Tuesday, May 26, 2015
20 Trillion in debt USA…Not for long!
The White House Administration’s “Fiscal Year 2016 Budget of the U.S. Government,” a slew of new proposals could affect you and your retirement savings.
This should come as no surprise.
Our government is in debt way over its head — and the biggest pool of money available to tap is retirement savings.
After all… according to Metlife, this pool of retirement money now stands at $24 trillion, when you add IRAs and 401(k)s to other retirement plans.
Here are three of the provisions from the White House Administration’s recent 2016 Fiscal Year Budget proposal:
1. Reduce the Tax-Break for IRAs and 401(k)s. Right now, the money you contribute to a retirement plan — like a traditional 401(k) or IRA, is 100% tax deductible. The current budget proposal could impose a tax burden as high as 11.6% depending on your tax bracket.
2. Cap Your Retirement Savings. This new budget from the White House would also limit how much you can contribute to any retirement plan beyond the government’s “cap”. Apparently, the government knows better than you how much you need for retirement.
3. Forced Use of Inherited Accounts. If you inherit a retirement account from a loved one, the proposed White House Administration plan could force you to empty that account out in 5 years or less.
And this is just the beginning.
This year coming in September if not before, interest rates have been zero percent. No matter what the fed’s decide as to the rise of interest rates be it 1% to 6 %. I see it maybe going to 2% myself. But, even at that rate. No, I am going to let you figure that out, after all we all disagree as to what the USA’s true debt is. I maintain it to be 20 plus trillion dollars. Many have settled at 18 trillion. Take which ever number you wish and apply that interest rate to the trillions owed. Then take notice with that increase means also many years payments and that will be just the interest paid on the borrowed money. Meaning the principal continues to grow. Now seniors of which I am one. There’s at this present time over 24 TRILLION in retirements meaning social security, 401K’s, IRA’s that many of us have saved over the years. All this will soon be taken over by this corrupt government to pay off this debt. What happens to the middle class? What middle class? Remember a business runs on the dollar thta piece of paper being printed daily in the hundreds of thousands and it’s backed up by what? Not gold or silver or even copper, it’s backed up by you the business owner as well as the consumer or citizen willing to make a trade in exchange for what you buy.
As of now many countries no longer deal in the dollar, India, russia, china, europe to name a few refuse to exchange the dollar for trade of products. Other countries are in the running as well. What happens when the dollar is no longer accepted by trade countries?
Let’s talk about the dollar first by looking at a few key “dots,” that are often forgotten. It’s easy to think that the US dollar always has been and always will be the world’s “reserve currency.” But it’s not likely if history is any indicator. In fact, the US dollar didn’t become the world’s reserve currency until 1944 when it replaced the British pound sterling, which reigned supreme for over a century. Before the British pound, during the 18th and 19th centuries, the Spanish dollar was the global currency of choice. Go back another 100 years before that and it was the Dutch guilder.
Not that there’s some time limit on a currency’s reign, but there have already been calls to replace the dollar coming from China, Russia, and the Arab States, but that’s to be expected. What’s more threatening is the UN, which in 2010 called for abandoning of the very concept of a single global reserve currency altogether.
But why does it matter? Why is this so important to all of us? Well, just today I was helping someone with scenario planning for the future of their business. This is a global business doing considerable international trade and many foreign exchange transactions. As an American company, it has a decided advantage over its international competitors. So how would the US losing its status as the universal reserve currency affect this company, and should it plan for this as one of its possible future challenges? Let’s take a look.
First, because the US dollar serves as the world’s reserve currency, a US company can take the money it has in the bank and spend it just about anywhere. It can buy copper from a company in Chile and pay in dollars. It can buy oil from Canada and pay in dollars. Need a ship built in Poland—no problem. The customer will take your dollars.
On the flip side, big companies like Boeing, which sells airplanes to airlines all over the world, gets paid in dollars.
Why is that a competitive advantage? Well, suppose an American company’s Canadian competitor wants to buy the same ship from Poland. First it has to convert its Canadian dollars into US dollars. To do that it sends money to its bank, which sends money to some large international investment bank, which then forwards the money on to Poland. It has to be converted to dollars—the US kind—somewhere, and every middle man takes a little piece off the top. That eats into profits and makes the Canadian company’s cost of doing business higher than its American competitor.
And, of course, what do companies—and countries—that get paid in US dollars do with their dollars? Well, because dollars tend to be worth more and historically have been more stable, they like to hang on to their dollars, rather than turning them back into their local currency. So now they’re sitting on dollars, but they can’t deposit that in Polish or Dutch or Thai banks and earn interest. To earn interest you have to buy something denominated in dollars, like, you guessed it, US government notes, bonds, and treasury bills. And since so many foreign companies have these dollars and want to buy US government securities so they can earn a little interest, all that demand means the US government doesn’t have to pay much interest at all to borrow that money. The net effect—US government borrowing costs are much lower than that of other countries—another big competitive advantage.
So, what happens if the world starts doing a lot more business in Chinese yuan or euros or yen or Swiss francs? What happens if the next time you go to buy a ship from Poland, the Polish company demands euros or, worse, that you buy Polish krona, first? What does that do to your costs and how does it make you less competitive?
The point is that understanding the role of the US dollar as the world’s reserve currency is an important dot and it’s one to keep a very close eye on because lots of forces are threatening the American dollars status and that would have profound impact on American companies and companies around the globe.
So, will the USA lose its reserve currency status at some point? Yes. In fact, it’s already starting to lose its reserve status to Europe and China. Will it be the end of the world and will it cause everyone to suddenly ditch the dollar? Probably not. It just means the USA will produce a lower proportion of global output and therefore, as a matter of accounting, the rest of the world will hold a lower percentage of US dollar denominated financial assets as a percentage of global output. It’s not the end of the world. It’s just a sign that market shares change and when you’re #1, well, there’s only one direction to go.
Of course, the US Dollar isn’t the only currency that nations maintain reserves of. The Euro is also a major reserve currency and the Yuan is fast becoming a major reserve currency. But since the USA produces 22% of all world output it happens to play a particularly special role in the global economy. By virtue of being the largest economy in the world the accumulation of US dollar denominated financial assets happens to dominate the global financial system. It’s sort of like being the top market share producer of a particular product in a particular industry. Other entities accumulate your products because you’re the top producer. And that changes over time. Market shares change and regimes shift with the evolving economy.
As described by Alan Greenspan in 1966, the new system consisted of “regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. … But now, in addition to gold, credit extended by the Federal Reserve banks (‘paper reserves’) could serve as legal tender to pay depositors.”
In other words, the dollar would only be partially backed by gold, and banks could create money by lending out money secured by credit from the Federal Reserve banks (even though the reserve banks did not necessarily have gold on deposit themselves). Thus the seeds of America’s first fiat (currency not backed by gold) dollar system were sown.
At that time, however, there were still restraints upon money-supply growth because the dollar was still convertible to gold upon demand. Anyone cashing in paper dollars was still legally entitled to its value in gold, so the money supply did not balloon completely out of control.
Yet by 1934, the paper money supply had expanded faster than the nation’s gold supply, so in order to prevent the nation’s gold supply from being drained, the U.S. decided to devalue the dollar—by 41 percent. Prior to 1934, an ounce of gold could be redeemed for just US$20.67, however after the revision, the U.S. government would only part with an ounce of gold in exchange for $35. In gold terms, anyone who had a U.S. savings account lost 41 percent of its value—overnight.
Even though the 1934 U.S. currency devaluation rocked people’s confidence in the dollar, World War II thrust the U.S. dollar into a new status: the world’s reserve currency. Toward the end of the war, representatives of most of the world’s leading nations met to create a new international monetary system, later known as the Bretton Woods agreement. At this meeting, the war-torn and virtually bankrupt nations of the world decided that since the U.S. economy had come to dominate the globe, and because it held 80 percent of the world’s gold due to the war, they would tie their currencies to the dollar, which, in turn, could be converted into gold at $35 per ounce.
Yet under the Bretton Woods system there were still limits on how much paper money a country could create. Each country had to police its own currency or be forced into embarrassing devaluations. The U.S. itself was constrained from overprinting money because the dollar remained fully convertible into gold.
However, by 1971, America had again printed vastly more paper money than was backed by precious metal. According to some estimates, so many paper dollars had been created that the nation’s gold supply only backed 22 percent of them. At the same time, French President Charles de Gaulle, recognizing that the dollar was losing value, had been exchanging his nation’s collection of U.S. dollars for American gold reserves. Seeing other nations following suit, U.S. President Richard Nixon closed the gold window in August 1971, no longer allowing foreigners to exchange their U.S. dollars for gold and thus ending the Bretton Woods agreement.
From that point on, America’s dollar became fiat, not backed by tangible assets. As the Federal Reserve bank of Minneapolis says, the U.S. dollar is fiat and is valuable only as long as “[p]eople are willing to accept fiat money in exchange for the goods and services they sell”—and only as long as “they are confident it will be honored when they buy goods and services.”
Since people were already in the habit of accepting paper backed by gold, Americans hardly noticed when the U.S. greenback became backed by nothing more than faith—until it started affecting their pocketbooks. Loss of the dollar’s gold backing resulted in a U.S. dollar sell-off in which foreign nations dumped dollars on the open market. This in turn caused roaring inflation and gold to spike up into the $800-per-ounce range. After the FRB jacked interest rates into the high teens, both Americans and foreigners decided they would trust the government and continued using the U.S. dollar.
The U.S. now operates on what many refer to as the Bretton Woods 2 system. Although there is no formal central bank agreement (as was the case with Bretton Woods 1), many countries, especially those in Asia, have more or less informally pegged their currencies to the dollar.
This system is inherently more unstable than the previous precious-metal-based non-fiat system. Since the U.S. dollar is no longer convertible to gold, there is no theoretical limit to how much the U.S. money base can expand—and the U.S. has been taking full advantage of this situation to increase its money supply.
Nevertheless, as one well-known economics saying goes, there’s no such thing as a free lunch. America’s monetary expansion has been a primary driver behind the massive and continual erosion in the U.S. dollar’s purchasing power.
The Dollar’s Decline
During Alan Greenspan’s term at the FRB alone, America’s monetary base tripled and more new money came into being than under all previous Fed chairmen combined. As the government has massively increased the money supply—doubling it in the last seven years alone—those dollars have become less valuable.
So many dollars have been created that only the dollar’s status as a reserve currency, along with the kindness of America’s trade partners, has prevented a complete dollar meltdown. Unfortunately, these dollar supports seem to be crumbling.
At one point, 86 percent of the globe’s transactions were denominated in dollars. Whether it was Russians and Saudis selling oil to the world, or Chinese purchasing wheat from Canada, the dollar was the primary means of payment. Thus, foreign nations needed to keep huge dollar reserves on hand. This was a gigantic plus for the dollar. Had foreign nations not needed to increase their holdings of dollars as world trade grew, there would have been a massive wave of homeless dollars roaming the world looking to be spent, and as the supply of dollars increased, the dollar’s value would have plummeted. Instead, over the years, America has been able to get away with creating the money needed to pay its bills and finance an otherwise unaffordable standard of living.
However, the dollar’s status as a reserve currency is now being challenged. In 2005, the percentage of dollar-denominated reserves held by foreign nations was 76 percent. Now, not two years later, it is down to 65 percent. “[T]here is a gentle and osmotic process underway,” says economic analyst Julian D.W. Phillips: “a lessening of the role of the U.S. dollar in the global reserves” (Financial Sense Online, Nov. 6, 2006).
Former Fed Chairman Alan Greenspan is also warning of possible protracted dollar dumping. “We’re beginning to see some move from the dollar to the euro, both from the private sector … but also from monetary authorities and central banks,” he said in October last year.
Although an all-out revolt against the dollar hasn’t yet occurred, clear signals are emerging that the dollar’s role as the world’s reserve currency of choice could be ending. Last year, Russia’s central bank, Sweden’s Riksbank, the Central Bank of the United Arab Emirates, Qatar Central Bank and the Central Bank of Syria all announced intentions to diversify their reserves away from the greenback.
Perhaps more worrisome is the fact that China and other Asian nations also have been hinting at diversifying out of their dollar reserve holdings. Australian Treasurer Peter Costello admonished central bankers in East Asia “to ‘telegraph’ their intentions to diversify out of American investments and ensure an orderly adjustment” (Sydney Morning Herald, Oct. 18, 2006). Over the past several years, central banks in China, Japan, Taiwan, South Korea and Hong Kong have spent hundreds of billions purchasing American government bonds. They have done so to support the dollar and help keep American consumers purchasing Asian-made products. If Mr. Costello is correct, however, “the strategy [has now] changed.” Recent trends suggest Asians are weaning themselves off American consumption. Consumer demand within China and Asia is growing, as is Asian trade with Europe. As the importance of Asian-American trade wanes, the incentive for Asians to support the dollar and to hold on to their massive dollar reserves is waning as well.
America’s Asian creditors are up to their necks in U.S. dollars and may now be reaching the point where they no longer feel it is safe to hold so great a proportion of their foreign currency reserves in the dollar.
“The exchange rate of the U.S. dollar, which is the major reserve currency, is going lower, increasing the depreciation risk for East Asian reserve assets,” warned the People’s Bank of China Deputy Governor Wu Xiaoling in November. The same month, the central bank’s governor, Zhou Xiaochuan, was quoted as saying that China has plans to diversify its assets into “many instruments,” presumably indicating a move away from the dollar (Forbes, Nov. 24, 2006).
This is big news, since China is the second-largest foreign holder of dollars in the world after Japan. China is estimated to hold approximately 70 percent of its $1 trillion of currency reserves in U.S. dollars. It certainly seems that Chinese central-bank officials are following Costello’s advice about being up front when they plan to sell their dollars. The question doesn’t seem to be whether the Asian banks will dump dollars—it is how orderly and significant the dollar devaluation will be.
America’s massive monetary expansion could be about to boomerang on itself, as it did in 1934 and 1971—only this time, the number of dollars involved absolutely dwarfs all previous currency crises. As the U.S. persistently destroys the value of the dollar by overprinting (or, more correctly, over-creating, since most money created is now digital), foreign nations are losing confidence in the dollar and its role as a reserve currency. Foreign central bank sales are the first waves of a coming dollar storm. The more that central banks dump dollars, the greater the loss of investor confidence in the dollar. In short as of today. A US five dollar bill is worth six dollars and twenty cents in candian money. (May 26, 2015)
US Dollar TO Canadian Dollar
100 USD = 124 CAD
250 USD = 310 CAD
500 USD = 620 CAD
2500 USD = 3101 CAD
5000 USD = 6201 CAD
7500 USD = 9302 CAD
25000 USD = 31007 CAD
1 million USD = 1.240 million CAD
Once Russia, along with numerous allies, makes the fateful move, you can be sure many nations will follow. They already are trying to do so. Why? Because the US is the most destructive force on the planet, and it’s achille’s heel is its “exorbitant privilege” known as the US dollar by most, and the Federal Reserve Note by those “in the know.”
This will spell hyperinflation, social chaos, civil war, among other dislocations. Think this is hyperbole? It’s not. To know that all one needs to do is look at the history of socialist banana republics…and then imagine something much, much worse. Why much worse? Because none of those banana republics were issuer of the world’s reserve currency. The US doesn’t produce a thing except the US dollar which are extremely easy to print as one man in Canada proved. He printed millions of dollars with a simple operation and circulated them. Moreover, Canada chose not to extradite him so he is a free man.
And so major nation-states are joining together to move beyond the dollar system. A “de-dollarized” world, as it is called in Russia, will change the lives of millions of Americans.