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Lack of growth in Wal-Mart sales stokes fears about U.S. recovery
By Doug Noland
Friday, November 26, 2004
Dear Mr. Dollar:
I have for some time expounded your shortfalls and
frailties.And now, with your soundness and future
status having been elevated to the crucial issue in
global markets and economics, it is appropriate that
I address my heightened concerns to you directly.
There are some critical issues that I want to ensure
you are aware of. As much as I have criticized you
in the past, I today fear for your future.
First of all, there is great confusion and misinformation
as to who you really are and what role you play. Some
believe -- and many would like to perpetuate the myth
-- that you are the "currency" created and managed by
the Federal Reserve.I think even you would admit that
this is an expedient and false impression.
Federal Reserve liabilities are but a small and shrinking
portion of dollar-denominated claims, and the Fed has
quite limited capacity to support you during episodes
of faltering confidence and market tumult. The Fed's
previous effort to support you by increasing the
attractiveness of U.S. securities is at this point a
largely spent force. And while the consensus view
holds that the Federal Reserve and administration have
advantageously used your devaluation as a policy tool
-- the Fed to "fight deflation"and the Bush team to buoy
U.S. manufacturers and employment -- it is more
accurate to recognize that the actual policy mechanism
has been to incite the (mindless) creation of additional
dollar claims (credit inflation), thereby stimulating
expenditures and asset inflation (real estate, bonds,
and equities, in particular).The policy has been to
perpetuate bubbles, and only talk as if they were
concerned about your strength and welfare.
"Strong dollar" blather has similarly lost efficacy.
Many confuse you with dollar "bills" -- Federal Reserve
notes -- and Treasury debt. Others commonly mistake
you for numerous credit instruments issued by various
types of institutions that can be used these days to
consummate transactions in the real economy or
financial markets. Some erroneously presume that
scores of previous gross financial transgressions and
policy derelictions -- not to mention the consequent
deep structural economic maladjustments and
endemic inflated asset prices -- will somehow be
forgiven if only the federal budget is balanced. If it
were only that easy, Mr. Dollar. I wish it were true.
Many refer to you as "fiat," insinuating that you are
authorized or sanctioned by the U.S. government.
This is inaccurate.The Fed enjoys no dollar
"monopoly power," while Secretary Snow and the
Department of the Treasury today possess virtually
no power at all. The issuance of dollar debt is open
to virtually all, while the size and nature of the dollar
trading market -- dominated today by derivative
trading, "hot money" speculative flows, and foreign
central banks -- is massive and unlike anything in
There were long periods when you were backed by
gold and other precious metals. This provided
inherent value for dollar instruments, as well as an
effective mechanism to restrict over-issuance.And
there were also decades when the Federal Reserve
and government authorities thoughtfully regulated
the creation of additional dollar financial claims.
Indeed, closely-regulated commercial banks were
the chief non-federal government entities sanctioned
with the capacity to create new dollar-denominated
purchasing power. In such a circumstance, the
terminology "fiat currency" was generally applicable.
But today, in a Fancy-Free Marketable
Securities-Based Financial New World Order -- with
myriad institutions creating liquid dollar-denominated
liabilities, and securities playing such an instrumental
role in the global system's payments settlement
mechanism -- the term "global wildcat finance" is
much more legitimate than "fiat currencies."
Mr. Dollar, it is today more factual and certainly
analytically advantageous to think of you in the
context of a "unit of account" in the global pricing
of U.S. assets.Your value is determined in the
marketplace (currency futures trading), and then
is used to impute value for a vast array of claims
throughout the global "ledger" of financial assets
and liabilities. As a unit of account your intrinsic
value would generally move inversely with the
quantity of financial claims created. However --
and we will return to this crucial issue -- any
chasm that develops between market perceptions
and reality creates fragilities and thepotential for
dislocation.Your market value will always be
relative to other units of account (currencies) and,
at times, to perceived superior stores of value
(gold, precious metals, crude, and energy).
Without the traditional anchor of inherent
fundamental value and/or constrained issuance,
the vagaries of marketplace perceptions play an
instrumental role. This role has risen in conjunction
with the rising prominence of marketable securities
throughout global credit systems. For years
(especially the '80s and '90s), your relative value
was supported by fragilities and recurring crises in
"competing" currencies or currency blocks.The
dollar was increasingly perceived as a universal
safe haven (remember gold at $255 and the euro
at 85?).For a few ("blowoff") years your perceived
worth was completely overblown by massive
speculative ("king dollar") flows into U.S.
securities markets.This inflated demand (fostered
by the Fed and the leverage speculating community's
attendant desire to play the Greenspan bond
bubble) accommodated an historic bubble of
non-productive debt and asset inflation --
self-reinforcing dynamics that have placed you
at extreme risk.
The past two years of massive global central bank
buying has only augmented these dysfunctional
monetary processes and incited acute monetary
disorder. And while your relative value did decline,
the gap between the massive inflation of debt and
the underlying limited capacity to create economic
wealth remained extraordinarily wide. Remarkably,
confidence in you remained high.
Most importantly, you are the "unit of account" for
financial claims created by the U.S. credit system.
Regrettably, for some time the "activist" Greenspan
Fed has nurtured -- and the U.S. financial sector
has enthusiastically delivered -- an unprecedented
inflation of new credit instruments (financial claims).
And the greater the credit bubble, the more
committed the Fed has been to providing unlimited
liquidity to the markets.
Unlimited marketplace liquidity?Mr. Dollar, this is
where they ensured your downfall.Moreover, a very
large percentage of thee new financial claims was
created in the process of financing consumption
(especially imports and "services"), asset inflation
(real and financial), and real investment of dubious
long-term economic value. Massive foreign dollar
claims have been accumulated that cannot be
matched against true economic wealth.And I fear a
large amount of this risk has been "hedged" in the
derivatives markets, which implies the potential for
a catastrophic market dislocation in the event of
panic "portfolio insurance"-type forced selling.
A myth has been propagated by no less of an
authority than our top central banker that the U.S.
economy is both wonderfully productive and
resilient, and that the magic of the market
mechanism will painlessly rectify U.S.
imbalances.But the reality of the situation is so
much different: Unrelenting inflation of dollar
financial claims has fueled unsustainable
economic and asset bubbles and these powerful
bubble dynamics have been mistaken for economic
efficiencies and resiliency. And, importantly, the
Fed is determined to perpetuate credit inflation and
liqudity excesses in a desperate gamble to avoid
asset price and debt collapse. Indeed, Mr. Dollar,
it is the pyramid of dubious dollar-denominated
claims -- and the Greenspan Fed's determination
to sustain it -- that are at the core of your risk
to collapse.You've been hung out to dry.
Mr. Dollar, no one knows better than you how
present-day notions of monetary and fiscal
policies -- along with New Age Finance, have left
you unguarded and vulnerable. Considering your
role as the "world's reserve currency" and the
eminent "unit of account" for global prices, to not
assiduously guard your well-being is an outrage.
The complacent consensus view nonetheless takes
comfort from the historical ebb and flow in your
relative value to other currencies. I would, instead,
suggest that the ongoing saga of contemporary
finance and its recurring currency crises and
collapses leave zero room for complacency.
And as you know, there is a consensus view that
holds that your value is being somewhat sacrificed
by the Fed as it sticks with its accommodative
monetary policy ("peg" interest rates low and let
your value "float"). Few in the United States see
much risk with this strategy, with most in
Washington and Wall Street content to enjoy the
seductive "debtors' blessing" delusion of
devaluation and inflation.
This is a quagmire.And if I had any hope that low
interest rates and the status quo would rectify acute
U.S. financial and economic fragilities I would not
be writing to you this evening. But I fear the worst:
The Fed is immersed in a trap of runaway credit and
asset inflation.Global players -- including central
banks -- are coming to recognize there is no way
out.Almost anything non-dollar is viewed as a
superior store of value to investors and the massive
speculating community. And perhaps others see
dollar vulnerability as a potential countervailing
force to aggressive U.S. foreign policies.
Things don't look good, Mr. Dollar. Confidence is
faltering, financial fragilities providelittle room for
error, and I fear we have passed the point where a
dollar crisis is avoidable.
I wish you the best in what will likely be a difficult
and tumultuous period.And I do sincerely hope you
can muster all your strength and surprise us with
It certainly didn't have to be this way. I hope the
Greenspan Fed (and the "inflationists") will be held
accountable. Too much lunacy has been spoken and
written, while the scourge of financial folly worked
furtively to destroy you. The world's pre-eminent
currency was a terrible, terrible thing to waste.
There will be huge costs to pay, and I'm saddened
and sorry it happened.
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