Foreign Investors Abandoning The U.S.

July 19, 2008

Foreign investors are beginning to see the U.S. as a bad place to invest their money.  Their stock investments are losing money.  They’re getting killed by their investments in our mortgage-backed securities.  Their investments in corporate and government bonds are beginning to look risky.  Now they’re looking to Asia.  This is very bad news.

What this means is that interest rates are going to rise.  How far and fast remains to be seen.  Why?  Because the dollars that we send them in payment for imported goods can only be used in one place – the United States.  So their choice is either to sit on those dollars and wait for the promise of higher returns in the future in the U.S., or go ahead and just keep blindly plowing them back into U.S. stocks and bonds and securities.   

At the same time, the U.S. has got to maintain a cash flow balance to finance to the budget deficit and the trade deficit.  It has to issue bonds and sell them to someone.  That someone isn’t Americans.  There is no money left here.  It has to sell them to foreigners holding those dollars.  So, when the Fed holds a bond auction, if no one bids on the bonds at the rate being offered, the rate immediately and automatically is raised.  This will continue until the rate looks attractive enough to offset the perceived growing risk of owning these U.S. investments.  So look for bond yields to begin rising dramatically.  And it’s bond yields that determine interest rates in the U.S. economy, not the Fed’s official overnight funds rate that gets all of the attention. 

Won’t rising interest rates tend to slow an economy that’s already on the brink of recession?  You bet!  Could this turn into a downward spiral?  Right again!  The only way to escape such a spiral is to cut off the root cause by stopping the outward flow of dollars; that is, by eliminating the trade deficit.  And if we wait for currency valuations to do the job, we’ll be waiting forever, and we have very little time to act.  It’s time to walk away from the World Trade Organization and return to the trade policies of tariffs and trade surpluses that once built this nation into an economic powerhouse.

FDIC (The Agency That Insures Your Bank Account) Being Phased Out

July 16, 2008

There’s been a lot of talk from government officials, attempting to prevent panic and a run on banks, assuring us not to worry, that our bank deposits are insured by the FDIC up to $100,000.  What no one has discussed is the fact that the FDIC is slowly being phased out by inflation.  Did you know that the $100,000 limit on insured savings has been in place for 28 years?  It was last increased in 1980, from $40,000 to $100,000. 

Depository Institutions Deregulation and Monetary Control Act of 1980
This act, which is passed as a response by Congress to get S&Ls out of interest- rate mismatch, is an effort to deregulate S&Ls.

This act:

  • Increases THE FDIC deposit insurance coverage from $40,000 to $100,000.

Since 1980, the CPI (consumer price index) has risen by 257%.  Therefore, the value of deposits insured by the FDIC has declined by 257% since 1980.  If this isn’t a gradual phase-out of the program, I don’t know what is.

Also, did you know that the FDIC only had about $52 billion in assets at the beginning of this year?  How many bank failures would it take to wipe out that fund?  Very few.  Then what?  Then taxpayers are on the hook – you and I.  The government will simply pick up the tab and add it to the national debt for our kids and grandkids to pay.

Not a Peep about the Trade Deficit

July 16, 2008

This morning I submitted the following “letter to the editor” to USAToday:

In an extraordinary display yesterday, with the nation on the brink of financial collapse, we witnessed our President, our top economic leaders and the leader of one of our biggest corporations appealing for market calm, assuring us that our investments are safe and rolling out the latest turn-around in the automotive sector’s death spiral. Simultaneously, economists pondered how the American Debt Machine might be restarted. Yet, not a single one of them so much as uttered a peep about the root cause of this mess – our $750 billion per year trade deficit which has drained $9 trillion of the life blood from our economy over the last three decades – real money, not the “funny money” printed by the Federal Reserve to replace it. Americans should be appalled at this lack of leadership or, giving free rein to my more cynical side, this organized conspiracy to hide the truth about what their trade policies have done to destroy our country.

Pete Murphy

Author, Five Short Blasts

I must admit that there are time when I suspect that globalization is a vast conspiracy by global governmental and corporate leaders to shake down the American people and redistribute their wealth to the rest of the world – perhaps a grand plan to sustain the relative peace as the world grows more desperately over-crowded.  I know, I know, it’s too unbelievable that such a conspiracy could be kept quiet without someone intentionally or inadvertently blowing the whistle.  But lately, especially after the events of yesterday, it seems even more incredible that the collective stupidity of governmental and corporate leaders is so great that none are capable of recognizing what our trade policies have done or dare to call them into question.

IMF Chief Concerned by U.S. Trade Deficit

July 9, 2008

IMF (International Monetary Fund) chief Dominique Strauss-Kahn today, while expressing concern about the deepening global financial crisis, also took note of the role of the trade deficit in the demise of America’s economy. Of course, he would never suggest that America reduce its imports and produce more domestically, since that would drag down the parasitic economies that feed on America’s trade naivete. Rather, he suggested that America needs to export more. In other words, the world’s parasites – those grossly overpopulated nations that are dependent on exports to sustain their bloated labor forces – need to start buying more American products.

… the United States needs to boost net exports to offset weakening domestic demand, Strauss-Kahn said …

It ain’t gonna happen! They don’t have the capacity to consume even their own domestic productive capacity. How will they start consuming more from America?

And now one of the world’s leading economists is scrambling to explain why America’s trade deficit hasn’t responded to the plunging dollar, contrary to their predictions.

… Strauss-Kahn said a competitive exchange rate was not the only driver of exports.

“Prices are important, of course, but quality, service and other things that go with exports are more and more important,” he said. “It’s not only a simple mechanical question of the exchange rate.”

Anyone who understands the new economic theory I’ve proposed in Five Short Blasts would be amused at economists’ disillusionment at the failure of their theories about trade and exchange rates. Of course the trade deficit isn’t responding to the falling dollar. The trade deficit has nothing to do with currency valuations! Rather, it’s a result of giving away access to a healthy market and getting no equivalent access in return when we deal with overpopulated nations like Japan, Germany, Korea, China, India and so many others.

America needs to stop blaming others for its problems, acknowledge that the real problem is our own trade policy, and begin taking positive action to achieve the trade results it wants and needs. The time for trusting our trading “partners” to boost demand, stop manipulating currencies and, in general, to keep all of the old promises they’ve been making for decades is long past. It’s time to take our fate into our own hands and implement the population density-indexed tariff structure recommended in Five Short Blasts.