Is the Ailing Dollar Making Us All Sick?

by: Philip Davis
The WSJ had an article Sunday morning called:

“Doctor the Dollar? Depends how sick - Bush Administration Prefers to Let Markets Operate, And Cures Open to Fed and Treasury Are Limited.”

The Bush administration has, in fact, let the market operate all right; the operation has successfully removed 37% of the dollar’s value since Bush took office - when he was left with a record high dollar index at 120 by the previous administration.

The dollar was able to recover from a market that fell from 11,900 in January of 2000 all the way down to 7,900 the week after 9/11 but it couldn’t survive the idiotic policy this administration HAD ALREADY BEEN PURSUING as they dropped rates from 6.5% all the way to 2.5% BEFORE September 11th, 2001. 9/11 only served to give our government the excuse to drop rates all the way to 1% by mid 2003. At no time were ordinary Americans able to benefit from this – credit card rates stayed around 16%, home mortgages stayed around 6% but our deficit was skyrocketing and our currency was plummeting as the US government was drained of all it’s current and future cash in a great redistribution of wealth.

Who really benefits from low rates? Certainly the people or, more accurately, corporations who seek to borrow capital at low rates. That money is, ultimately, borrowed from bank depositors, and low rates decrease the amount of interest that will be paid to people who save their money, lowering the incentive to save and pushing their retirement further down the road.

American workers have increased productivity over 100% since 1970 yet real wages ARE EXACTLY THE SAME. We know corporate profits set new records driving the markets higher and, again, who benefits? In a low interest environment when savings are driven lower and inflation is driven higher, those who already have assets (real estate, commodities, securities) to sell are able to unload them to late-market speculators who borrow money in order to turn the wealthy’s paper gains into hard currency. This is nothing more than the top 10% getting richer at the expense of the other 90%.

Of course there are consequences to this sort of behavior, the amount of outstanding US currency, already growing at a tremendous pace before 2001, jumped an additional 50% under the Bush administration. (SO FAR, those presses are still running day and night!) Again, this is no problem for the wealthy, who diversify their assets into foreign currencies and invest in emerging markets like China or India and, while poor folks can buy ETFs too, this doesn’t tend to be a realistic alternative for the average American family that has poured their life savings into a home. The money of the wealthy flowing out of America and into foreign currencies and markets caused a record bull run in foreign markets and foreign currencies, further devaluing US assets for those too poor to diversify. Don’t worry, it’s only about 300M of us, the other 3M will be fine!

So these monetary policies have transferred Trillions of dollars of US wealth out of this country in the form of oil imports (we spend $400Bn a year importing oil alone), commodities and outflows to foreign asset markets while what little value remains in this country goes on sale to the rest of the world. Since we are a net importer of most commodities, this is no benefit to us and the main asset that goes up for sale is our land as that market begins to collapse and we begin to go in debt to foreign countries at a record pace.

For many homeowners, much of the value they gained after decades of hard work was also stolen from them as the dollar’s declining purchasing power and rising local taxes (as the only spending our Federal government cut was the money they used to give to health, highway and educational programs, forcing that burden back to the local government). This is a great chart, showing the value of a US home measured in ounces of gold over the past few years:

In order to make ends meet as inflation (which was denied by the government) out paced their stagnant real wages, many homeowners were enticed into “refinancing” their homes at low rates, many of them at “teaser” rates that seemed low at first and then spring like a trap when they “reset.” While these loans were being written at a record pace, Before 2001, net equity was extracted from US homes at a pace below $200Bn a quarter, as you can see from this chart, close to $1 TRILLION PER QUARTER was removed from US homeowner’s equity as the refi boom peaked out last year.

This is money that has been systematically forced out of the hands of the people who worked their whole lives for it to benefit the jackals who don’t care where the money ultimately ends up, as long as they get their cut. Kudos to Andrew Cuomo for taking some of the more obvious swindlers to task, but it will take a lot more than one state’s Attorney General to undo the damage that has been done to this country after 7 years of selling our nation’s future down the river in order to benefit a very select few at the top.