The Crash is a Good Thing?

Add comment September 30th, 2007

By Dale Allen Pfeiffer of The Mountain Sentinel

Since Bernanke cut interest rates last Tuesday (Sept. 25th), the already weak dollar has gone into a tail spin. Bernanke’s banker friends complained that they did not have enough money to cover their obligations and Bernanke responded by revving up the presses and printing up a slew of fresh funny money. In doing this he ignored the rest of the world, which was hoping that he would show some backbone and stand firm in support of the dollar. So now, everywhere you look, the dollar is losing its value against other currencies.

The Saudi’s unpegged their currency from the dollar for the first time since the oil dollar was established. They had no choice; it would have been suicide for them to follow Bernanke’s move. And elsewhere, other countries will have to follow suit or the US will drag them down. Japan is scrambling for shore.

Not long after the cut in interest rates, the dollar passed a key point against the Euro when it surpassed 1.41 dollars to one Euro. Since then the value of the dollar has continued to drop. The US dollar has been dropping against the Euro since January 2003. It now worth less than 59% of the value it had four years ago. At this point a dollar crash is nearly inevitable. US dollars may soon have as little value as confederate dollars.

For many years we have depended on foreign investors to support our economy by stockpiling our currency. These foreign investors cannot hold onto their dollars for much longer. Already they have lost over 40% of their investment. They will have to cut their losses and divest. This has already started to happen, and as the sell-off accelerates the dollar will find itself in a freefall which will quickly leave it a worthless currency. A massive sell-out could see the dollar losing as much as 90% of its value within days.

Snake Oil

You would not know any of this from the major news networks. They are trying to tell us that the drop in the dollar is actually a good thing. They reason that foreign consumers will flock to the US to buy devalued goods. This is a load of crap, and they know it.

US goods will not devalue. There are very few goods that are wholly US-made today. Most are at least partially manufactured offshore. Because of that, US goods will not devalue, they will simply go up in price. Soon, US consumers will find that their dollars can only purchase half of what they currently buy. And this ratio will worsen as the dollar continues to plunge. Once this crash is complete, US consumers will learn that they have lost everything. They will find that their salaries, their pensions, their health insurance coverage, everything is worthless.

So why is the media trying to sell us this lie? Simply to keep up consumer confidence. If US consumers understood what was really happening, there would be a panic. The truth could cause a run on the banks. Along with foreign investment, consumer spending is the only other pillar supporting the US economy. Consumer spending has already become sluggish. If the reality of our situation were understood, US consumer spending would quickly crumble.

The smart money is already fleeing the US market. It is diversifying into precious metals and a host of other currencies. It is quietly moving outside of the US. This migration has been going on for years, but now it is beginning to speed up. Yet, while this flight is going on, they want the general public to remain unalarmed. The smart money is trying to make its exit before a stampede blocks the fire doors. There were only so many lifeboats on the Titanic and the first class passengers were evacuated before anyone else was allowed out of steerage.

Black Monday and Bloody Tuesday

Monday, October 1st is the day of fiscal reckoning. October 1st is New Year’s Day for businesses, and on that day all the banks are required to open their books and honestly assess their current standing. The fear for the last couple months is that more than a few banks may close their doors. On Monday, we will find out for sure.

For several years now, the banks have been playing wide and loose with loans and investments. Spurred by low interest rates, they lured in consumers and home owners into mortgages and loans that they simply could not afford. It used to be that a bank would underwrite and fund every loan it made. But in the past decade, banks have developed the practice of making loans, storing them on their balance sheets for a short period of time and then packaging them into derivatives called collateralized debt obligations (CDOs). These CDOs were then sold off to investors expecting a high rate of return on the investment. Through this mechanism, the banks did not tie up their own collateral with the loans they issued, so they could issue more and more loans.

CDOs were bought up by insurance companies, hedge fund managers, pension funds and even other banks throughout the world. Due to low interest rates, these managers even purchased CDOs with borrowed money. The CDOs themselves became collateral for more borrowing.

There are hundreds of billions of CDOs out there, and until now it has been mostly speculation as to what percentage is junk. Monday, October 1st the banks will have to fess up, and we will know once and for all whether or not they are capable of covering their losses. The losses in CDOs will be amplified and complicated by the problem of commercial paper.

“Commercial paper is highly-rated short-term notes that offer investors a safe haven investment with a yield slightly above certificates of deposit or government debt. Banks use the money to purchase longer-term investments such as corporate receivables, auto loans, credit card debt, or mortgagees.” (Wall Street Journal 9-5-07)

There is $2.2 trillion in commercial paper in the US. Much of this commercial paper is currently worthless because it is tied to toxic CDOs. Yet the banks are obligated to cover this commercial paper and refinance it regularly. Right now nobody will touch anything connected to CDOs, so the banks are sitting on whatever commercial paper they have in their possession and will have to cover its finances and make up for its losses on their own.

And here is the problem. The banks do not have the collateral to cover hundreds of billions in commercial paper and failing CDOs. So they have turned to the Fed, and their friend Bernanke has tried to come to their rescue by making billions in emergency bank loans and by lowering the interest rate. This lowering of the interest rate will not be used to lure in more shady mortgages. Nobody is offering mortgages right now. The funny money the Fed is currently printing up is supposed to help cover the banks’ losses.

Unfortunately, it is too little too late. Nor would it solve the problem anyway. The toxic CDOs are still there, as is the commercial paper. At best, the lowering of interest rates will simply buy a little time, while making the crash worse when it does come. That is all Bernanke was hoping to achieve when he lowered rates last week. And he did this as a wager that the weak dollar would not unravel as a result.

That is precisely what is happening. The dollar is unraveling, and on Monday, October 1st, we will find out just how much help Bernanke provided to his banker friends. If the banking news is as grim as many analysts believe it will be, then we will hear of banks defaulting and closing their doors. Thousands of small businesses and millions of regular customers will find that they cannot access their accounts. Where they can do so, there may be runs on the banks until they do close their doors.

A Black Monday will likely be followed by a bloody Tuesday as the banking news leads to a route on the stock market. In this climate, the dollar is likely to plummet even farther as foreign investors hurry to divest themselves of their shrinking dollars. It could all be over for the US economy before the week is out. And we may well see our once vain public standing in soup lines by the beginning of November.

Police States & the North American Union

Yes, we already live in a police state. But after the economy crashes, they will act to consolidate this police state and bring it to a new level of repression. Protests will be dealt with severely and encampments of the homeless will be aggressively policed.

It is possible that they will ram through new debt regulation that could turn the US into a nation of debt-servitude. The power-players may walk away from their financial obligations, but they will not want the general public to do so. If you can declare Chapter 7 bankruptcy, do so right now. Otherwise, try to discharge all of your debts while the dollar still has some value.

Eventually the government will announce that it is abandoning the dollar and creating a new regional currency: the Amero. This new currency will coincide with plans for consolidating the US with Mexico and Canada. It will be announced as our answer to the European Union, and will be touted as the road to future prosperity.

It probably will bring some prosperity to large corporations. But for the rest of us, it will mean lower wages, environmental destruction, a strengthening of the police state and the further encroachment of fascism. The North American Union is just more snake oil to benefit the rich and oppress the rest of us.

Stock Up and Drop Out

What can be done to prepare for the worst? The best thing you can do right now is to stock up on essential goods before the dollar collapses and prices go up. Purchase dried goods such as beans, grains, flour, dehydrated milk and dried fruit. It would be wise to stock enough of these durables to last your family for a month. Keep them someplace dry and air tight.

You might also invest in other items such as soap, razor blades, batteries, gardening seeds, socks, and other small but important items. A good supply of fishing gear could come in handy. Bicycles, spare tires and bicycle trailers would also be good items to have around.

These are goods that you will find useful. They are also goods that will have a high barter value if the dollar becomes worthless. If you think about it for a while, you can probably come up with a long list of such items. Things such as deodorant, spices, solar stoves, water purification kits and/or tablets, antibiotics, vitamins and other first aid supplies could also be worth a premium.

After stocking up, it is time to wash your hands of the system which has brought us 9-11, the “War on Terror,” global warming, energy and resource depletion, environmental destruction and increased economic disparity. George Bush told us how to do this when he told us that it was our patriotic duty to consume.

Stop consuming. Find some like-minded people and work on disconnecting yourself from the system. Default on your debts if you can and pay them off if you cannot. Leave your job and find a way to support yourself outside of the system. Stop going along with business as usual and build that sustainable lifestyle that we all know is the only sane alternative. Don’t put it off any longer. Start right now while there is still a chance. Or you will find yourself slaving away in a collapsing police state in short order.