Kunstler: The Last Days of the US Dollar


Richard Moore

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The Last Days of the United States Dollar

James Howard Kunstler
November 27, 2007
Author of The Long Emergency

The great debate among those of us on the Economy Deathwatch seems to be whether
the debacle we observe around us will resolve as a crash or a slow-motion 
financial train wreck. It seems to me that at every layer of the system, we're 
susceptible to both -- in tradable paper, institutional legitimacy, individual 
solvency, productive activity, real employment, "consumer" behavior, and energy 
resources. Some things are crashing as I write.

The dollar is losing about a cent every three weeks against other currencies. A 
penny doesn't seem like much, but keep that pace up for another year and the 
world's "reserve currency" becomes the world's reserve toilet paper. Oil prices 
are poised to enter the triple-digit realm, the psychological effect of which 
may be jarring to 200 million not-so-happy motorists. The value of 
chipboard-and-vinyl houses is tanking beyond question. Of course, the 
government's consumer price inflation figures and employment numbers are 
dismissed broadly as lacking credence. But anybody who has bought a bag of 
onions and a jar of jam lately knows that things are way up in the supermarket 
aisles, and so many illegal Mexican migrants were employed in the Sunbelt 
housing boom, that their absence in the bust won't register on any chart.

It's hard to describe what constitutes the bulk of the stuff moving through the 
world's financial markets for the simple reason that it was purposely-designed 
to be so abstruse and provisional that traders would be too intimidated to ask 
what it represents -- and the growing terrified suspicion is that it's mostly 
worthless. By this I refer to the global freak show of derivatives, concocted 
"plays" on hypothetical "positions," credit default swaps, arbitrages in 
imagined "differentials," nifty equations, hedges, promises, algorithms executed
by robots, and "off-book" wishes chartered in the Cayman Islands. Probably all 
of them, in one way or another, are just scams, since they are unaffiliated with
productive activity.

At a more fundamental level, these mutant "investments" were derived from a very
tangible trade in loans and mortgages made to flesh-and-blood chumps, but even 
those are only the last in a long spiral of serial "bubbles," or market frenzies
based on unreal expectations. And this leads into the very real realm of poor 
choices, fiscal and fiduciary irresponsibility, deliberately deceptive policy, 
criminal malfeasance, and the broad abandonment of standards in acceptable 
behavior by people in authority. A lot of observers attribute this to the Gordon
Gecko ethos -- the discovery back in the 1980s that "greed is good," which was 
meant to trump a previous ethos that life is tragic.

Anyway, the trade in mutant investment entities appears to be collapsing now as 
their worthlessness in market terms (as opposed to theoretical terms) becomes 
manifest. The major holders of this dreck are losing the ability to conceal 
their losses, but suspicion now reigns that the losses are far greater than even
the massive multiple billions reported so far by the likes of Merrill Lynch, 
Citicorp, and others. I suppose that what we've been seeing lately is a 
desperate attempt to hold things together just long enough to cut those 
Christmas bonus checks so that when the pink slips do finally fly in 2008, at 
least some Big Boyz will walk away with enough cash to cover a hacienda in 
Uruguay and the salaries of a half-dozen private security goons to guard it.

But I must say, at the risk once again of sounding extreme, that the structural 
and systemic sickness in the finance realm is now so severe that it is hard to 
imagine we will get through the month of December without some major trauma in 
the markets. In fact, I'd go so far as to predict a thousand-point drop (or 
more) in the Dow just in this week after Thanksgiving. Real wealth "out there" 
is evaporating like popsicles dropped on the floor of Hell's fifth circle. It is
coming out of the system whether the Big Boyz or anybody else likes it or not, 
and its absence will assert itself.

At the risk of sounding even more extreme, I would be hard put to believe any 
reports that "consumer" spending in the days following Thanksgiving will match 
the hopes and wishes of economic officialdom. My own hunch is that average 
Americans are so maxed out on debt that they don't know whether to shit or go 
blind. Perhaps lot of them are willing to take a last step into fatal insolvency
in order to put a plasma TV screen under the Christmas tree and appear as heroes
to their families. If that's the case, it would only imply a greater bloodbath 
in credit card default thundering through the system in February and March, 
which would only deepen the carnage in collateralized debt instruments further 
up the food chain.

That stuff probably has a long way to unwind, even as the "train" of losses hits
the immovable obstacle of reality and the "boxcars" of consequence fly off the 
rails. The slow-motion train wreck could sweep away an awful lot of familiar 
things in its path -- banks, companies, government-sponsored enterprises, whole 
industries, whole economies, nations, up to and including the prospects for 
civilized existence, if severe hardship leads to war, which it often does.

To some extent, the speed and severity of the financial train wreck will occur 
in a mutually reinforcing relation to what happens in the oil markets. The rise 
in price is only the mildest symptom of growing instability for the system that 
allocates the world's most critical resource. Even in the face of "demand 
destruction," weird changes are occurring in the way that the oil producers do 
business. The decline in export rates and the new spirit of "oil nationalism" 
will take center stage now, even if the US economy seizes up. These phenomena 
will represent a new cycle in world affairs: the global contest for remaining 
fossil fuel resources.

Sooner rather than later, the next symptom will appear: spot shortages around 
the US and hoarding behavior. This is what will finally wake the American public
out of its long sleepwalk (and Matthew Simmons said this first, by the way) -- 
when the lines form at the gas stations and the tempers flare and the handguns 
come out of the glove compartments. In the financial markets and the economies 
of nations, it's not a case of either / or. It's a matter of either / and.

James Howard Kunstler
November 27, 2007
Author of The Long Emergency

Jim Kunstler is the author of The Long Emergency, The Geography of Nowhere and 
many other books. He lives in upstate New York.

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