The Future of the Dollar and why it must fall

I have been reading articles talking about how the Russians, Chinese, Brazilians, Indians, Australians and other countries are moving away from using the dollar as the world's reserve currency. Many are complaining that these countries are turning their backs on us; but, that is not a fair comment. Why should they use the dollar as the reserve currency when we are inflating it?

Imagine this scenario. Your neighbor lends you $1,000, you take that money and buy yourself a television set. You are supposed to pay your neighbor $110 a month for ten months; but, each month you delay paying him, you actually pay him less because inflation is going at 20% a month. You are cheating your neighbor by paying with money that is worth less than the value of the money at the time you borrowed it.

Now lets consider what went on with our economy and the dollar. After World War II the oil producing nations agreed to only use dollars when people bought oil. So, if China wanted to buy oil they had to have dollars. After going off the gold standard, the dollars ceased being backed by anything other than a trust that the United States would produce more valuable goods to be sold oversees than it produced dollars.

Ever since the 70s this has been and less true as we have sent our industry oversees where there was cheaper labor and less control over environmental concerns. The same is true for England. The 70s in England were horrifying with very high unemployment and the elimination of their industrial infrastructure. Instead of manufacturing things, England and the United States began making their money from other countries by controlling the world's financial transactions. Basically, banking and insurance. By scamming the financial industry, these countries were able to buy cheap manufactured goods and getting a percentage on all the transactions; but, it also meant higher unemployment and less and less use for lesser skilled employees. It increased the separation between the wealthy and the poor. Only those involved in the financial section really benefited.

Warren Buffet saw this coming and warned us about it. He noticed that CEOs were paid whether the companies succeeded or not based merely on their manipulation of the stock market. The businessmen involved in manufacturing stopped understanding their businesses because they were replaced by "financial experts" who made more from financial transactions then they did from running manufacturing companies well. This was glaring clear in the case of General Motors which made more from servicing loans (including home loans) than they did from manufacturing cars. That is a bad business plan for any country. This led to corporate raiders, people who would take over companies just to sell off the parts for short term gains.

Because the dollar was the world reserve currency, we could get away with cheating other nations and playing the inflation game; but, that time is now coming to an end and we don't have any way to pay our debts with goods or labor (and in the end money is merely a promise of future goods or labor). Cyprus basically made it's money in a similar manner, it was laundering foreign money for a price. As the day of reckoning comes there are only so many options.

We could pay off our foreign debt by selling our natural resources or our infrastructure. We could pay off our debt by eliminating social programs and turning into a third world nation where half our population lives without the basics. We could tax the wealthy more. The truth is taxes and the elimination of social programs will still not give us enough to pay off our debts. The last choice is to declare national bankruptcy, refuse to pay our debts. Now if America defaults on it's national debt, who would ever lend us money (buy treasury bonds) in the future? Why would the rest of the world allow the US and England to control the financial industry? They wouldn't and then we have no industry of significance. No work and no income.

The housing bubble was intentional as I said many years ago. It came into being after 911 when the inherent weakness in the western economies became apparent. The solution was to create an artificial bubble in the economy, the last hurrah of the west. People made insane amounts of money building, buying and selling and other things related to the housing bubble. We were manufacturing houses using Americans and selling at continually inflated prices that had nothing to do with someone's ability to pay. These debts were then packaged and sold to banks worldwide. These bad debts were called derivatives. Because of the housing bubble bursting (people not paying their mortgages), these derivatives have lost much of their value.

So I ask again, why should foreign countries want to buy dollars when we have nothing to sell them that is as valuable as what they sell us? If you lived in China, would you want to trade your labor for dollars when you cannot buy anything with them from America and you can buy oil without using dollars?

The world will and is going off the dollar standard. The question now becomes what replaces it so that international trade will continue. The choices are a gold backed Chinese Yuan or an international standard for currency that no longer allows for individual nations to manipulate the value of the currency. This discussion is being played out for those who don't understand economics in the media. The arguments over ending welfare or reducing the military or increasing taxes are merely theater.

Detroit and Stockton, who decides?

Short post; but, something that has been on my mind. I have read lots of stories about how because Detroit is so bad off, the state is going to take them over. This is quite legal as cities and towns are merely "creatures of the state". They get a state charter to exist. In California, the City of Stockton is seeking bankruptcy in Federal court. This means that the State of California must have consented to the city declaring bankruptcy and is willing to let a federal judge determine how a city in California will be run. Most of the chatter in the media is about whether or not the judge will take public pension funds (that are not city owned) and use them to pay down the city's debt. The bigger question is why the state is not taking over Stockton and managing it, itself. Think about this, can a state declare bankruptcy? If they did, the federal judge could put whoever he wanted in as governor (under the title of financial manager or whatever). I don't believe a state can declare bankruptcy unless it abdicated it's roll as a state.

Now here is the thing. Would you think it was okay if the federal judge took 5% of all the bank accounts in Stockton to pay the city's debts? You would be outraged. Stockton does not have it's own pension plan, it places the employees and city's contributions into the state plan. It is a private bank account, for the employees that is managed partly by the state. It is it's own entity, it is not controlled or owned by the City of Stockton. But, Stockton is owned by the state, all cities are in California.

This is one to watch. Stockton itself is small and meaningless, just like Cyprus. It is the precedent that is being set that tells the tale. In 1975, New York City was looking at declaring bankruptcy, the Teachers Pension Fund lent it $150 million (quite a lot at the time). Today, New York would like to not pay in to the same fund. People here are just arguing over whose bank account gets robbed and that is a shame. It is also a distraction from the biggest issue, the federal government controlling local governments with the permission of the state.