Are Americans, In Large Part, Ignorant of The coming Economic collapse?

Because that is exactly what's going to happen if the American dollar and economy are not rescued by nations that are not exactly our friends. The only reason they would come to our rescue is if a collapse of the Americans dollar would harm their own economies enough to make it worth their while.

Even if China and others decide to come to our rescue, it won't be until the American economy is hit hard enough to lower American living standards for generations to come.

Hamish Mcrae: These are perilous days for the US

Published: 14 November 2007

I don't think Americans get it. I don't think they realise quite how serious the collapse of the dollar is for the global economy, nor the long-term consequences of this decline for the position of the US in the world. Sure, they grumble about prices in London and find it odd that US lawyers want to be transferred to the UK because they can earn more money here. But at a fundamental level, to judge by the conversations I have had in recent weeks, I don't think the US financial community appreciates quite what peril it is in.

There have been periods of dollar weakness before. The most notable marked the end of the fixed exchange rate system in the early 1970s. There have been periods of excessive dollar strength too, one of which led to the Plaza Accord in 1985 – so called because the agreement by the US and other major economies that the dollar needed to be capped was reached in the Plaza Hotel in New York.

Now it may be that in another five years the dollar will be strong again and Britons who used this age of the pound above $2 to buy property in the US will feel rather smug. Maybe. At some level, the dollar will become good value again and while currencies do overshoot their true long-term values, they do bounce back.

But there seems to be at least half a dozen reasons why what is happening now to the dollar is very serious indeed.

Most obviously, the present fall is going further than previous declines. The most marked collapse is against the euro but if you measure even against sterling, a rate of $2.10 cannot be justified by the relative purchasing power of the two currencies. It may not happen, but you hear talk in the City that the rate may go to $2.40, which would be back to the old dollar/sterling rate under the fixed exchange rate system. The greater the decline, the greater the disruption to the world economy.

Why such a large fall? That leads to the second feature that distinguishes this bout of weakness: the US current account deficit is much larger both in absolute terms and as a percentage of GDP than in previous dollar cycles. Every year, the US has to borrow around 6 per cent of its GDP just to pay for its imports. Until a few months ago it was able to do so. Foreign investors were impressed by the sales pitch they got from the US banking community: buy these sophisticated financial instruments our brilliant maths experts have created and you will get a higher return than you can get from anywhere else. Now those US bankers don't look so smart and more than one non-US investor has indicated to me they felt they have been stuffed with rubbish. They won't trust those bankers again.

So, the third new element: trust in US financial sophistication has been shattered. The problem is not just the dollar; it is the integrity of US financial institutions. The pitch that the US has more transparent and more resilient markets than other countries is no longer credible.

The fourth element is that there are other places to invest. I was at a Middle East fund management conference last month and everyone wanted to talk about opportunities in Asia. This year, for the first time ever, China is adding more demand to the world economy than the US. It is still a smaller economy and will be for another 20 years at least. But the direction is clear, with China set to pass Germany to become the world's third largest economy some time next year. India is also extremely attractive to Middle Eastern investors, thanks in part to the physical proximity of the sub-continent and the cultural links between the two regions. Anyone who invested in India five years ago will have done wonderfully well, far better than they would have done had they invested in the US.

Connected with this, point five, is the deterioration in the cultural relationship between the US and the rest of the world in the past few years. The US no longer appears quite the safe haven for investments that it used to, for a variety of reasons. One has been resistance in Congress to foreign takeovers. Another has been the change in visa requirements – why invest in the US if it is awkward to visit your investment? Can you really trust the US legal system to be dispassionate in a dispute between a foreigner and a national? At a low enough price, US assets will still be attractive, but they do carry a handicap and will continue to do so.

Finally, and this is perhaps the most important thing, there are now alternatives to the dollar. There is the euro, of course, and foreign central banks are building up their reserves in euros. The pound is now being held much more widely in central banks too. Most important, there are a basket of other currencies, including the Chinese yuan, which international investors feel they should hold. A decade or more ago, the options were much narrower.

So what is going to happen? Well, it is true that a very weak dollar creates problems for other countries as well as the US. It is not just that any non-American investor will have seen a large fall in the value of their investment; any foreign company trying to sell into the US or compete against US exporters will find it harder to do so.

That does not mean that US companies will always win. It was interesting that Airbus managed to secure a huge order this week from Emirates, against Boeing's more established competitor. But a weaker dollar does create problems for the rest of us.

The problems for the US, though, will be more serious, for it needs to import, amongst other commodities, half its oil. The high dollar oil price is already increasing inflation elsewhere – here in the UK for example – but the burden on the US is relatively worse. The more the dollar weakens, the greater the difficulty the US Federal Reserve will have cutting interest rates, for to do so would make the dollar weaker still.

We may just muddle through with the dollar falling for some months more, the US going into recession, the rest of the world pulled along mainly by demand from China and from the rest of Asia, and then eventually the dollar and the US recovering.

I am not too worried about the UK economy, though things are clearly slowing here. What we have to recognise is that there is such a thing as a global economic cycle. Some sort of downturn, maybe not too serious a one, in the next couple of years does seem inevitable.

There may need to be, however, an international rescue of the dollar. The world's central banks, including, crucially, the Bank of China, would come together and agree a package of measures to support it.

Were that to happen, it would be a mark of the way economic power is shifting in the world. It is slowly and inexorably shifting away from the US and that will, to many Americans, come as a shock.

h.mcrae@independent.co.uk

(In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. I.U. has no affiliation whatsoever with the originator of this article nor is I.U endorsed or sponsored by the originator.)


The Nazis, Fascists and Communists were political parties before they became enemies of liberty and mass murderers.

Time For Citizens o Take On Corporate America

with a vengeance!

October 1, 2007

Op-Ed Columnist

Enron’s Second Coming?

By PAUL KRUGMAN

In May 2005 NYSE Magazine featured an article titled “American Dream Builder” — a glowing profile of Angelo Mozilo, the chairman and C.E.O. of Countrywide Financial, the nation’s largest mortgage lender. The article portrayed Mr. Mozilo as a heckuva guy — a man from a humble background determined to help other people, especially members of minority groups, achieve the American dream of homeownership.

The article didn’t mention one of Mr. Mozilo’s other distinguishing characteristics: the extraordinary size of his paychecks. Last year Mr. Mozilo was paid $142 million, making him the seventh-highest-paid chief executive in America.

These days, of course, Mr. Mozilo doesn’t look like such a wonderful guy, after all. Instead, he’s starting to bring back memories of other people who used to be praised not just as great businessmen but as great human beings — people like Enron’s Ken Lay and WorldCom’s Bernie Ebbers.

So far, nobody has accused Mr. Mozilo of breaking the law. Still, what we’re learning from the housing mess is that the crisis of corporate governance, which made headlines in the early years of this decade, never went away.

At this point it appears that Mr. Mozilo achieved the rare feat of victimizing three distinct groups.

First were the borrowers. As The Times’s Gretchen Morgenson reported in August, Countrywide often led customers to “high-cost and sometimes unfavorable loans” that, among other things, generated “outsize fees to company affiliates providing services on the loans.”

Then there are the investors who bought those Countrywide mortgages directly or indirectly, in the form of financial instruments created by slicing and dicing claims on borrowers.

You can’t especially single out Countrywide for the failure of investors to realize how much risk they were taking on — that’s a failure with many fathers, including everyone from Moody’s and Standard & Poor’s, which were far too free with their AAA ratings, to Alan Greenspan, who assured us that while there might be a bit of “froth,” there was no national housing bubble.

But Countrywide made more questionable loans than anyone else — and its postbubble behavior does stand out. As Ms. Morgenson reported in yesterday’s Times, Countrywide seems peculiarly unwilling to work out deals that might let borrowers hold on to their homes — even when such a deal, by avoiding the costs of foreclosure, would actually work to the benefit of both sides.

Why block mutually beneficial deals? As the article points out, Countrywide can make money from the fees it charges on foreclosures, while the losses from mortgages that could have been saved, but weren’t, are borne by others.

Last but not least, since it may be the key to the whole story, is the victimization of Countrywide’s own stockholders.

Last year Mr. Mozilo’s huge compensation drew a protest from a group of shareholders including the American Federation of State, County and Municipal Employees Pension Plan. But the worst was yet to come.

In late 2006, even as Countrywide began using shareholders’ money to buy back its own stock at more than $40 a share — it’s now worth only $19 — Mr. Mozilo was selling. Between November 2006 and August 2007 — that is, during the months before investors fully realized the extent to which his company would be hurt by the subprime mortgage crisis — he unloaded $138 million worth of Countrywide’s stock.

Again, unless the stock sales lead to insider-trading charges, there’s nothing in this story that involves illegality. Still, how can it be that so soon after Enron, WorldCom and other scandals rocked the business world, we’re once again hearing about executives cashing in just before their companies are revealed as less successful than advertised? The answer, of course, is that we never dealt properly with those scandals.

Here’s what I wrote back in May 2003:

“Last summer it seemed, briefly, as if the torrent of scandals — and the revelations about how closely some of our politicians were tied to scandal-ridden companies — would bring about a public backlash against corporate malfeasance. But then the topic largely vanished from the news, driven out by reports about Iraq’s nuclear weapons program and all that. And after the midterm elections, which put apologists for corporate insiders back in control of all the relevant Congressional committees, we might as well have had the sirens sound the all-clear.”

Sure enough, C.E.O. paychecks, which came partway back to earth in 2002, more than doubled between 2003 and 2006. And with those huge paychecks came renewed incentives for malfeasance. Once again, executives could become richer than Croesus by creating the illusion of success, even for a little while.

There is one big difference this time: the number of victims — misled borrowers, homeowners whose neighborhoods are being destroyed by foreclosures, investors who thought they were buying safe assets — is even larger.

(In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. I.U. has no affiliation whatsoever with the originator of this article nor is I.U endorsed or sponsored by the originator.)


The Nazis, Fascists and Communists were political parties before they became enemies of liberty and mass murderers.