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October 14, 2004 | Modified January 27, 2005 The truth IS out there.

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A NEXIALIST N+E+W+S FEATURE: The BIG One VII: Coming Home to Roost?

from L. Reichard White

Do you like the "A-ha!" experience?

To save time, read only bolded text. If you remember, it is designed to make sense when read that way. To save even more time (and see the really important parts), read only the magenta text.

Here's the latest in NEXIALIST N+E+W+S's The BIG One series. First clips are a bit of a review.

For a complete review, start HERE: The BIG One! MASTER Menu


N+N:Reprise: "This is the biggest financial challenge facing the world in the last half-century." -Bill Clinton to CFR, 14 Sep 1998 346_clip1
N+N:Reprise: Mr. [Albert] Friedberg [famed Austrian economist, currency specialist and head of Canada's Friedberg Mercantile Group] points to the monetary policy of the Federal Reserve as the fundamental cause of the currency debacle. He notes that since the early 1990s, the Fed has backed a credit expansion policy that it has exported abroad. He also predicts that "the crisis will widen. It will travel from Asia to Russia, Greece, Brazil. Eventually it will come back to the United States." -TORONTO GLOBE AND MAIL (January 10, 1998) 346_clip2
N+N:Reprise: "It's certainly the worst international monetary crisis since the founding of the system, the Bretton Woods [paper money] system in 1944. ... And I know that the authorities in Washington are most concerned about this spread, and properly so -- because it seems to be happening." -Roger Altman, EVERCORE PARTNERS CHAIRMAN, former Deputy Secretary of Treasury, CNBC, 14 Aug 1998, ~7:37:21 AM EDT 346_clip3
N+N:Reprise: "We must [now] address not only a run on a bank or a firm, but also a run on nations." -American President William Jefferson Clinton to the World Bank and the IMF, October 6, 1998 346_clip4


JACKSON, Wyo. (AP) -Federal Reserve Chairman Alan Greenspan said Friday that the country will face "abrupt and painful" choices if Congress does not move quickly to trim the Social Security and Medicare benefits that have been promised to the baby boom generation.
... "If we have promised more than our economy has the ability to deliver, as I fear we may have, we must recalibrate our public programs so that pending retirees have time to adjust through other channels," Greenspan said. "If we delay, the adjustments could be abrupt and painful." *Greenspan Cautions on Baby Boomer Benefits*, By MARTIN CRUTSINGER, apnews.myway.com, Aug 27, 3:42 PM (ET) 346_clip5
Starting in the 1970s, the share of Federal revenue spent on interest expense began to grow. This burden is now approaching 30%, even though interest rates have been falling for several years.
This 30% threshold is significant because the debt experience of other countries has shown that when the interest expense burden of the national debt exceeds this level, monetary disorder is the inevitable result. -GOLD Newsletter, Vol. XXIII, August 15, 1993 from article entitled "Deficits, Gold And The U.S. Constitution" by James Turk 346_clip6
An array of government and private analysts put the actual U.S. "fiscal gap," which means all future receipts minus all future obligations, at $40 trillion (Government Accountability Office) to $72 trillion (Social Security Board of Trustees).
These are ... present-value figures, heavily discounted to show in today's dollars what it would cost to pay off the debt immediately. The International Monetary Fund estimates the gap at $47 trillion, the Brookings Institution at $60 trillion. ... These obligations are not imaginary. And unlike the 1980s and 1990s, economic growth cannot bail out the government because the Baby Boom retirement is at hand. ...
      ... corrective actions grow more severe each year. ... Gokhale said that fresh numbers from the Medicare trustees show the fiscal gap has since grown to $72 trillion, $10 trillion of that for Social Security and an astonishing $62 trillion for Medicare, the government health care program for the elderly. ...
"The country's absolutely broke, and both Bush and Kerry are being irresponsible in not addressing this problem," Kotlikoff said. "This administration and previous administrations have set us up for a major financial crisis on the order of what Argentina experienced a couple of years ago."
If this sounds far-fetched, former Bush Treasury Undersecretary Peter Fisher and former Clinton Treasury Secretary Robert Rubin both alluded to such a scenario at a June budget forum in Washington.
"Having been involved in markets for a long, long time," Rubin said, "I can tell you these things can change unexpectedly and without warning," referring to potential financial market reactions to the U.S. fiscal position.
Fisher warned of a "pivot point" when "the collective wisdom of bond traders thinks that the deficit horizon has turned," adding, "Both Bob and I are nervous."
The world has seen fiscal imbalances of this sort before, in Asia and Russia in the late 1990s and more recently in South America. Such financial panics can be triggered by any number of events -- a flight from Treasury bonds by the foreigners who buy much of the U.S. debt, for example -- if investors' views of the market, which are focused on the short term, suddenly change.
"If you look at financial crises, they occur seemingly overnight," said Kotlikoff. "More and more pieces of straw drop on the camel's back, and all of a sudden, the camel collapses. ... Nobody knew exactly what day Argentina was going to go south or exactly what day Russia was going to default. The timing is up for grabs." ... But early signs of a problem are now appearing, analysts said, starting with the mounting deficits under Bush. Speeches ignore impending U.S. debt disaster, No mention of fiscal gap estimated as high as $72 trillion, Carolyn Lochhead, Chronicle Washington Bureau, Sunday, September 12, 2004, San Francisco Chronicle 346_clip7
BUENOS AIRES -The sinking of Argentina [the peso -lrw] is leading impoverished women and men to take desperate measures, selling their hair or blood, jumping on an overturned cattle truck to butcher the animals on the spot, or taking money to hold a place in a queue outside a bank all night long. ...In December, the same necessity led crowds to plunder supermarkets.
      An owner of a wig factory in Rosario, in the northeastern province of Santa Fe, commented in a radio interview that the devaluation of the Argentine peso had made imports too expensive and his company could no longer purchase the materials needed to create artificial hairpieces. ... Poverty has increased dramatically, and now affects 44 percent of the population of 37 million, according to official figures. Unemployment stands at 24 percent ...
      Marta Martinez, a middle-class retiree, 75, said she has never experienced a crisis like the one afflicting Argentina today. "When I was a child I experienced the crisis of 1930, and the people talked a great deal about that and the lack of work. But never -never -did it compare to what we are seeing now, a situation as desperate and distressing as this," she said, her voice breaking. Argentina: Images of a shipwrecked nation By Marcela Valente, Asia Times, March 29, 2002 346_clip8
If we look at the fundamentals compared to third- world countries like Indonesia and Argentina, we're worse off than they are, but because of the status of the dollar in international trade, we seem to have some leeway. We have the twin deficits, the budget deficit and the trade deficit. This can't go on forever -- and things that can't go on forever don't go on forever. -Economist Paul Krugman, author of ^^w$"The Great Unraveling," Democracy Now!, December 21, 2004 346_clip9
Twenty years ago the total debt of U.S. households was equal to half the size of the economy. Today the figure is 85 percent. ... a "spectacular wave of bankruptcies" is possible. ... It is undeniable that America is living in a "debt bubble" of record proportions. ... Greenspan might instead deliberately allow the dollar to slump and inflation to rise, whittling away at the value of today's consumer debts in real terms. ... Higher interest rates, or higher inflation: Either way, ... You wouldn't want to hold 30-year Treasuries, which today yield just 4.83 percent. Economic `Armageddon' predicted, Brett Arends, On State Street, Tuesday, November 23, 2004 346_clip10
*F*orget Enron, WorldCom or mutual funds. The crisis enveloping the insurance industry is "the scandal of the decade, without a question" and "dwarfs anything we've seen thus far."
Says who? None other than former Securities and Exchange Commission Chairman Arthur Levitt. ...
Almost every insurance company, including Boston-based Liberty Mutual, has received subpoenas as part of New York Attorney General Eliot Spitzer's widening probe....
"It's hard for me to see how this scandal will not reach right to the top," he [Levitt] told Bloomberg News. ...
Banks threw Marsh Mac [the target of the investigation] a $2.8 billion lifeline yesterday, keeping open credit lines to prevent collapse. *Ex-SEC chief marks scandal*, By *Brett Arends*, /Thursday, October 21, 2004 346_clip11
Stephen Roach, the chief economist at investment banking giant Morgan Stanley ... His prediction: America has no better than a 10 percent chance of avoiding economic "armageddon." ... In a nutshell, Roach's argument is that America's record trade deficit means the dollar will keep falling. To keep foreigners buying T-bills and prevent a resulting rise in inflation, Federal Reserve Chairman Alan Greenspan will be forced to raise interest rates ...The result: U.S. consumers, who are in debt up to their eyeballs, will get pounded. ...
Roach marshalled alarming facts to support his argument. To finance its current account deficit with the rest of the world, he said, America has to import $2.6 billion in cash. Every working day. That is an amazing 80 percent of the entire world's net savings. Sustainable? Hardly. ... -Economic `Armageddon' predicted, Brett Arends, On State Street, Tuesday, November 23, 2004 346_clip12
PIMCO, which manages the world's largest private portfolio of U.S. government debt, ...argues that America's Asian creditors should forgive a portion of the debts owed to them by the U.S. government in exchange for the U.S. government imposing what amounts to a broad based austerity program, resulting in a substantial decline in American living standards. ...
America's creditors would agree to this restructuring because in its absence, their eventual losses would be far greater, as the U.S. government would have no choice but to default on its sovereign debt. ... That the largest private manager of U.S. government bonds would even contemplate default is significant in and of itself; but that it could actually advocate it as policy, however, should be shocking. ...A triple A rating basically implies a zero probability of default. Since this paper argues that default is all but inevitable, it would imply that not only should U.S. sovereign debt not be AAA rated, but that it should fall into the category of junk. Peter Schiff: Euro Pacific Capital, PIMCO Peeks Through the Looking Glass, December 24, 2004 346_clip13

Japan is warning the White House that there will be 'enormous capital flight' from the dollar if the Bush administration maintains its laissez-faire approach to the mounting currency crisis. Tokyo fears that Japan's strongest economic recovery in a decade could be derailed by the sudden appreciation in the yen against the greenback. The criticism of President Bush's inaction, by a senior member of the ruling Liberal Democratic Party, will be taken as a veiled threat that Japan could start to sell off its multi-billion-dollar holdings of US Treasuries. ...Like Japan, the eurozone fears that its tentative recovery could be choked off by the fall in the dollar, which European Central Bank president Jean-Claude Trichet has called 'brutal'. Japan threatens huge dollar sell-off*, Heather Stewart in Tokyo, Sunday December 5, 2004, The Observer http://www.observer.co.uk 346_clip14
a headline ... read ... "India to dip into forex reserves to build roads." Looks innocuous enough, but it was the signal long awaited that the US dollar would finally crack. For a long time now India, China, Japan and a number of other countries have been reinvesting the dollars they have been paid for exports in low yielding US Treasury bonds. India has around US$120 billion foreign exchange reserves ... which have been depreciating against the euro, pound and yen.
...the Indian government is going to spend a goodly part of this money on roads, rail systems and power stations. Now that one country has come to its senses, others will follow as it dawns that they are simply subsidising the US economy at their own cost by holding these bonds. ...
...China's foreign exchange reserves are many times larger and we have pointed out on a number of occasions that it holds the future of the US dollar in the palm of its hand. Stop Press!!! India Puts The Boot Into US Dollar, Minews Story, October 25, 2004 346_clip15
DAVOS, Switzerland (AP) -- China has lost faith in the stability of the U.S. dollar and its first priority is to broaden the exchange rate for its currency from the dollar to a more flexible basket of currencies, a top Chinese economist [Fan Gang] said Wednesday at the World Economic Forum. ... "The U.S. dollar is no longer -- in our opinion is no longer -- (seen) as a stable currency, and is devaluating all the time, ...Fan said, speaking in English.
"So the real issue is how to change the regime from a U.S. dollar pegging ... to a more manageable ... reference ...Now people understand the U.S. dollar will not stop devaluating." Economist: China Loses Faith in Dollar, Edith M. Lederer, Associated Press, Wednesday January 26, 2005, 4:37 pm ET 346_clip16
Another salvation may be the economy. It's going to go very bad, folks. You know, if you have not sold your stocks and bought property in Italy, you better do it quick. ...Europe is not going to tolerate us much longer. The rage there is enormous. ...-- it's going to be an awful lot of dancing on our graves as the dollar goes bad and everybody stops buying our bonds, our credit -- we're spending $2 billion a day to float the debt, and one of these days, the Japanese and the Russians, everybody is going to start buying oil in Euros instead of dollars. ...the damage he's [Bush] going to do between then and now is enormous. We're going to have some very bad months ahead. -Pulitzer prize- winning investigative journalist Seymour Hersh: "We've Been Taken Over by a Cult," Stephen Wise Free Synagogue in New York, Democracy NOW!, Wednesday, January 26th, 2005 346_clip17

For a complete guide to The BIG One! series, start here: The BIG One! MASTER Menu

N+N: Home Page mailto: L. Reichard

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