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Dreamweaver
12-17-2008, 08:10 AM
Yikes!!!
What’s the worst that could happen?

That’s a question that James Rickards spends a lot of time pondering these days, as he sifts through the national security implications of the financial crisis facing the United States.

Rickards will lay out his worst case scenarios in a lecture sponsored by the Navy and the Office of the Secretary of Defense for Policy tonight. And his forecasts aren’t for the faint of heart.


The Bait Effect

Terrorists, and al Qaeda in particular, are fascinated with the idea of destroying the U.S. economy. Rickards worries that the economic meltdown in the United States could serve as bait of sorts for a terrorist attack, as plotters calculate that a strike now could have a “force multiplier” effect because of the already skittish U.S. stock market.

The China Syndrome

The Chinese own more than $500 billion worth of U.S. Treasury bonds, and billons more in the debt of other U.S. entities such as those held by Freddie Mac and Fannie Mae. And a general sense of mutually assured financial destruction keeps them from wielding that debt like a weapon: if the Chinese dumped U.S. debt on the global market, their own holdings of U.S. debt would decline in value, the U.S. economy would be damaged, ultimately harming the Chinese economy by reducing American ability to buy more Chinese goods.

The Existential Crash

A pessimist by nature, Rickards believes that many economic forecasters are wrong, and the recession will get far worse than predicted.

He sees an epic disaster scenario in which the U.S. gross domestic product declines by a staggering 35 percent over the next six to seven years. Crippling deflation could take hold. Unemployment, he says, could approach 15 percent.

That’s a calamitous rate, but it would not be an all time high: unemployment hit 25 percent during the Great Depression.

“The national security community needs to be conversant with this,” Rickards said. “In defense, intelligence, and national security, you earn your money by preparing for things that may be remote, but pose an existential threat if they come to pass.”

In this scenario, the possibilities for global unrest increase dramatically as a staggering United States retreats from foreign aid and global diplomacy and the list of dangerous failed states grows sharply.

The Alternate-Dollar Nightmare

“The Number One vulnerability is the dollar itself,” Rickards concluded. “We’re printing them and shoving them out the door, and the Fed is basically out of bullets. So why hasn’t the dollar collapsed? The short answer is, global investors don’t have any other choice.” That is, there simply aren’t enough Euro- or Yen-backed securities for investors to shift their money out of dollars and into some other currency.

But what if some kind of global coalition – say a trillion-dollar sovereign wealth fund allied with several countries around the world – banded together to create a gold-backed alternative to the dollar?

Rickards says investors – many of whom already resent that they have no alternative to the dollar – would sell American currency in huge numbers to take advantage of the new opportunity. “If that happens, that’s the end of the dollar,” Rickards said. “You’d have high unemployment, deflation, and interest rates would go up. It would take what already looks like a strong recession and make it a Great Depression or worse.”
http://www.politico.com/news/stories/1208/16663.html

Fiddlerdave
12-17-2008, 08:58 AM
Now people are starting REALLY to get it.

Aside from the obvious point in the "Existential Crash" that the recession is ALREADY worse than predicted, its difficult to not be right on that one. We can safely assume every aspect of the current situation that we hear is worse than we are told, every statistic-warping device that can be applied is in full play.

What I really find odd is that people seem to assume no other powerful national entities are NOT going to take advantage of the national weakness at this time.

I find USA people's comfort in the China (or other countries) economic MAD scenario badly misplaced. As the US economy winds down, the US market buys less and less from China. At what point does it become worth more to the Chinese to eliminate the USA's economic and reserve currency dominance than receiving the maximum income from the sales it makes during a (possibly) deeper USA economic collapse? (Income that cannot go away completely in any event).

China and others often take a longer view of economics- if their calculation shows them better off in 10 or 15 years if they were to exploit (if even needed) the USA's current malfeasance and decline to overtake the USA's dominance in currency and economic forums, immediate losses for them could well be tolerated (and blamed on the USA as well to quiet popular complaints!)

Losing such things as reserve currency status of itself is not a disaster for the USA - unless it has overextended itself in debt and poor economic practices already. In currency, since USDollars are required everywhere, the USA can print lots of money and not suffer the same inflation penalty other countries would. And of course it made the currency of choice for mattress-savings accounts, a particularly inflation-fighting use for the USA, since the dollars are out of the inflation-causing circulation like they would be if put into a bank.

Suddenly being at the whim of others in the economic world is a big change for the USA, and requires some adjustment and belt-tightening, at a minimum, assuming those "others" are not punitive. Sadly, quite a few of the world community have some resentment to work out. The adjustment period would be tough for US citizens, on the whole.

Ross
12-17-2008, 02:14 PM
What I really find odd is that people seem to assume no other powerful national entities are NOT going to take advantage of the national weakness at this time.

I am sure the Chinese and others would love to take financial advantage of this
situation the only problem is how to do it without shooting themselves in
the foot.

Fiddlerdave
12-17-2008, 05:50 PM
I am sure the Chinese and others would love to take financial advantage of this
situation the only problem is how to do it without shooting themselves in
the foot.But that's the point. They may decide it may be quite worth shooting themselves in the foot to run the show. Besides, no decisionmaker there, just like here, is going to miss a single meal or comfort regardless of the price they decide for others to pay for a chance for more power. The Chinese and others have a much keener sense of history than we in the USA, imagine being the ones to shepherd your country to be the full and top World Economic Power!

I got clear on this kind of thinking in many leaders listening to the Nixon tape where he decides to stay in Vietnam despite being certain it was a lost and pointless cause, because withdrawing might, I repeat only might, endanger his re-election. Imagine! Assuring the killing and maiming thousands of US troops, inummerable Vietnamese, and squandering billions of dollars just to make sure your own career is not risked in ANY way? That is a whole different way of thinking than regular people.

And as our buying power diminshes, the losses look smaller every day. Maybe it wouldn't be worth a foot, but how about a few toes? The Gold Ring is ever closer and more tempting.

Misty
12-17-2008, 05:56 PM
Dave, a few years ago Fortune magazine had an issue that contained a lot of information about China, her progress and the 100 year plan that the leaders supposedly have. From time to time I've wished I'd saved that issue so I could compare the speculations with what's actually happened so far. Once I tried to get it from their archives but wasn't able to dig it out. Do you happen to recall anything about it?

frodo
12-17-2008, 07:18 PM
I wouldn't write off America just yet. There are massive anomalies in the American economy that are just aching to be cured, and if they are, then the U.S. will bounce back harder and faster than anyone can imagine. I've talked about these before.

As for China, Shanghai isn't China. They have massive problems and a great deal of unrest.

What concerns me is countries like Russia or Israel deciding on what the USSR once labeled "adventurism" - a little act of aggression, like attacking Georgia, Iran or Lebanon, and sparking a wider war.

Fiddlerdave
12-18-2008, 01:56 AM
Dave, a few years ago Fortune magazine had an issue that contained a lot of information about China, her progress and the 100 year plan that the leaders supposedly have. From time to time I've wished I'd saved that issue so I could compare the speculations with what's actually happened so far. Once I tried to get it from their archives but wasn't able to dig it out. Do you happen to recall anything about it?No, I haven't. I have seen some information on their plan, I have paid attention since 2002 when I went there to install a project, with the same kinds of thoughts in my head I see many have here. I was awestruck by the reality, most of all by the workers and companies and their unbelievable industriousness and creativity.

What was most striking is that 3/4 if what my company shipped to install came from China originally. What little the company I worked for had made was of poorer quality. It was embarrassing. (They liked my software, though!)

Anyway, no, I have not seen the Fortune article, but be clear that every goal and plan they had made was so far exceeded by reality that if it was 5 years ago, it is certainly superceded by the reality, even with the downturn.

A planned economy with flexibility seems to be an extremely powerful engine, if the planners are any good. It seems that they are, so far. Having the USA finance its own reduction seemed a particularly elegant touch.