Danger of a Pull-Out — of the Dollar


While we’re being run out of Iraq, we’re running out of money and heading for a recession.

The world has started foreclosure proceedings on the U.S. It’s finally happening, much to the detriment of your children and their children.

Bad news out of Saudi Arabia: The archaic but wealthy kingdom is so scared of our imminent recession that it’s abandoning our shaky dollar.

Ambrose Evans-Pritchard of the Telegraph (U.K.) explains this morning:

Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.

This stuff is really complicated, and I’m oversimplifying, and many rich schnooks are the ones making the decisions. (Read this good overview of Wall Street’s subprime greed by David Ignatius in Beirut’s Daily Star.)

The fact is that, no matter how much money the hedge funds and private-equity people are raking in, a recession looms in the U.S. The rest of the planet is a coalition of the unwilling to be dragged down with us.

This attack by the Saudis on our economy may prove to be more damaging to the U.S. in the long run than the mostly Saudi hijackers’ attack on the World Trade Center, which, though horrible and deadly, was an attack on only the symbol of our economy. There was no justification for the 9/11 attack. But this economic attack is justified, because of the greedy schmucks and costly war that have helped send our economy spinning out of control.

Here’s the rub: Our rich are getting richer, but foreign investors and governments own most of our debt. As the dollar collapses, they are pulling their money out — can’t a brother get a dime?! World investors are looking elsewhere; many have a yen for Japan’s strong economy.

We’re Number Something-Other-Than-1!

Just one example of how relatively poor we are and how this crisis has been building for a long time: In April, Saudi Prince Alwaleed bin Talal demanded that Citigroup make “Draconian” cuts in its budget, and 17,000 people lost their jobs. Who cares what some Saudi prince says? Well, he’s the huge bank’s biggest individual shareholder.

Here’s more from the Telegraph on the recent move by Saudi royals:

As a close ally of the US, Riyadh has so far tried to stick to the peg [of the dollar], but the link is now destabilising its own economy.

The Fed’s dramatic half point cut to 4.75 percent yesterday has already caused a plunge in the world dollar index to a fifteen-year low, touching with the weakest level ever against the mighty euro at just under $1.40.

There is now a growing danger that global investors will start to shun the US bond markets. The latest US government data on foreign holdings released this week show a collapse in purchases of US bonds from $97 billion to just $19 billion in July, with outright net sales of US Treasuries.

The danger is that this could now accelerate as the yield gap between the United States and the rest of the world narrows rapidly, leaving America starved of foreign capital flows needed to cover its current account deficit — expected to reach $850 billion this year, or 6.5 percent of GDP.

Our money woes are killing us:

[Hans Redeker, currency chief at BNP Paribas] said foreign investors have been gradually pulling out of the long-term US debt markets, leaving the dollar dependent on short-term funding. Foreigners have funded 25 percent to 30 percent of America’s credit and short-term paper markets over the last two years.

“They were willing to provide the money when rates were paying nicely, but why bear the risk in these dramatically changed circumstances? We think that a fall in dollar to $1.50 against the euro is not out of the question at all by the first quarter of 2008,” he said.

“This is nothing like the situation in 1998 when the crisis was in Asia, but the US was booming. This time the US itself is the problem,” he said.

Are the Democrats really sure they want to take over the White House? They will inherit an economy heading south and an unwinnable, tragic war.

We can’t afford to keep fighting in Iraq, but we can’t afford not to as long as we can’t get some sort of international alliance to help calm things down over there.

Mercenaries like Blackwater may have to do all the fighting for us, but we won’t be able to pay for them. As for our own soldiers: When we finally bring them home, there may be a full-blown recession and no jobs for them.

This is all tied to our mortgage-market crisis, which is caused by our money men playing dangerous games with the dough you homeowners send to the bank every month.

Here’s even more from the Telegraph that warns of an even deeper crisis with the mortgage mess:

Jim Rogers, the commodity king and former partner of George Soros, said the Federal Reserve was playing with fire by cutting rates so aggressively at a time when the dollar was already under pressure.

The risk is that flight from US bonds could push up the long-term yields that form the base price of credit for most mortgages, thus driving the property market into even deeper crisis.

“If Ben Bernanke starts running those printing presses even faster than he’s already doing, we are going to have a serious recession. The dollar’s going to collapse, the bond market’s going to collapse. There’s going to be a lot of problems,” he said.

The Federal Reserve, however, clearly calculates the risk of a sudden downturn is now so great that the it outweighs dangers of a dollar slide.

Former Fed chief Alan Greenspan said this week that house prices may fall by “double digits” as the subprime crisis bites harder, prompting households to cut back sharply on spending.

That’s easy for him to say. He’s got a new book to peddle.