Treasury rates. An instant US recession follows.

The Growing Spectre of US Foreign Exchange Controls:

If an accelerating outflow of funds now held by foreigners inside the US were to start, it is a near certainty that at some point in this accelerating outflow, the US would act to institute a version of FOREIGN EXCHANGE CONTROLS. In effect, these would prohibit funds owned by foreigners from leaving the US. For all those who had lent to the US, that would be a global catastrophe.

The recent freeze-up in the global interbank payments system would be small potatoes in comparison because the flow of money across the world's borders would also start to freeze up. Many smaller nations in this bind would promptly institute their own national versions of foreign exchange controls and some of them would simply seize American assets inside their borders and sell them in their own local markets, using the proceeds from the sale to compensate their nationals from the losses they had suffered from having their money blocked by the US. International trade and air travel would come to a shuddering halt. Factories beyond number would be standing still because required foreign components would not be arriving. Economically, most nations would be thrown backwards to function upon the productive means presently existing inside their own borders. Deep recessions and outright depressions would follow.

Lots more follows for subscribers.

October 2007
William (Bill) Buckler
Captain of The Privateer
email: capt@the-privateer.com

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