This is the age of once-in-a-lifetime events.

Just as the last quarter of 2008 witnessed the greatest financial crash in most people’s lives, the Northern-hemisphere Summer of 2009 presented a political happening on a similar order of magnitude to President Nixon’s exit from the White House in 1974.

From Messiah to Anti-Christ?

In metaphoric terms: President Barrack Obama hit the “Lincoln Wall” going ninety miles an hour and on the way to the hospital, a medical emergency worker found the number “666″ on his scalp, under his hair.

The “Lincoln Wall”, of course, was the barrier referred to by Abraham Lincoln, in the saying:

You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time.

President Obama hit this “wall” when he failed to get a Democrat-controlled Congress to pass a thousand-page “health care reform” bill, without reading it, before adjourning for summer recess and facing their constituents at traditional townhall meetings.

The “medical emergency worker” in this metaphor represents the American people who finally began to figure out that Barrack Obama was not the “Chosen One” after all.

The number “666″ represents the little girl along the parade route as Obama drove to a town meeting in New Hampshire, holding up the hand-written sign: “Obama lies, Grandma dies”.

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The rest of the world holds $16.8 trillion in US financial assets, according to Federal Reserve release Z.1, as of Q1 2009.

Foreign trade based on dollars
Foreign trade based on dollars

Most of US financial assets held by foreigners are the result of the fact that the United States has been importing more from the rest of the world since 1971 than it has been exporting and that the sellers of foreign goods have been happy to receive US dollars in payment.

US financial assets held by the rest of the world consist mostly of debt instruments denominated in US dollars.

About $5.6 trillion is made up of direct investments and miscellaneous assets like real estate. Another $1.6 trillion is in US traded equities. The balance, about $9.6 trillion, is dollar-denominated debt owed to non-resident holders.

Although this “foreign debt” poses no real threat to US citizens, since it is denominated in US dollars, many people, including economists who should know better, think otherwise.

So, how long would it take to “work off” this debt?

What would happen if foreign exporters suddenly refused payment in dollars?

As long as the rest of the world accepts dollars in payment for exports, while the US continues to import more than it exports, the US trade deficit will continue to grow.

The decline in the value of the US dollar is nothing new. It has been going on for over half of century, since President Roosevelt rescinded convertibility into gold. The decline accelerated with President Nixon’s complete abandonment of the gold standard. Current variations in the value of dollar are hardly a blip in the long term trend. (Of course, other fiat currencies have also been declining in value.)

The US dollar has  declined since FDR abandoned the gold standard
The US dollar has declined since FDR abandoned the gold standard

Let’s pretend, however, that foreign exporters suddenly decide that they will no longer accept dollars in payment for their goods and rush to get rid of their holdings of US financial assets.

Here is what would probably happen:

  • The value of the dollar against other currencies would plunge.
  • US export goods would become incredibly cheap in terms of foreign currency. This would tempt foreign holders of US dollar debt to trade it for cash and buy export goods.
  • By dumping dollar bonds to buy export goods, interest rates on US bonds would soar as prices fell. This would tempt some foreign holders not to sell.
  • American importers, unable to pay in dollars as in the past, would need to borrow foreign currencies to import essentials like oil. Imports of “non-essentials”, like plastic dolls from China, would drop. Oil prices would rise. Americans would use their cars less.
  • Foreigners holding dollar assets would find that the only way to get rid of the now-unwanted dollars would be to use them to buy non-financial assets from Americans (such as real estate and export goods). Dollars are legal tender in the US. There is plenty of US real estate and other non-financial assets to absorb the accumulated trade deficit.
  • US exports in Q1 2009 were running at an annual rate of $1.5 trillion. At this rate, it would take a little over six years to “work off” the dollar-denominated financial debt due foreigners by selling them US goods and services. Of course, if the rest of the world was really anxious to get rid of their dollar debt, they could buy US export goods at a faster rate, while rushing to buy US real estate and making direct investments in US businesses (which by now would be humming along quite nicely to supply the booming export market.)
  • Faced with soaring prices of oil and the inability to pay in dollars, the US would suddenly forget the “green dream” of wind farms and bio-energy and rush to drill in the Gulf of Mexico, while building nuclear plants in every state.
  • As foreigners got rid of US financial assets, a major source of credit card financing would dry up. Americans, by necessity, would become thrifty.
  • As a major source of easy credit disappears, corporations would be forced to turn to old-fashioned methods of equity financing. Stock buybacks would be a thing of the past. Stock prices would fall — effected by rising interest rates.
  • Foreign exporters, faced with falling demand from the United States that now lacks the currency with which to pay for their products, would have to lay off workers, while employment picks up in the United States in the export sectors. Foreign governments might even seek to boost the dollar.

In other words, if the rest of the world were suddenly to turn against the dollar, the trade deficit might be eliminated in a few years, causing a boom in industrial production and real estate in the US, radical changes in economic behavior, and less employment in former exporters to the US.

What could cause this to happen?

The easiest way to destroy the credibility of the US dollar would be to jack up government spending to the point of bringing on hyper-inflation. In other words: just follow the current policies of the Obama administration.

However, there are countervailing forces that make the above scenario unlikely:

US Senator Al Franken (D-Minnesota)
US Senator Al Franken (D-Minnesota)
  • The US is still a representative democracy: Despite the bizarre seating of the not-so-funny comedian Al Franken as a US Senator and the presence of representatives of “safe districts” like Nancy Pelosi and Barney Frank, the public can still be counted to turn away from its leaders, once the “misery index” gets above 15%. Since unemployment is expected to surpass 10% soon, while even modest recovery should send inflation above 5%, the current government is likely to be voted out of office once the public finally understands that Obama promises have been false. Just as in the days of Jimmy Carter, a return to conservative government will restore confidence in the dollar, as steps are taken to curb inflation and reverse Obama policies.
  • A cheap dollar will boost American exports: As foreign factories cut back production to meet declining US demand, there will be pressure to accept payment in dollars, as before. After all, many countries have dollar balances, while balances in other currencies are far smaller. Because the value of the dollar has fallen, the value of goods that can be purchased with a dollar will have increased. As foreign unemployment rises, the urge to return to the dollar will also increase. A stronger dollar means not only more sales for foreign factories, but less competition from US exporters.

This “thought experiment” shows that fears of America’s children and grandchildren having to work for years to pay off debt to foreigners are unfounded.

The trade deficit would quickly disappear in an extreme inflationary environment. The system has self-correcting mechanisms.

Illustrations: Wikimedia Commons


The trillion-dollar Obama health care plan increases the odds that US economic recover will be delayed, and that unemployment and inflation will increase.

The main thrust of the Obama plan is to increase taxes on individuals earning more than $250,000 a year, while forcing all but the tiniest businesses to purchase health insurance coverage for employees.

The money raised by these taxes will be transferred as subsidies for those who do not have health insurance — primarily due to low earnings and inability or unwillingness to purchase health insurance without government assistance.

Proposed legislation on Obama care, drafted by House Democrats, covers more than 1,000 pages. Some analysts claim that this huge document contains clauses that will eventually force millions of American to acquire government health insurance.

Typical of Obama reforms, the measure is being rushed through Congress without adequate discussion of consequences, without bi-partisan consensus, and with scant disclosure by the Democrat party that has filibuster-proof control of the US Congress. Most Republicans are expected to vote against the measure.

Increased inflation and unemployment

Most new employment in the United States is created by small and medium-size business — precisely the people that President Obama wants to tax in order to raise funds that will be transferred to poorer, less-productive sectors of the economy.

Businesses being hit by these massive new taxes have only a few ways to respond:

  • Reduce the number of employees or delay hiring new employees.
  • Pass the costs of higher taxes on to consumers.
  • Increase outsourcing of labor costs to offshore suppliers.
  • Compensate for rising taxes by reducing wages.

In other words, the immediate impact of Obamacare is likely to be increased unemployment and higher prices — stagflation.

The Obama administration claims that costs of subsidized health insurance will be compensated by undocumented “cost savings” — but these claims are contested by the Congressional Budget Office.

In the next decade, Obamacare is estimated to cost over $1.5 trillion.

Why health costs will continue to rise

Over the last fifty years, costs of health care in the United States have steadily increased faster than other consumer prices.

There are many reasons for the escalating costs of health care, but the two main drivers have been:

  1. Medical advances: Many life-saving medical procedures are available today that were impossible fifty years ago. Organ transplants are a case in point. The existence of these procedures creates demand. However, many of these procedures are extremely expensive, well beyond the financial capacity of most of the population. In good times, many employers have been willing to give workers free health insurance to cover such costly procedures.
  2. Employer paid health insurance: The common practice of large businesses providing free health care insurance to employees as a fringe benefit, often written into employment contracts, has created vast inefficiencies in the pricing of medical services, as beneficiaries of health care were disassociated from the normal need to shop for the best service at the lowest price. At the same time, because of the nature of insurance contracts, doctors were paid per procedure rather than for results. The costs of health insurance for individuals not covered by group plans became too high for many to afford.

To these basic structural reasons for escalating health care costs, the Obama plan adds the extra price driver of increasing the size of the market for health services (by offering subsidized coverage to the poor), without a corresponding increase in the number of doctors and nurses.

A missed opportunity

Barrack Obama was elected on a platform calling for change and there is general consensus that reforms of the US health care system are needed.

However, by forcing through a plan that seems almost certain to increase unemployment while spurring inflation, the so-called misery index (inflation plus unemployment) is likely to rise far above the level that prevailed when President Obama took office. Over the last two generations, a rising misery index has portended that the incumbent President will be removed from office by the voters.

This, perhaps, is why President Obama is anxious to pass this highly controversial legislation before his popularity sinks to the point where such legislation will not longer be possible.

Along with mismanaged “spending is stimulus” package and the “cap and trade” legislation, the Obama healthcare plan may seal the fate of this administration.


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