05.31.2009 0

Decline and Fall

  • On: 06/16/2009 09:46:51
  • In: Monetary Policy
  • By Robert Romano

    Correction: Moody’s downgraded Japan, and Britain faces a similar fate from S&P, not vice versa.

    As inevitable as the rising of the sun in the morning and its descent in the evening, eventually, every great empire in history reaches its summit of outermost expansion, its moment of greatest wealth, power, and influence. And then, decline and fall inevitably follow.

    Assyria. Persia. Macedonia. Rome. Byzantium. Britain. History is replete with examples of nations that dominated the politics and economies of their era and who, once they reached their zeniths, subsequently returned to a relatively minor status among nations.

    Through the ill-advised decisions of a nation’s leaders, suffice to say, some fell quicker than others.

    And America will be no different. The only question is how quickly the nation’s leaders wish to travel down the road to serfdom.

    Today is an extraordinary day in that respect. In Yekaterinburg, Russia, the leaders of Brazil, Russia, India, and China (BRIC) are meeting to discuss—among other topics—safely transitioning their holdings away from U.S. dollar-denominated assets such as treasuries or Fannie Mae and Freddie Mac mortgage-backed securities and into International Monetary Fund bonds denominated in the agency’s reserve currency, Special Drawing Rights (SDR).

    Not that anyone could or should blame them for opting to slow their purchases of U.S. debt. Creditors have warned the U.S. publicly that it is on a reckless fiscal course with its projected record budget deficit of some $1.8 trillion, proposed $3.6 trillion, $11.3 trillion debt, and $104 trillion of unfunded Medicare and Social Security liabilities. The national debt has grown for every single year since 1954.

    Coupled with the nation’s more than doubling the money supply since September, its more than $12.8 trillion committed in bailouts for the financial system, and the now-proposed Obama nationalization of the U.S. health care system, BRIC are watching their dollar-backed assets decline in value as the U.S. spends and borrows itself into the Abyss.

    Which is one reason pundits, traders, Timothy Geithner and everyone else should not take too much solace in Russian Finance Minister Alexei Kudrin’s proclamation that it’s “too early to speak of an alternative” to the dollar.

    To continue investing in an asset that will predictably fall in value out of mere tribute would not only be irrational, but irresponsible to the peoples of BRIC’s respective nations. Moody’s has already downgraded Japan’s debt, and the UK faces a similar fate by S&P. Facing a possible downgrade of U.S. debt, BRIC’s only alternative is to transition to a safer alternative as a hedge—one which they would be in a position to wield increasing influence over.

    According to the International Business Times, BRIC are “seeking a louder voice on the global stage.” More accurately, however, through today’s BRIC summit, the nations are seeking to expand their role in overseeing the global monetary system of the 21st century. And the means by which they can leverage the inevitable decline and fall of the post-Cold War unipolar system to their advantage in light of the U.S. financial emergency that has given way to its even more formidable debt emergency.

    If the U.S. is to fall as the world’s economic superpower, they intend to ascend in its place.

    They even have a willing participant in the Obama Administration. While in China recently, Treasury Secretary Timothy Geithner said, “[T]he United States will fully support having China play a role in the principal cooperative arrangements that help shape the international system, a role that is commensurate with China’s importance in the global economy.” Left unspoken is America’s declining influence, but the numbers speak for themselves.

    BRIC has a combined $2.8 trillion in international reserve assets excluding gold, according to Bloomberg News, representing 42 percent of global currency reserves. And they have a combined GDP (PPP) of $15.446 compared to the U.S. GDP (PPP) $14.264 trillion: Brazil ($1.981 trillion), Russia ($2.261 trillion), India ($3.288 trillion), and China ($7.916 trillion).

    Comparatively, BRIC should be expected to grow against the U.S. especially as the dollar continues to decline and predicted inflation ensues with monetary and fiscal “stimuli” taking root. With oil topping $70 a barrel and gold nearing $1000 an ounce, there is no question that the next great danger facing the American economy is inflation. As noted by MSN Money’s Bill Fleckenstein, “When money printing goes into excess, as it almost always does, speculation follows.” And prices shortly thereafter.

    All of which facilitates the decline of the dollar, and the fall of the nation as an economic superpower. It is a danger that is certain to hammer the American people over the coming years at the gas pump and in the grocery store with higher prices, on their credit card statements in the form of higher interest rates, and on their tax bills as the next generation is faced with the daunting—if not impossible—task of paying off the gargantuan national debt.

    And it only further incentivizes a whole sale run on dollar-denominated assets. Already, international demand for U.S. assets declined in April, as reported by Bloomberg News. And China has announced $50 billion in purchases of SDR-denominated bonds, Russia $10 billion, Brazil $10 billion, and today India is expected to announce a similar plan.

    This is just the beginning.

    Today is also an extraordinary day with respect to the decline of the dollar for another reason. For today, the House is expected to vote on whether or not the U.S. shall willingly participate in replacing the dollar as the world’s reserve currency by extending a $100 billion credit line to the IMF, explicated in this background published by Americans for Limited Government.  That cash will be used to give loans to developing nations, which in turn will be used to leverage the sale of the SDR-denominated bonds.  Since it is a fiat currency, the more widely used and accepted it is, the more value will be assigned to it.

    And on a relative basis, the dollar as a reserve currency will only have one place to go: down.

    This is a decline that shares at least one similarity with its Roman predecessor. Edward Gibbon famously wrote that Rome’s downfall was in large part because the nation had outsourced its military to the barbarians. So, too, the U.S. has outsourced its line of credit to its adversaries overseas. The nation’s leaders have done so willingly.

    As noted above, through the ill-advised decisions of a nation’s leaders, some nations fall quicker than others. And some appear to be in an outright rush to traverse the road to serfdom.

    Robert Romano is the Senior Editor of ALG News Bureau.

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