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What's Behind the Door?   (October 1, 2007)


After reading the mainstream press (Wall Street Journal, Barrons, BusinessWeek. S.F. Chronicle etc.) this weekend, I had an epiphany: everything's wonderful!

The dollar is at historic lows? No problem! The depreciating dollar will boost the sales and profits of those wonderful U.S. global companies like Coke.

Inflation? It's only 1.8%! No problem! Are they measuring it on Planet Earth? So they claim.

Mergers and Acquisitions are back! Credit crunch--gone! The investment bankers sold someone $9 billion of junk paper for the First Data buyout (at 96 cents on the dollar plus a basket of goodies for every billion), and they only planned to sell $5 billion, so this means it's all good again-- buyers will snap up any junk which is put out on the curb for sale. Only $14 billion more to dump on some blind trusting fools....

Consumers bought more, so there won't be a recession. Well yes, some of those increased sales were cars shoved off the lots via huge discounts, but sales are sales.

The world can handle $100/barrel oil, no problem! They didn't ask you if you're fine with $4/gallon gasoline, but this is the headline on the WSJ, so it must be true: $100/barrel oil is nothing.

I feel like the kid who senses a monster behind the door. The adults keep reassuring me that it's all my imagination--but then what's that burning smell, and that black slime oozing out from beneath the door? Why is the door glowing orange and putting out so much heat?

Let's test the MSM's knowledge a bit. The U.S. exports $1 trillion a year and imports $1.8 trillion, leaving a $750 - $800 billion "current account" trade deficit each and every year--an imbalance that must be filled by foreign money and foreign investors.

So the dollar plummets 5.1% in less than a month (from 81.80 to 77.60 on the DXY index), lopping 5.1% off the value of every foreign investor's holdings of stocks, bonds and Treasuries. How happy would you be to lose 5% a month on investments which pay 5% or less a year? Do you now want to buy more dollar-denominated bonds?

If you bought Treasuries in 2002, when the dollar was 120 on the DXY, you've already lost 36% of your underlying value. How much more will you have to lose before you get slightly annoyed with a Fed and U.S. Treasury which gleefully depreciates your holdings?

Recall that non-U.S. investors hold over $2 trillion in Treasuries and more than $2 trillion in corporate, mortgage and other debt/paper. The 5.1% drop in the dollar this past 4 weeks has cost them $204 billion. A $100 billion here, a $100 billion there, and pretty soon you're talking real money.

So let's say Boeing, IBM, Coke, John Deere, et. al. can sell 10% more goods and services because the dollar is now a Third World currency. Great. Add $100 billion to U.S. exports.

Oops! All the MSM cheerleaders forgot one tiny little detail: oil is priced in dollars, and oil rises in dollar-denominated cost when the dollar loses value. So let's do some simple math. The U.S. consumes 23 million barrels of petroleum a day, or 8.4 billion a year. Roughly 63% of that is imported. Since oil costs $20 more a barrel this year, as the dollar has lost ground, then that adds $20 X 5.5 billion barrels, or $110 billion to the U.S. import bill.

So the dollar dropping like a stone adds $100 billion in exports, and costs us $110 billion in added imports.This kind of factless, mathless, exceedingly one-sided cheerleading-- that the plummeting dollar magically only adds to our exports, not to our imports--is, sadly, what passes for "analysis" in the media in our cheerily unquestioning era.

So what's behind the door? Nothing, as the mainstream media insists? (Is that a bead of sweat on your brow, WSJ?) Or is the monster much closer, and more dangerous, than we even imagine?

For another view of what's behind the door, let's turn to frequent contributor Harun I.:

In fact the markets and the currency don’t worry me as much as the specter of the end of cheap energy and diminishing water resources. Access to energy was very significant in WW II. Our war machine is an energy hungry beast. At some point people will say, “to hell with democracy, this is about survival.”

The other thing that weighs heavily on my mind is the fragility of the food supply chain. The developed world is not ready for any shocks whatsoever to the food supply. New Orleans hasn’t been studied enough. Things broke down quickly and no one to my knowledge has discussed openly the ramifications of the same situation on a mass scale. To be clear I am not indicating the particular cause but the effects. The effect was the interruption of resources, food supply and utilities. Here we are in the 21st century in the free world’s wealthiest, most powerful nation and civility disappeared in the blink of an eye. Katrina should have been understood as a dark reminder that first world and third world may be separated by one natural disaster.

Everything you mentioned in your posts the last two weeks is an indication of a civilization on the brink. States are no longer self-sufficient and the federal government cannot respond competently to anything but super-minor events. Our systems have become very complex and therefore vulnerable to minor shocks. At the point we lose balance and fall into the abyss money won’t matter.

Longtime correspondent (and Haiku stalwart) Jed H. provides a commentary, haiku and photo on what's behind the door.

Well , just as we had expected , the FED made a (deep) cut to FedFunds Rate from 5.25 to 4.75 % , most likely a Big Worry over the Slowing Economy . And right on cue , the US Dollar Index broke below 80.00 & slid to ~ 78.50 ; Gold & Silver spiked to recent new highs ; & Wall St took in a relief rally . But, " Nothing Changed " for the....Housing Bubble Bust !!

This brings out my "HAIKU POEM" RE: INFLATION:

ONE Black Swan ...Landed
U.S. Dollar nears Worthless
Look Out ! FAR Below !!

I felt compelled to send you this Image of Despair -- a woman in the Great Depression of the 1930s, there with three young kids (the youngest is barely seen).

Of great concern to me is that with our "Mountains of Debt", & your Blog about the "ROT Within" --- political, financial, Wall Street, Main Street etc, that the US of A is heading back ...towards this "Condition" !!

And, from what I read & surmise, the US Housing Bubble, Bursting will continue at least through 2008 & likely into 2009, or beyond . BEN&FED will NOT likely be able to contain HIGHER T-bond Rates, as the $USD$ comes under extreme pressure, commodity prices soar, etc . The "UNwinding" of the Credit & Derivatives (Hedge) Bubble, which the (Greenspan) FED created, & in addition to the Housing Bubble !! ALL that to avoid the pain from the Y2K Tech/ Stock MKT Bubble -- this one may NOT be contained !!

So , I send you this .... VERY SAD Image, and my HAIKU as follows:

Credit BUBBLE BURSTS
Swirling ABYSS of BLACK HOLES
The FACE of DESPAIR

(CHS NOTE: This is a very famous photo by Dorothea Lange, taken in 1936, which goes by the name Migrant Mother.)

Thank you, Harun and Jed. If you consider any of the Big Lies pounded home by the mainstream media week after week--an unquestioning parroting of obvious obfuscations such as inflation is a miniscule 1.8%, the trashing of our currency is actually a good thing, oil rising to $100 /barrel is of little consequence--then you realise they have lost all credibility as anything but shills for investments banks and those who might lose their grip on power lest the drugged-out, anxious populace awaken from its long seven-year slumber.


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copyright © 2007 Charles Hugh Smith. All rights reserved in all media.

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