Plaza-Lite

The Daily Reckoning – Weekend Edition
May 13-14, 2006
Baltimore, Maryland
by Kate “Short Fuse” Incontrera

VIEWS FROM THE FUSE: PLAZA-LITE

The Plaza Hotel in New York City is one of the most recognizable pieces of architecture in the world, thanks to it being the backdrop to countless movies and television shows (not mention “The Donald’s” purchase of it in the late 80’s.) When you think of this hotel, what picture do you conjure up? Posh celebrities sipping champagne in the famed Palm Court? Scenes from The Way We Were?

You probably don’t immediately think of international finance ministers cooking up economic policies – but on September 22, 1985, that’s exactly what occurred.

The then G-5 (composed of Japan, France, West Germany, the United States and the United Kingdom) gathered in the Plaza Hotel and agreed to devalue the U.S. dollar in relation to the Japanese yen and the German Deutsche Mark by intervening the currency markets. They called this agreement the Plaza Accord.

Each country made specific promises; the United States’ being to cut the current account deficit, which had risen to 3.5 percent of GDP. The G-5 then interceded in their respective currency markets to get the dollar down, the least painful way to address the deficit. The plan worked.

The Economist tells us: “By the end of 1987, the dollar had fallen by 54% against both the D-mark and the yen from its peak in February 1985.”

Twenty years later, we find ourselves in a similar situation. The U.S. current account deficit is at almost 7 percent of GDP, and to counteract this global imbalance, central banks worldwide are participating in what is seen as a “regime change.” The U.K.’s Telegraph reports:

“Central banks around the world – led by the Fed – are tacitly co-operating to bring about a managed dollar decline. The first signs of this came at last month’s Group of Seven finance ministers’ meeting in Washington.

“That was followed by an unusually stark statement to Congress by Ben Bernanke, who said America’s ‘international debtor’ status ‘cannot continue forever’. The IMF chipped in too, warning that the ‘resolution of global imbalances’ may require a ‘substantial’ dollar decline.”

This supposed intervention in the currency markets has been coined “Plaza-lite”, a nod to the 1985 agreement, and traders are dropping the dollar like a prudish prom date. On Thursday, the greenback hit a year-low against the euro, sterling and Swiss franc. If this perceived deal plays out like the original Plaza Accord, the dollar could have a lot further to fall.

Marc Chandler, economist at Brown Brothers & Harriman in New York, said: “Precisely what officials feared would happen from the large global imbalances is now taking place in reaction to their clumsy attempt to ‘fix the problem’. Volatility in the capital markets is rising. Global equities are tumbling.”

We think we’ll stick with gold.

Short Fuse
The Daily Reckoning

P.S. There’s another precious metal that could be making you major gains right now – silver. In a good year for gold, especially like the cycle we’ve just locked into right now, silver can give you even greater gains… driven by the same precise megatrends.

— Daily Reckoning Book Of The Week —

Demise of the Dollar…and why it’s great for your investments
by Addison Wiggin

This acclaimed book spent over a week in the #1 slot on Amazon’s bestseller list – knocking Harry Potter to number two. It then showed up on Barnes and Noble’s bestseller list and debuted on The Wall Street Journal’s Business bestseller list last week at #8!

The only logical next step was for the book to get on the New York Times bestseller list…which it and sat strongly at #5!

The Demise of the Dollar examines the reasons for the dollar’s slide – including the nation’s historic trade deficit, the euro, government spending habits, globalization, and other international factors – and offers an up-close look at the Federal Reserve’s attempts to “manage” the dollar’s value.

THIS WEEK in THE DAILY RECKONING: Twice a year, Omaha is beholden to large swarms of out-of-towners. In June, thousands stay for two weeks to see the College World Series. But in May, Omaha belongs to Berkshire Hathaway’s shareholders, and Capital and Crisis’ Chris Mayer was there. Read his full report, in “The Church of Buffett and Munger”, below…

Don’t Cry for Evita      05/12/06
by Bill Bonner

“Eva Peron was a favorite of the poor of Argentina. She had a warm heart, it was said. But like that other great champion of the masses, Che Guevara, Eva realized her greatest glories after she was stone cold dead.”

The Church of Buffett and Munger     05/11/06
by Chris Mayer

“What does Buffett, a long-time newspaper investor think? Buffett thinks the current woes are part of a longer-term trend that is not likely to reverse. And valuations on newspaper stocks don’t reflect this.”

A Chicken in Every Pot and A Car in Every Garage   05/10/06
by Dan Amoss

“Does anyone really stop to think about what would happen to the current economy if Congress enacted a plan to pay off the gargantuan federal debt?”

In A Post-Dollar World     05/09/06
by Justice Litle

“On our way to a post-collapse, post-dollar world, Asia will likely transition from a de jure dollar standard to a de facto gold standard. This will happen in stages as the dollar crumbles.”

The Exorcism of the United States    05/08/06
by The Mogambo Guru

“The head that is being twisted around by the Federal Reserve is America’s. Instead of hearing Ms. Blair saying her immortal, blood-chilling line, all you hear is cartilage snapping, bones breaking, and then the head pops off.”

HEADLINE, NEWS And INSIGHT: A little something for everyone in this week’s articles…

Athens and the U.S.: The Decline and Fall
by Eric Phillips

“Government decisions are made with increasing deference to power, money, public opinion polls, and demagoguery; because of this, any difference between the Democrats and Republicans become negligible.”

U.S. Bubbleocracy
by Paul Mampilly

“Today, the greatest benefit of living in our democratic, capitalist society is not the right to vote or the right to free speech but the right to this delusional dream of vast wealth through speculation.”

To Rule Is To Destroy
by Lew Rockwell

“Spending is running $2.6 trillion per year. If today you slashed the budget in half, you would be back to the small-government days of the beginning of Clinton’s first term.”

————————

FLOTSAM AND JETSAM: What our generation sees as the “norm”…traveling in airplanes…forking over $40 to fill up your gas tank…dropping major bucks on a plasma TV – could be obsolete in the next 50 years or so. James Kunster explains…

Reverse Science Fiction
by James Howard Kunstler

Riding the van out of the airport Friday night to the Park-and-Fly lot, with the planes floating down in the distant violet gloaming, an eerie recognition came over me that life today is as much like science fiction as it will ever get – at least as far ahead as I can see. Some of my friends’ kids may never fly in airplanes. They may never own cars. At some point twenty, thirty years ahead, they may not take for granted throwing a light switch in a dark room.

Our sense of normality will be coming up for review soon, and hardly anybody seems ready to face it. The now-consistently moronic New York Times played a story in the Sunday business section which said that “consumers” were just shrugging off three-dollar gasoline and spending like gangbusters in the super discount box stores. It seems not to have occurred to the editors that perhaps three dollars a gallon is not the final destination of our pump prices. They were so triumphal over the public’s supernatural immunity to the three-dollar-flu that they failed to essay what four-dollar or even five-dollar a gallon gasoline might do to America’s shopping heroes.

My own guess is that it is liable to drive the NASCAR grandstand ticket prices a wee bit higher, at least.

But such is the mood of the nation on the cusp of the summer driving season. What the Timesmen/women might have also missed is the fact that all that heroic shopping is being accomplished with “money” as yet unearned – on plastic, that is. The three-dollar a gallon fill-up isn’t causing any pain because nobody is forking over actual dollar bills, and the same thing with those $1500 plasma flat screen TVs that the hero consumers are scooping up so valiantly from the Best Buy loading docks.

I think our future perception of all this will be as a kind of reverse science fiction – in the sense that sci fi has until now always been presumed to take place in the future. The science fiction of my friends’ children will take place in the past. When some of them are old, the omnipresent electric power of this time, and all the wonders that ran on it, will seem like an unfathomable occult force that saturated the world like a spell. They will tell stories about it in the flickering firelight, and their grandchildren will blink in amazement.

It’s too bad they will never see a Harry Potter movie, with its utterly blasé and incessant deployments of magic. These children of the future will be astonished when somebody manages to roast a parsnip.

Editor’s Note: James Kunstler has worked as a reporter and feature writer for a number of newspapers, and finally as a staff writer for Rolling Stone Magazine. In 1975, he dropped out to write books on a full-time basis.

His latest nonfiction book, “The Long Emergency,” describes the changes that American society faces in the 21st century. Discerning an imminent future of protracted socioeconomic crisis, Kunstler foresees the progressive dilapidation of subdivisions and strip malls, the depopulation of the American Southwest, and, amid a world at war over oil, military invasions of the West Coast; when the convulsion subsides, Americans will live in smaller places and eat locally grown food.

You can purchase your own copy here:

The Long Emergency

You can get more from James Howard Kunstler – including his artwork, information about his other novels, and his blog – at his Web site:

http://www.kunstler.com/