The Dollar and Its Viability

With the total Government Debt, inter and intra, going towards 120% of the GDP by the year 2012, we now suspect that the dollar will disappear. That being the case one may no longer be safe with even hard assets in the US.

The UK Independent states:

"The Chinese believe, for example, that the Americans persuaded Britain to stay out of the euro in order to prevent an earlier move away from the dollar. But Chinese banking sources say their discussions have gone too far to be blocked now. "The Russians will eventually bring in the rouble to the basket of currencies," a prominent Hong Kong broker told The Independent. "The Brits are stuck in the middle and will come into the euro. They have no choice because they won't be able to use the US dollar."

Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years' time. The current deadline for the currency transition is 2018.

The US discussed the trend briefly at the G20 summit in Pittsburgh; the Chinese Central Bank governor and other officials have been worrying aloud about the dollar for years. Their problem is that much of their national wealth is tied up in dollar assets."

This is or should be a terrifying change since the need for dollars will disappear and thus so too will China. It is our belief that if the current Administration does not turn to a lower spending profile quickly, it will cause the US economy to implode.

The New Yorker article on Summers et al is an example of the hubris that this team has brought to the White House. In many ways it is akin to McNamara and the Kennedy White House. The article states:

"There were sound arguments why the $1.2-trillion figure was too high. First, Emanuel and the legislative-affairs team thought that it would be impossible to move legislation of that size, and dismissed the idea out of hand. Congress was “a big constraint,” Axelrod said. “If we asked for $1.2 trillion, it probably would have created such a case of sticker shock that the system would have locked up there.” He pointed east, toward Capitol Hill. “And the world was watching us, the market was watching us. If we failed to produce a stimulus bill, that in and of itself could have had deleterious effects.”

There was also a mechanical argument against a stimulus of that size. Peter Orszag, who was celebrating his fortieth birthday that day, said that, while the argument for a bigger stimulus was sound theoretically, there were limits to how much money the government could practically spend in the near future."

Namely, there really was no logic to the number at all. We stated that when we analyzed the Romer paper last January. It mad no sense then and even less now. We are on a road to perdition, and the dollar will be one of the final victims.