Nobel Economist: Dollar Not Good Store of Value, Has High Degree of Risk

Nobel Prize-winning economist Joseph Stiglitz recently voiced his rather pessimistic view of the US currency, saying, “The dollar is not a good store of value," and "anybody looking at the dollar has to say there’s a high degree of risk.”

Stiglitz, a Columbia University economics professor, also told a conference in Bangkok this month that he is concerned about the growing specter of inflation.

Under the leadership of Ben Bernanke, over the past year the Fed cut its benchmark lending rate to as low as zero while creating an additional $1.1 trillion in credit that was subsequently unleashed into the economy.

“As the balance sheet of the Fed has blown up, as the deficit of the U.S. and the debt has increased, people have asked the obvious question: will there be inflation in the future? Right now we’re facing deflation, but some time in the future, there will be consequences," said Stiglitz.

He is not alone in this view. Curtis Mewbourne, a portfolio manager at Pacific Investment Management Co., the world’s biggest manager of bond funds, says the dollar will weaken as the U.S. pumps “massive” amounts of money into the economy.

“Investors should consider whether it makes sense to take advantage of any periods of U.S. dollar strength to diversify their currency exposure,” Mewbourne wrote in his August Emerging Markets Watch report. “The massive amounts of U.S. dollar liquidity produced in response to the crisis” have helped reduce demand for the currency, he wrote.

China, the world’s largest holder of foreign-currency reserves, and Russia have both called for a new global currency to replace the dollar as the dominant place to store reserves.

Stiglitz concurs.

“There is a need for a global reserve system,” Stiglitz told the Bangkok conference. "The current reserve system is in the process of fraying.”

Mewbourne has a similar view, writing, “While we have not yet reached the point where a new global reserve currency will arise, we are clearly seeing a loss of status for the U.S. dollar as a store of value even in the absence of a single viable alternative.”

Proposals for a new global currency are based on a weighted basket of international currencies, plus gold. Economists argue that such an alternative could be a less volatile alternative than the U.S. dollar. At present, other nations are affected by the dollar's vulnerability to swings in the U.S. economy and changes in U.S. fiscal and monetary policy.

Bill Gross, Mewbourne's PIMCO colleague, is also warning that the U.S. currency will fall. In June, Gross urged holders of dollars to diversify before central banks and sovereign wealth funds do the same because of concerns that government budget deficits will deepen.

International Energy Agency: Oil Running Out Far Faster Than Previously Predicted

Dr Fatih Birol, the chief economist at the respected International Energy Agency, says the world is heading for a catastrophic energy crunch that could cripple a global economic recovery because most of the major oil fields in the world have passed their peak production.

Dr Birol said that the public and many governments appeared to be oblivious to the fact that the oil on which modern civilization depends is running out far faster than previously predicted and that global production is likely to peak in about 10 years – at least a decade earlier than most governments had estimated.

But the first detailed assessment of more than 800 oil fields in the world, covering three quarters of global reserves, has found that most of the biggest fields have already peaked and that the rate of decline in oil production is now running at nearly twice the pace calculated just two years ago.

The IEA estimates that the decline in oil production in existing fields is now running at 6.7 percent a year compared to the 3.7 percent decline it had estimated in 2007, which it now acknowledges to be wrong.

In its landmark assessment of the world's major oil fields, the IEA concluded that global consumption of oil was "patently unsustainable", with expected demand far outstripping supply.

Oil production has already peaked in non-OPEC countries and the era of cheap oil has come to an end, it warned.

In most fields, oil production has now peaked, which means that other sources of supply have to be found to meet existing demand.

Even if demand remained steady, the world would have to find the equivalent of four Saudi Arabias to maintain production, and six Saudi Arabias if it is to keep up with the expected increase in demand between now and 2030, Dr Birol said.

"One day we will run out of oil. It is not today or tomorrow, but one day we will run out of oil and we have to leave oil before oil leaves us, and we have to prepare ourselves for that day," Dr Birol said. "The earlier we start, the better, because all of our economic and social system is based on oil. So to change from that will take a lot of time and a lot of money and we should take this issue very seriously," he said.

US Income Inequality Reaches Record Level

According to research done by Emmanuel Saez, a professor of economics at U.C Berkeley, in 2007, the top 10% of income and wage earners got half (49.74%) of all income and the other 90% split the other half.

The previous peak level was 49.29% in 1928, the height of the 1920s stock market bubble.

If capital gains are excluded, we were not quite at the Roaring 20’s levels of inequality, but were close at 45.51% vs. 46.09% in 1928.

The average from the end of WWII through 1980 was 32.3% excluding capital gains and 34.0% including them.

But the disparity began widening in the early 1990s. According to Saez, "The top 1% incomes captured half of the overall economic growth over the period 1993-2007."

And the disparity became especially distorted during the current decade.

"While the bottom 99 percent of incomes grew at a solid pace of 2.7 percent per year from 1993-2000, these incomes grew only 1.3 percent per year from 2002-2007. As a result, in the economic expansion of 2002-2007, the top 1 percent captured two-thirds of income growth," reports Saez.

Even while the stock market surged, employment expanded, and home prices inflated at historic levels, things were not nearly so rosy for the vast majority of U.S. workers.

The full report can found at: http://elsa.berkeley.edu/~saez/TabFig2007.xls

"As in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped." -- Marriner S. Eccles (1951), FDR's Fed Chairman, on events leading to the Great Depression

US Bank Closings

2007 - 3
2008 - 25 (more than in the previous five years combined)
2009 - 74, the most since 1992 (122). It's only August.

Bank closures typically take place on Fridays, and this past Friday was no exception. Colonial Bank was the latest bank to fall, and it was the biggest failure this year.

The FDIC’s list of “troubled banks” stood at 305 at the end of the first quarter, the latest data available.

On August 14, Bloomberg News reported that more than 150 publicly traded U.S. lenders had nonperforming loans above 5% of their total holdings. Former regulators say that this is the level that can wipe out a bank's equity and threaten its survival.

Last September, Christopher Whalen, managing director of Institutional Risk Analytics, which sells its analysis of FDIC data to investors, predicted that 100 U.S. banks would fail by the end of 2009. The current pace of closures could easily surpass that.

By the end of 2008, the FDIC expected bank failures to cost its insurance fund around $65 billion through 2013, up from an earlier estimate of $40 billion. However, its problems have grown continually worse.

As of March 31, the FDIC had $13 billion to cover $4.83 trillion in deposits. Does that make you feel insured?

The August 14th failure of Colonial Bank (the biggest failure this year) will deplete the FDIC’s deposit insurance fund by $2.8 billion, the agency said.

So far, failures this year have cost the insurance fund nearly $18 billion.

Think about that: $13 billion in assets, $18 billion in losses. Does that make any sense? It seems that the FDIC's insurance fund is already broke.

History and context:

- In 1930, 1300+ banks failed, 600 in just the final two months of the year.

- During the savings-and-loan crisis (1986-95), 2,377 banks failed.

- In 1989, 534 banks were closed, the most since 1934.

- According to the FDIC, since 1934, the only two years with no bank failures were 2005 and 2006.

- From 2000=2007, only 32 US banks failed.

Deutsche Bank Makes Dire Housing Projections

In June, Deutsche Bank forecast that home prices – covering 100 U.S. metropolitan areas – will decline an additional 14% from the first quarter of this year through the first quarter of 2011, for a total drop of 41.7%.

In March, it had projected that the total decline would be 39.6%.

By this measure, we are at least a year-and-a-half away from the end of this housing recession/crisis.

But that isn't the worst of the bank's predictions.

According to Deutsche Bank, 48% percent (or nearly half) of all US mortgages will be underwater by early 2011. This is a stunning, and dire, prediction that would affect some 25 million homes.

Deutsche Bank also predicts that 41% of all prime conforming mortgages will be underwater by early 2011. For prime "jumbo" mortgages (principal values larger than the conforming maximum), the underwater condition is projected to rise to 46%.

"Underwater" defines the condition of the mortgage balance outstanding being larger than the market value of the house. Prime mortgages are those issued to borrowers with the highest credit ratings. Conforming mortgages are those that come within the size limits prescribed for Fannie Mae and Freddie Mac underwriting. Prime conforming mortgages are considered the least risky of all mortgages.

As of March 31, the share of homes mortgaged for more than their value was 26 percent, or about 14 million properties, according to Deutsche Bank. Further deterioration will depress consumer spending and boost defaults by borrowers who face unemployment, divorce, disability or other financial challenges, the bank analysts said.

If the employment picture were to improve, the number of underwater mortgagees staying in their homes would be greater than it will be if unemployment doesn't peak for another 1-2 years, which was the situation after the last recession in 2001.

The Deutsche bank projections imply that it does not see an improved employment picture developing.

Some of the millions of currently unemployed are going to become future defaults, unless the unlikely event of increased employment occurs in the coming months.

At present, the average California foreclosure has a total loan balance of $425,134 on a home that is now worth $236,739 — meaning the average foreclosure is 45% underwater.

And the fallout may get worse; 72% of foreclosures aren't being put on the market because lenders are waiting to see how much additional loan modification assistance will be provided by the federal government.

However, being that our government is massively in debt — to the tune of $13 trillion — it may have reached the limit in bailouts and assistance that it can provide.

The Fed Rules All

Despite the fact that more than half of the House of Representatives signed on as co-sponsors, and despite the efforts of Senators as disparate as Jim DeMint and Bernie Sanders, the Senate still managed to block a bill to audit the Federal Reserve on procedural grounds.

In July, the Senate brazenly chose not to have the Government Accountability Office increase its scrutiny of the Federal Reserve by auditing it and then issuing a report with its conclusions.

It's worth noting that DeMint is a southern, Christian conservative, and the liberal Sanders is a self-described socialist. The two rarely agree on anything, except that the Fed needs to be audited for the good of the nation.

As DeMint put it, " The value of our dollar, our whole economic system, rides on this unelected, secret agency called the Federal Reserve. We're not sure what they're doing right now.... Frankly, a lot of us here in this country, and around the world, are concerned that we're going to destroy the American dollar and the worldwide reserve currency."

DeMint said that he and some of his colleagues are concerned that the Federal Reserve will monetize the debt (by printing more money), buy our own debt, and ultimately devalue the dollar in the process.

Yet, despite the Fed's utter lack of transparency, the Obama administration has proposed giving it the power to regulate all financial institutions — banks, insurance companies, brokerage houses, etc.

And now we have seen a concerted effort to keep the GAO, and the Congress, from taking a look at the Fed's books. Clearly, the Fed fears oversight. It must feel quite relieved that it will continue operating in secrecy.

The fact hat a bill with 250 co-sponsors in the House could still fail in the Senate says a lot about the awesome power of the Fed.

For what it's worth, DeMint says he will keep bringing the bill up as an amendment to other Senate bills, hopefully getting it passed that way.

Why should you and all Americans care?

The Federal Reserve’s balance sheet is so out of whack that the central bank would be shut down if subjected to a conventional audit. That's what Jim Grant, editor of Grant’s Interest Rate Observer, recently told CNBC.

With $45 billion in capital and $2.1 trillion in assets, the central bank would not withstand the scrutiny normally afforded other institutions, Grant said in a live interview.

In other words, it's all a giant charade.

Perhaps Americans are finally getting hip to the Fed's smoke and mirrors act.

According to a recent Gallup Poll, the Federal Reserve has the lowest approval rating of nine various federal agencies -- including the IRS.

In the July poll, only 30% of respondents gave a thumbs up to the Fed, while 40% said the IRS was doing an excellent or good job. A majority of the public (57%) sees the Fed’s current performance as either poor or fair.

That amounts to a serious public relations problem for the Fed.

But why should they worry? They've got the Senate under their thumb and on their side.

This is beyond politics. "We the people", and our interests, are not being represented. Instead, we are being blinded and then robbed.

"To understand how unwise it is to have the Federal Reserve, one must first understand the magnitude of the privileges they have. They have been given the power to create money, by the trillions, and to give it to their friends, under any terms they wish, with little or no meaningful oversight or accountability. Thus the loudest arguments against greater transparency are likely to come from those friends, and understandably so."
- Rep. Ron Paul