Guest Blog: Jim Lydecker on the Economic Crisis

For those of you about to watch the debate between two guys who are NOT the best this country could do for a leader; take this pill first, from my friend Jim. Then see what comes out of their mouths, our yours....

I lifted this whole from the Napa Valley Register.



Economic crisis is all about the dollar

Friday, October 03, 2008
By Jim Lydecker

For those of you counting, we are about to pass another dubious milestone and reach the unheard debt amount of $10 trillion. Adding another trillion in record time prompted the Economist to dryly remark, “at least it hasn’t hit a zillion yet.” Maybe it will. Bush says we need to print up a quick $750 billion in order to save the economy, though many feel it will be closer to $3 trillion.

The problem here is that printing paper money may help in the short term but will hasten the collapse of the economy. An economic collapse brought on by debt is like an organism infected by cancer. On the other hand, a fiscal collapse is more like a massive coronary. Uncle Sam may be dead before he hits the floor.

It has been said that “He who holds the gold rules.” Throughout the ages, when gold was used, and laws protected honest commerce, productive nations thrived. However, when wealthy nations — those with powerful armies — lived beyond their means, they had to use fiat money.

The terms "fiat currency" relates to types of currency whose usefulness results, not from any intrinsic value or guarantee that it can be converted into gold or another currency, but instead from a government’s order (fiat) that it must be accepted as a means of payment. Those nations and their economies always failed.

Today gold no longer rules. Instead, “He who prints the money makes the rules.” And the rules are similar: Compel foreign countries to produce and subsidize the country with military superiority and control over the monetary printing presses. Dollar dominance began in 1944 at the Bretton Woods agreement. Due to our political and military muscle, and because Fort Knox held a mountain of gold, the world accepted the dollar as the reserve currency. With no controls, the Federal Reserve printed more money than we had gold for the next 27 years. This sham was exposed in 1971 when the French wanted to cash in their surplus dollars only to find there wasn’t enough gold.

To rescue the dollar, it had to be backed by something of value before becoming interchangeable with Monopoly money. In 1973, the Nixon Administration struck a deal with OPEC to price oil in and only accept dollars for all transactions. We, in turn, promised to protect various oil-rich kingdoms from any internal or external threat. Thus the birth of the petrodollar. The agreement with OPEC has allowed tremendous artificial demand and strength allowing the Federal Reserve to print money at will. Since most nations need to import oil, they needed dollars. This arrangement kept the Third World mired in poverty. To get dollars, they had to keep their natural resources and labor cheap. There are several ways to bring these ethereal days to an end and one is if OPEC decides to accept currency other than the dollar for oil. This could bankrupt us in a very short time.

In November 2000, Iraq demanded euros for oil. The first Bush Cabinet meeting (January 2001) was dominated by how to get rid of Hussein and Iraq back on the dollar. There was no concern of his military or terrorism prowess. It was instead about his attack on the integrity of the dollar.

Another example was when Venezuela floated the idea of switching to the euro in mid-2001. Immediately there was a coup attempt against Chavez, reportedly with CIA assistance.

Real threats come from countries who are incapable of threatening us militarily but able to dismantle us economically. This is the threat we see from Iran. Since 2004, Iran has been talking of switching to the euro and we have repeatedly put Teheran in our cross-hairs. The fear is not a fundamental Islamic revolution causing Middle East countries to fall like dominoes, but that there may be a domino effect where they will all stop taking dollars.

And now matters are made worse because we are essentially printing money to rescue an economy that has gone down the wrong path. The arrangement between the Federal Reserve printing money backed by Treasury notes, both worthless, is check-kiting at its worse.

Warren Buffett put it in perspective last week when he said, “No one knows who is skinny-dipping until the tide goes out.”

The truth of the matter is this: Our currency is backed by our military in the sense that anyone choosing to not accept it will get a thumping by our armed forces. Dollar superiority depends our strong military, and our strong military depends on the dollar. Ironically, no outside military force is needed to tear this relationship apart and with it would go the economic engine that powered what was the American Century.

There’s a new world waiting and it is not promising.