Dollar Inferno

“We hate you guys…”

Mr. Luo Ping, director general at China’s Banking Regulatory Commission, speaking in New York on Wednesday, shared his opinion of U.S. bailout policies:

“Once you start issuing $1 trillion-$2 trillion …we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”

Reports in the press this week say that China is considering ways to diversify out of the dollar. The Chinese are no fools. They see what is coming. And they know what it will do to them – the holders of the largest pile of dollars ever assembled.

The Financial Times made it perfectly clear to them in a cartoon yesterday. It shows Barack Obama in front of a huge smoking trashcan filled with dollars. The president is pouring on gasoline.

Yes, dear reader, Mr. Ping has caught on. And the rest of the world is catching on too. The feds are printing trillions of dollars…and dumping them in banks and zombie corporations. They’ve got out their Zippo lighters…their firestarters…their kindling and crumpled paper.

But getting this blaze going is harder than most people think. It could take months…or even years.

Yesterday, the Dow held steady. But oil continued to sink. The price per barrel fell below $35.

France is officially in recession, says today’s La Tribune. GDP fell at a 1.2% rate in the last quarter, the government announced. A decline of 1% is expected for 2009.

Spain is in a worse recession. Property sales are off 30%. The GDP is expected to decline 3.3% this year. And unemployment is projected to reach 19% by 2010.

“Falling like a rock,” says La Tribune of Spain’s economy.

Meanwhile, “India set for slowest growth in six years,” says the FT.

“Austria warns of dangers in potential Ukraine ‘catastrophe,’” continues the gloom and doom.

And in Japan:

“Deflation fears grow as wholesales prices fall.”

“Pioneer lays off 10,000 workers…”

World trade is collapsing. Now everyone is complaining about ‘protectionism.’ The next G7 meeting has protectionism – and how to avoid it – at the top of the agenda. But protectionism is just the reaction, not the cause. Trade is collapsing because people have become reluctant to spend, invest or lend anywhere – especially, far from home.

The guy who invented the shipping container industry works in the office above us, here in the “Sea Container Building” in London. You know, the building with the gold balls on the roof. He’s an American from Kentucky who later got into the railroad business and went broke. But after WWII he figured out that shipping could be made much more efficient by putting goods into metal containers and using big cranes to stack them on ships. Thanks to his innovation, globalized trade got a huge boost.

But now, for the first time in its 53-year history, container traffic is going down. In the last four months, not a single new container vessel has been ordered. China – the planet’s largest factory – is making, selling and shipping less stuff to the rest of the world. Exports to the United States are down 10% year on year; exports to Europe are down 17%.

In the United States itself: “CEOs see grim economic outlook…”

“Biggest GDP drop since ’46…”

“Toll Bros. first quarter revenue down 51%…no end in sight to real estate trouble…”

“Caterpillar to cut 2000 jobs…”

The headlines are nearly unanimous: it’s deflation that menaces the world, not inflation. But Sparky Benarnke…and Barack “House-o-fire” Obama…are on the case. They’re not going to rest until they get that darned conflagration going.

Eventually, they’ll get a small flame started… And then, watch out…it could burn, baby, burn… like a brush fire in Australia.

And that’s when the Chinese will really hate us.

*** “Fears of a return to the 1930s are too pessimistic,” writes David Bowers in the FT.

Au contraire, they seem too optimistic to us.

In the ’30s, the feds still had a residual respect for law and order. So did the public. When the Roosevelt administration went about taking control of the economy, it had to fight against the courts the whole way. As many as 1,600 injunctions were issued to prevent the feds from carrying out their grandiose plan. When these cases got to the Supreme Court, the court threw out key parts of Roosevelt’s program as unconstitutional. The U.S. Constitution was meant to limit was government could do. Apart from the express undertakings described in the document, all other things were supposed to be left to the states and to individual citizens. Nowhere in the U.S. Constitution was there any mention of an “industrial recovery” program, for example. So the Supremes threw it out.

Then, Roosevelt attacked the court itself. He argued that “nine old men” should not be allowed to stop progress. He tried to pack the court with more justices ready to do his bidding. This was too much for Congress to swallow; even his vice president was against it. The amendment to increase the number of Supreme Court justices failed.

But then, the old men themselves failed. They died. And as their mortal envelopes got packed in the dirt, new justices were appointed – such as Felix Frankfurter and William O. Douglas – who were willing to go along.

This time there is practically no resistance. President Obama enjoys support, both wide and deep. The public is behind him. Congress is on his side. And the courts have long since given up trying to limit the power of the federal government.

Everyone wants something for nothing. And everyone believes he can get it from the feds. As a result, we’re looking at trillion dollar deficits – as far as the eye can see.

That’s not all, of course. Back in the ’30s, the dollar was still linked to gold. The price was set by law and dollar holders were free to convert their dollars into gold at the statutory price. In order to devalue the dollar, the Roosevelt administration had to call in the nation’s gold – making it illegal for private citizens to hold the yellow metal – and then revalue gold upwards. In a stroke of a pen, debts denominated in dollars were clipped 60%.

Now, there’s no need even for the pen. Dollars float on a sea of debt…with no golden anchor to windward. All it takes is a whoosh of inflationary breeze and the buck is off! No need for calling in gold. No need for legislation. In a few days, the value of the dollar could be cut in half…or by 75%…or more.

And who’s going to protest? The Chinese? Yes…but they don’t vote in U.S. elections.

The Daily Reckoning