classical economics
for analysis,  forecasting
and policy design

Dollar and Debt Transparency
By Wayne Jett © September 25, 2009
    With governments representing 20 economies meeting in Pittsburgh today and a governor of the Federal Reserve System opining in the Wall Street Journal, attention focuses on the woeful future (if any) of the U. S. dollar. Orthodox views, co-opted for decades by the Fed’s lavish spending among economists and selective leaking of insider information, accept with resignation that the dollar’s role as international reserve currency is a dying star, soon to go dark.
    Not long ago, giving up the dollar’s preeminent role in world commerce was unthinkable in U. S. financial and political circles. But growing output of BRIC nations (Brazil, Russia, India and China) earns them more influence in determining the quality of paper currency they receive for their products. The Fed demonstrated in 1987-1996 that dollar value relative to gold could be kept relatively stable. But the Fed caused tremendous commercial turmoil and economic damage by deflating the dollar nearly 50% in 1997-2001 and then devaluing by two-thirds since 2003. This is currency instability of a degree unacceptable to producer nations with any alternative.
    China and others are looking to a currency of sorts in the nature of “special drawing rights” (SDRs) issued by the International Monetary Fund acting as a central bank. Some retort that the dollar will remain the preeminent reserve currency due to “stability of our political system” and “the rule of law” associated with it. If these two measures are to be determinant, the dollar is presently in real trouble, although SDRs are also problematic.
Political Stability and Rule of Law
    Political system stability is defined partly by adequacy of national security and defense against enemies foreign and domestic. While U. S. armed services and diplomacy have served adequately to date, both are vulnerable to failing economic prosperity and to incapable political leadership. Apart from international concerns, domestic political affairs in the U. S. now are as unstable as at any time since the Great Depression, and for similar reasons. The U. S. political system is not delivering justice to the people, particularly as demonstrated by rampant financial fraud during 2007-2009.
    This is where the “rule of law” determinant of the dollar’s future comes into play. Yes, massive fraud in financial markets gives rise to social unrest and instability in the political system. In addition, however, fraud that is left unchecked by law enforcement debilitates and disables markets. Capitalism cannot function productively without the rule of law. This is what demolished corporate equity markets and drove private capital from markets for commercial paper, bank shares, mortgage lending and other financial assets in 2007-2009, enabling Treasury and the Fed to take over those previously efficient private markets. Efficiency will not return to those markets until the rule of law is restored and government is otherwise out of them.
Bringing Law Back to Markets
    As previously advised, the Fed’s only chance to drain the gigantic $1.2 trillion added to the monetary base during the past year without collapse of the financial sector depends upon restoration of rule of law in U. S. markets. The SEC must require all failed-to-deliver shares to be bought and delivered immediately, and must require pre-borrow of shares for all future short sales. Congress must ban all “side bet” credit default swaps and reform derivatives markets to prevent manipulation of crude oil prices. Each of these actions would be tremendously positive for the dollar. Yet, apparent lack of political resolve to do any of them partly explains the dollar’s vulnerable condition.
    If you are tempted to think such concerns as major public companies (not to mention smaller ones) having their shares prices driven to ground by naked short selling aided by credit default swap side bets, consider reports this week by Reuters and by John Mauldin that 40% of NYSE volume is comprised of trading in four companies: Bank of America, Citigroup, Fannie Mae and Freddie Mac. Whether this results from High Frequency Trading, which effectively front-runs all buy and sell orders, or NSS/CDS assaults of the nature which took down Bear Stearns, Fannie, Freddie, Lehman and AIG, plus others, is unknown to the public. Either tactic is deceitful and manipulative. The SEC remains mum and submissive under new management.
    The Federal Reserve knows of these concerns, but their efforts to lead towards further dollar devaluation reiterate that the Fed is a central player causing the problem and will not provide a solution. With currency worth 3.5 cents compared to the 1970 dollar, the Fed seeks “gradual,” “controlled” devaluation of 50% more. Why?     
    Total U. S. debts are now said to be $60 trillion. America’s future generations cannot possibly pay more than $30 trillion – no matter how high taxes are raised and no matter how poor they are made to be. Since the debts are unaffordable, the Fed proposes to cheat those who are owed the money by devaluing the currency. This is the quality of “rule of law” which prevails at the Fed and undergirds the dollar.
Solving the Debt Conundrum
    Here is an alternative to the Fed’s scenario. Let’s have full transparency regarding the “debt” incurred. List each and every debt and fully describe it. Then we can decide whether the debt is justified, or should be modified or even repudiated. A substantial element of debt surely relates to health care costs, which rise inexorably as a result of monetary inflation. Dollar devaluation makes such “debts” larger, not smaller. Other “debts” have been undertaken, presumably, to bail out big investment banks, or to pay off their “side bets” with big winnings. Perhaps the “debts” found to be worthwhile would be even less than $30 trillion. Without full transparency, the public cannot know.
    Would it not be far better to modify, claw back or repudiate such “debts” now than to impose them on future generations who had no part in creating them? Some of the “debts” are owed due to promises to the present generation. It is a higher morality to break such political promises to those now living than to rob the value of capital to be created by labor of human beings yet unborn by devaluing their currency. At least those now living should be presented with a fully informed opportunity to do this, rather than being force-fed new debt piled upon debt as desired by the federal government’s Wall Street money masters.
    Bring law and order to financial markets. Review obligations created by Congress, the Treasury and the Fed, and decide their merits in the light of day. This is the prescription for returning the dollar and the American republic to health. ~