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  • "We will heat our homes with your dollars!"

    "We will heat our homes with your dollars!"

    French President Nicolas Sarkozy and another rhyme of history.


    It could have gone better. At the start of the new Presidential administration in 1969 at last a stylistic peer of the irascible French President Charles de Gaulle had appeared in the person of the new US President, Richard M. Nixon, or so it was hoped:
    "Charles de Gaulle has not been an admirer of U.S. Presidents. According to Author Pierre Galante, he called Franklin Roosevelt "a false witness," Harry Truman "a merchant." Of Dwight Eisenhower, he said: "I am told that on the golf links he is better at putting than he is with the long shots. This does not surprise me." To De Gaulle, John Kennedy "had the style of a hairdresser's assistant—he combed his way through problems." Lyndon Johnson was like "a truck driver or a stevedore—or a legionnaire." Nixon and the general should strike it off fairly well. Both are direct, practical men, and De Gaulle showed characteristic prescience in granting Nixon a 40-minute interview in June 1967—at a time when De Gaulle would not have welcomed L.B.J. into the Foreign Legion. De Gaulle respects a tough adversary, and Nixon has been advised to be polite but firm."

    A VOYAGE OF REDISCOVERY AND RECONCILIATION, TIME Magazine, Feb. 28, 1969

    Alas, De Gaulle's inflammatory words and deeds on monetary matters rendered this promising partnership dead on arrival of Nixon to the Whitehouse:
    Perhaps never before had a chief of state launched such an open assault on the monetary power of a friendly nation. Nor had anyone of such stature made so sweeping a criticism of the international monetary system since its founding in 1944. There was Charles de Gaulle last week proclaiming that the primacy of the dollar in international dealings was finished, calling for an eventual return to the gold standard —which the world's nations scrapped 50 years ago — and practically inviting other countries to follow France's lead and cash in their dollars for gold.
    It was a particularly nettling irritant just as the U.S. was deeply involved in making some hard decisions about its monetary policy.


    The Drain. President Johnson faces the unpleasant task of producing what he calls "strong and specific" actions to deal with the persistent U.S. balance-of-payments deficit, a problem intimately related to gold. The President's advisers are still debating just how "strong" these imminent measures should be.

    There is a growing awareness, heightened by De Gaulle's offensive, that past attempts to close the payments gap have been mere palliatives — and that the problem has begun to undermine U.S. influence around the globe.

    Just before De Gaulle spoke, Treasury Secretary Douglas Dillon made the first public admission that the U.S. payments deficit in 1964 moved higher than anyone had expected. It totaled about $3 billion, all of which the U.S. is legally committed to exchange for U.S. gold on demand. The Federal Reserve announced that the U.S. gold supply declined last week by $100 million, to a 26-year low of $15.1 billion.

    De Gaulle v. the Dollar, TIME Magazine, Feb. 12, 1965

    The same TIME article that proposed a happy first meeting between De Gaulle and Nixon reported De Gaulle's continued goading of US monetary leadership:
    "Despite the vicissitudes of the franc, De Gaulle insists that gold should ultimately be the sole international monetary standard, and that its official price must be increased, thereby devaluing the dollar. The threat of a fresh monetary crisis will dominate the Nixon-De Gaulle conversations. France's President hopes either to avoid that crisis altogether, or, if it comes, to make sure that it is not blamed on him alone. To that end, he wants joint efforts by the U.S., Britain and France to contain inflation and improve their balance of payments positions. Otherwise, he might have to devalue the franc by 20% or more—which would set off a shock wave of devaluations and imperil both the dollar and the pound."

    A VOYAGE OF REDISCOVERY AND RECONCILIATION, TIME Magazine, Feb. 28, 1969

    Younger readers wonder what it was all about.

    Back in the old days, before it was "learned" that "payments deficits don't matter" and currency values started to be measured with the rubber ruler of government statistics they were measured using an immutable frame of reference: gold. A nation need not worry that its loan to another might be repaid in devalued currency. If France was concerned that the US had devalued the dollar and was repaying its debts to France with cheapened dollars, it could assert its right to demand payment in gold instead of paper. It was a free market monetary system for determining currency values. It offered governments no easy avenues for currency manipulation. If an international gold standard were in place today, China might demand a repricing of gold to devalue the dollar against gold to reflect the dollar's true exchange rate value rather than accept depreciation of its vast hoard of US Treasury bills. Or China could legally demand US gold instead, surely more than the US possess; US gold reserves of 8,133.5 tons are worth $208 billion today while China holds US dollar reserves in excess of $1.2 trillion. The international gold standard was a strict market-based taskmaster, making currency and trade imbalances transparent and leaving politicians with no place to hide out.

    In the late 1960s, much as today, the US Treasury claimed a strong dollar policy but rising inflation in the US and among US trade partners told another story. De Gaulle wasn't buying the strong dollar tale and demanded not only payment of French debts with US gold but encouraged other European nations to do likewise.

    Politicians love free markets the way Bostonians love the Red Sox–a lot when they are doing well, not at all when they aren't. Nixon got busy working out a way to repay the debts that the US had run up with its European trade partners with an asset less expensive to attain than gold. Paying the debts with an asset as cheaply and easily produced as Treasury paper was far more desirable.

    So, in the early years of his administration, Nixon pulled the plug on the international gold standard.
    "Less than a year ago, U.S. international financial policy was ruled by the idea of "benign neglect": the complacent conviction that Americans could continue pouring out their overvalued dollars, buying as many foreign goods and factories as they chose and spending on military ventures as lavishly as they pleased. The rest of the world, so the theory went, had to absorb all the dollars because the dollar was as good as gold. It had an "immutable" value in terms of gold, and the U.S. was pledged to sell American gold—at the rate of $35 an ounce—in exchange for dollars that foreigners wished to cash in. But as foreigners piled up almost $50 billion in U.S. currency, while the U.S. gold stock melted to $10 billion, that pledge became hollow. Nixon gave it the coup de grāce on Aug. 15 by decreeing that the U.S. would no longer redeem foreign-held dollars for gold."

    The Quiet Triumph of Devaluation, TIME Magazine, Dec. 27, 1971
    This "coup de grāce" was not a devaluation, in De Gaulle's view, but a default.


    The point when the US went off the international gold standard is apparent in this graph.
    After 1971, the ratio of money supply Money at Zero Maturity (MZM) growth to economic
    output GDP diverged from a ratio of close to 1:1 where it had remained except during
    wartime since the establishment of the Republic. Today the ratio stands at 6:1, meaning
    that the money supply is now growing six times faster than the economy.

    Fast forward to November 7, 2007. The dollar has plunged 33% against the euro since 2002. The most direct threat of action by US trade partners came again, as in 1971, from a French President, Nicolas Sarkozy. He told a joint session of the U.S. Congress that the Bush administration must stem the dollar's plunge "or risk a trade war."


    Currency trader in Japan 11/12/07

    Today, as the dollar fell hard against the yen, the news on the currency front went from bad to weird. Stealth devaluation of the dollar has been tough on strong trade partners like France and Germany, but the impact is more severe on the nations on the edges of the global monetary system.
    Currency Controls Return as Central Banks Fight Gains
    Nov. 12, 2007 (Gavin Finch and Ye Xie - Bloomberg)

    Central banks from Bogota to Mumbai are imposing foreign-exchange curbs to take control of their soaring currencies from traders dumping the dollar.

    In Colombia, international investors buying stocks and bonds must leave a 40 percent deposit at Banco de la Republica for six months. The Reserve Bank of India created a bureaucratic thicket to curb speculation by foreign money managers. The Bank of Korea is investigating trading of currency forward contracts to limit gains in the won, now at a 10-year high.

    Instead of using currency reserves or interest rates to influence foreign exchange markets, central banks and finance ministries are setting up obstacles to keep the falling dollar from threatening company profits and economic growth. The U.S. currency slumped 10 percent this year against its biggest trading partners, the steepest decline since 2003, while Treasury Secretary Henry Paulson has reiterated that the U.S. supports a "strong" dollar.

    "Central banks are struggling to find new ways to intervene against their currencies and some of the proposals simply can't work," said Mirza Baig, an analyst in Singapore at Deutsche Bank AG, the world's biggest currency trader. Some plans are "truly bizarre," he wrote in a report.

    The parallels between international monetary events in 1971 and today are not a repeat but a rhyme of history. To highlight the similarities and differences, we bring the December 1971 TIME story up to date with our iTulip version:
    For the past decade the US has enjoyed the complacent conviction that Americans could continue pouring out their overvalued dollars, buying as many foreign goods as they chose and spending on military ventures as lavishly as they pleased. The rest of the world, so the theory went, had to absorb all the dollars. (In the 1971 instance, the dollar had an "immutable" value in terms of gold, with the U.S. pledged to sell American gold—at the rate of $35 an ounce—in exchange for dollars that foreigners wished to cash in.) In the current instance, the value of the dollar is maintained by game theory: prisoner's dilemma. US trade partners were forced to buy dollars in order to support its value. If they did not, and the value of their current dollar holdings will fall and the price of their exports will rise, and that hurts their own economies as much as the US economy, so the theory went.

    But as foreigners piled up more than $5 trillion in U.S. currency, 100 times the amount owed in 1971 before the last dollar crisis, while the US trade deficit balooned, its real estate market melted down, and its economy slowed, that pledge became hollow.
    Sarkozy's pressure on the US is not a forcing function for a full blown international monetary crisis in the years ahead the way Charles de Gaulle's demand for US gold in the late 1960's led the US to "close the gold window" and abandon the gold standard. Markets will continue to punish the US for fiscal mismanagement, irresponsible monetary policy, flawed industrial policy, lop sided trade policy, and ham fisted foreign policy that includes, as in 1971, military ventures. Rather than a sudden crisis, we expect the death by a thousand cuts.

    We got on the short side of the dollar here in 2001 and haven't budged. Now nearly everyone is a dollar bear. As contrarians we are uncomfortable on the same side of a trade as the majority of market participants, but until the causes of the dollar's decline–unsustainable US government policies–reverse, the bet on the dollar in 2007 is still a rhyme of 1971, unfortunately a downward path.

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    Last edited by FRED; 11-13-07, 01:39 PM.
    Ed.

  • #2
    Re: "We will heat our homes with your dollars!"

    "We will heat our homes with your dollars!"

    he didn't really say that, did he?

    Comment


    • #3
      Re: "We will heat our homes with your dollars!"

      Sarkozy's pressure on the US are not a forcing function for a full blown international monetary crisis in the years ahead the way Charles de Gaulle's demand for US gold in the late 1960's led the US to "close the gold window" and abandon the gold standard. Markets will continue to punish the US for fiscal mismanagement, irresponsible monetary policy, flawed industrial policy, lop sided trade policy, and ham fisted foreign policy that includes, as in 1971, military ventures. Rather than a sudden crisis, we expect the death by a thousand cuts.

      We got on the short side of the dollar here in 2001 and haven't budged. Now nearly everyone is a dollar bear. As contrarians we are uncomfortable on the same side of a trade as the majority of market participants, but until the causes of the dollar's decline–unsustainable US government policies–reverse, the bet on the dollar in 2007 is still a rhyme of 1971, unfortunately a downward path.
      Inflation question. Is it absolute or relative, or does absolute inflation matter?

      If you don't understand my question, think of air pressure. Air pressure of open air is 14.7 psi. The recommended air pressure in your car tire may be something like 30 psi. It's not really 30 psi, it's actually 44.7 psi. But when you measure you're really measuring the difference between the air pressure in the car tire relative to the air. The absolute air pressure does not matter.

      Is inflation the same way? We all know that the U.S. is devaluing its currency. But if every other country in the world were doing it, does it still matter? If the U.S. has 10% inflation year-over-year, and the Euro Zone decided to let inflation increase to say 6%, does the 10% inflation matter or is it just the 4% difference between the two currencies that matters?

      The reason I'm asking is I am wondering if the Fed's and the Treasury's plan is to inflate the dollar, but that by the size of the U.S. economy and the number of dollars abroad, the U.S. inflation will force other economies to "inflate or suffer", partially negating the bad effects here. (I'm trying to figure out what Bernanke and Paulson are trying to do. I don't think they're stupid, I think they know full well what they're doing and devaluing the dollar on purpose. But I can't figure out what they're trying to accomplish.)
      Last edited by rj1; 11-12-07, 07:40 PM.

      Comment


      • #4
        Re: "We will heat our homes with your dollars!"

        Originally posted by rj1 View Post
        Inflation question. Is it absolute or relative, or does absolute inflation matter?

        If you don't understand my question, think of air pressure. Air pressure of open air is 14.7 psi. The recommended air pressure in your car tire may be something like 30 psi. It's not really 30 psi, it's actually 44.7 psi. But when you measure you're really measuring the difference between the air pressure in the car tire relative to the air. The absolute air pressure does not matter.

        Is inflation the same way? We all know that the U.S. is devaluing its currency. But if every other country in the world were doing it, does it still matter? If the U.S. has 10% inflation year-over-year, and the Euro Zone decided to let inflation increase to say 6%, does the 10% inflation matter or is it just the 4% difference between the two currencies that matters?

        The reason I'm asking is I am wondering if the Fed's and the Treasury's plan is to inflate the dollar, but that by the size of the U.S. economy and the number of dollars abroad, the U.S. inflation will force other economies to "inflate or suffer", partially negating the bad effects here. (I'm trying to figure out what Bernanke and Paulson are trying to do. I don't think they're stupid, I think they know full well what they're doing and devaluing the dollar on purpose. But I can't figure out what they're trying to accomplish.)
        EJ asked me to post:

        qwerty posted the following link last week. The story addresses your question.
        1967: Wilson defends 'pound in your pocket' (BBC)

        The Prime Minister, Harold Wilson, has defended his decision to devalue the pound saying it will tackle the "root cause" of Britain's economic problems.

        The government announced last night it was lowering the exchange rate so the pound is now worth $2.40, down from $2.80, a cut of just over 14%.

        The decision came after weeks of increasingly feverish speculation and a day in which the Bank of England spent £200m trying to shore up the pound from its gold and dollar reserves.

        In a radio and television broadcast this evening, the Prime Minister said devaluation would enable Britain to "break out from the straitjacket" of boom and bust economics.
        It does not mean that the pound here in Britain, in your pocket or purse or in your bank, has been devalued."

        - Prime Minister Harold Wilson
        The only alternative, he said, was to borrow heavily from governments abroad - but the only loans on offer were short-term ones.

        The government inherited an £800m deficit from the Conservatives when it was elected three years ago.

        Mr Wilson said Labour had managed to reduce the deficit, but the cost of hostilities in the Middle East, the closure of the Suez Canal and the disruption to exports through the dock strikes had contributed to the strain on sterling.

        He said: "Our decision to devalue attacks our problem at the root and that is why the international monetary community have rallied round.

        "From now the pound abroad is worth 14% or so less in terms of other currencies. It does not mean, of course, that the pound here in Britain, in your pocket or purse or in your bank, has been devalued.

        "What it does mean is that we shall now be able to sell more goods abroad on a competitive basis."
        The argument is nonsense and the opposition party jumped all over it.
        Conservative leader Edward Heath has also appeared on television to reply to Mr Wilson's broadcast.

        He accused the Labour Government of failing in one of its foremost duties - to safeguard the value of the country's money.

        He said: "Having denied 20 times in 37 months that they would ever devalue the pound, they have devalued against all their own arguments."
        Needless to say, the devaluation did NOT address the "root" problem. The "root" problem was that Britain had not yet dealt with the consequences of the reverse of capital flows from its former colonies that resulted after its empire ended in 1948 and continued to live beyond its means. Britain's economy finally hit bottom nine years later on September 29, 1976 when Britain under PM Callaghan applied to the IMF for a loan of $3.9 billion. To get an idea of how much money that was, in 1971 when the US defaulted on its gold obligations, it owed the world $50 billion. Today it owes $5 trillion. If the US were to need an emergency international loan under similar circumstances today, it would need to borrow on the order $4 trillion.

        National currency devaluations and are always moves of desperation. Under the floating exchange rate system, these are no longer acknowledged as there is no drain on gold from the nation's treasury to explain. Two important points. One, the vast majority of the US population is too unaware of the consequences of dollar devaluation for President Bush to need to explain the 33% devaluation of the dollar against the euro since 2002 in the way Prime Minister Harold Wilson needed to explain a 14% devaluation to the British people in 1967. In fact, Bush's Treasury Secretary Henry Paulson continues to lie about the fact, at least "20 times in 37 months." Second, under the US single party state there is no need to apologize for fear of attack by the opposition party. There is no opposition party, and either party will do the same.

        The question is, once the US is no longer able to sell long term bonds to Asia, Europe, and oil producing countries in amounts needed to support domestic spending and US leadership is forced by circumstances to stop lying about the fact, what will they do?

        That is the real question we have been discussing here all these years.
        Last edited by FRED; 11-12-07, 08:58 PM.
        Ed.

        Comment


        • #5
          Re: "We will heat our homes with your dollars!"

          Originally posted by FRED View Post
          The question is, once the US no longer able to sell long term bonds and US leadership is forced by circumstances to stop lying, what will they do?

          That is the real question we have been discussing here all these years.

          Is there any evidence of this so far? 30-year Treasuries yield 4.6%, for crying out loud.

          All other indicators of excessive money creation (i.e. inflation) are here, except for those stubborn bonds. I have yet to read a convincing explanation -- with some evidence to back it up -- for how this can be.
          Very puzzling.

          Comment


          • #6
            Re: "We will heat our homes with your dollars!"

            iTulip writes:

            << Second, under the US single party state there is no need to apologize for fear of attack by the opposition party. >>

            This seems either a controversial assertion, or an eye opener for me, and I have no idea which it of the two it may be.

            I was under the impression that genuinely bi-partisan electoral mechanisms still exist in the US, although weakened? I thought our admittedly weakened electoral mechanisms still provid a good deal more mechanism for a functioning republic than the "vestigial" democracy visible in the cardboard institutions of tin-pot states?

            Is there or is there not a large and still deep legacy in this country, from it's heyday as a federal republic, to still allow (fairly easily in purely legal terms) for a grassroots movement to commandeer one or the other of the main political parties, and so compel it to mandate a change of course for the country?

            The component that seems lacking seems to be not the legal or electoral mechanisms for genuine multi-party power sharing, but rather a general apathy and lack of national will to confront realities. Americans prefer to hide in national slogans. The weakness is in the public, not in the institutions. That's a major difference, and describing this weakness as a "one party state" would then risk being inaccurate (a.k.a. exaggeration)?

            My question then is: How does the "US single party state" if it exists, reliably secure it's vested interests today, according to iTulip? If it can't be shown to secure it's vested interests with an iron fist, i.e. there is no impenetrable institutional moat through which an awakened American public could not walk to take back it's government, then how can we say America is genuinely a one-party state?

            This sounds altogether too bleak and ascribes to the US constitution a fatal weakness which it has not yet demonstrated (to my mind).
            Last edited by Contemptuous; 11-12-07, 09:32 PM.

            Comment


            • #7
              Re: "We will heat our homes with your dollars!"

              Originally posted by NemoPublius View Post
              Is there any evidence of this so far? 30-year Treasuries yield 4.6%, for crying out loud.

              All other indicators of excessive money creation (i.e. inflation) are here, except for those stubborn bonds. I have yet to read a convincing explanation -- with some evidence to back it up -- for how this can be.
              Very puzzling.
              You might even call it a conundrum.
              It's all fun and games until someone loses an eye!

              Comment


              • #8
                Re: "We will heat our homes with your dollars!"

                Originally posted by Lukester View Post
                iTulip writes:

                << Second, under the US single party state there is no need to apologize for fear of attack by the opposition party. >>

                This seems either a controversial assertion, or an eye opener for me, and I have no idea which it of the two it may be.

                I was under the impression that genuinely bi-partisan electoral mechanisms still exist in the US, although weakened? I thought our admittedly weakened electoral mechanisms still provid a good deal more mechanism for a functioning republic than the "vestigial" democracy visible in the cardboard institutions of tin-pot states?

                Is there or is there not a large and still deep legacy in this country, from it's heyday as a federal republic, to still allow (fairly easily in purely legal terms) for a grassroots movement to commandeer one or the other of the main political parties, and so compel it to mandate a change of course for the country?

                The component that seems lacking seems to be not the legal or electoral mechanisms for genuine multi-party power sharing, but rather a general apathy and lack of national will to confront realities. Americans prefer to hide in national slogans. The weakness is in the public, not in the institutions. That's a major difference, and describing this weakness as a "one party state" would then risk being inaccurate (a.k.a. exaggeration)?

                My question then is: How does the "US single party state" if it exists, reliably secure it's vested interests today, according to iTulip? If it can't be shown to secure it's vested interests with an iron fist, i.e. there is no impenetrable institutional moat through which an awakened American public could not walk to take back it's government, then how can we say America is genuinely a one-party state?

                This sounds altogether too bleak and ascribes to the US constitution a fatal weakness which it has not yet demonstrated (to my mind).
                really? you can close your eyes, listen to hillary and any republican and tell them apart? how? on these issues? ron paul is different but one man is not a party. he is the exception that proves the rule. the fact that republicans aren't out screaming about the devaluation is proof that we have a one party state. absolute proof.

                Comment


                • #9
                  Re: "We will heat our homes with your dollars!"

                  Originally posted by rj1
                  Inflation question. Is it absolute or relative, or does absolute inflation matter?
                  RJ,

                  It depends on who you are.

                  If you are in the country with higher inflation, then it is absolute inflation which matters.

                  If you are outside of the country in question, then relative inflation matters - but not in the way you think.

                  In this case, the change in prices of goods times volume, then compared to your own economy, is what matters.

                  Think of it this way: When the US had a strong dollar and Mexico went through their peso crisis, Mexico's problems had very little effect on the US since the US/Mexico trade was small and furthermore it was Mexico with the inflation problem.

                  However, if the US has an inflation problem, you can be pretty sure Mexico is affected as the same relative trade has a much larger impact on Mexico.

                  Thus our present devaluation/inflation is affecting everyone else in the world since the US is the big boy in terms of trade.

                  My mental analogy uses ice and fire as an example. Fire represents inflation; if your chunk of ice is on fire and sitting next to a big chunk of ice, the big chunk of ice doesn't get affected much. If you are the small piece of ice next to a large flaming glacier, well, you're going to get melted!

                  Comment


                  • #10
                    Re: "We will heat our homes with your dollars!"

                    Originally posted by Uncle Jack View Post
                    You might even call it a conundrum.
                    good one. wonder what the brit bond yield curve looked like as the brit empire started to unravel.

                    Comment


                    • #11
                      Re: "We will heat our homes with your dollars!"

                      Originally posted by NemoPublius View Post
                      Is there any evidence of this so far? 30-year Treasuries yield 4.6%, for crying out loud.

                      All other indicators of excessive money creation (i.e. inflation) are here, except for those stubborn bonds. I have yet to read a convincing explanation -- with some evidence to back it up -- for how this can be.
                      Very puzzling.
                      2 possible factors i can think of:

                      1. pension funds, burned by the 2001-02 bear market, found religion in the form of matching their assets and their liabilities, so need long duration instruments and are relatively price insensitive in this pursuit.

                      2. deflation believers. gary shilling, for example, still is recommending long bonds on the theory that we're headed into deflation. he's been recommending long bonds for a long time and, so far, he's been right. with the financial system under obvious stress, some investors will buy duration instead of just going with tbills.

                      Comment


                      • #12
                        Re: "We will heat our homes with your dollars!"

                        Metalman -

                        That's no kind of proof at all. The fact you discern almost complete "cloned" homogeneity of views between one party and the other substantively does not remotely demonstrate that the institutional structures are any less than fully functioning to allow a multi-party functioning republic.

                        I have yet to see the tough, factual arguments demonstrating exactly where the electoral process has set up impenetrable barriers to a popular backlash against the status quo. Where is it exactly that the institutional mechanisms now clearly block a grassroots party from introducing a change agenda?

                        Monotonous or brainwashed similarity of views between the two major political groups has little or nothing to do with the legal and electoral structures of a democratic state. What afflicts the US today is a moral failure. The institutions still largely hold, and that's a huge difference.

                        I read many descriptions on this website which openly suggest it's a one party state here. I think these opinions would undergo a drastic change and lose their "tenderness" towards our current constraints, if they were ever char-broiled by a genuinely one-party state environment.

                        I'm completely open to being wrong - I just haven't seen the convincing argument for it yet. The malady is moral, it's within the electorate - not within the institutions. Curiously, that is almost the more fatal illness of the two. However, it does not by any means describe a 'one-party state'.

                        Comment


                        • #13
                          Re: "We will heat our homes with your dollars!"

                          Originally posted by FRED View Post
                          EJ asked me to post:


                          qwerty posted the following link last week. The story addresses your question.
                          The Prime Minister, Harold Wilson, has defended his decision to devalue the pound saying it will tackle the "root cause" of Britain's economic problems.

                          The government announced last night it was lowering the exchange rate so the pound is now worth $2.40, down from $2.80, a cut of just over 14%.

                          The decision came after weeks of increasingly feverish speculation and a day in which the Bank of England spent £200m trying to shore up the pound from its gold and dollar reserves.

                          In a radio and television broadcast this evening, the Prime Minister said devaluation would enable Britain to "break out from the straitjacket" of boom and bust economics.
                          It does not mean that the pound here in Britain, in your pocket or purse or in your bank, has been devalued."

                          - Prime Minister Harold Wilson
                          The only alternative, he said, was to borrow heavily from governments abroad - but the only loans on offer were short-term ones.

                          The government inherited an £800m deficit from the Conservatives when it was elected three years ago.

                          Mr Wilson said Labour had managed to reduce the deficit, but the cost of hostilities in the Middle East, the closure of the Suez Canal and the disruption to exports through the dock strikes had contributed to the strain on sterling.

                          He said: "Our decision to devalue attacks our problem at the root and that is why the international monetary community have rallied round.

                          "From now the pound abroad is worth 14% or so less in terms of other currencies. It does not mean, of course, that the pound here in Britain, in your pocket or purse or in your bank, has been devalued.

                          "What it does mean is that we shall now be able to sell more goods abroad on a competitive basis."

                          The argument is nonsense and the opposition party jumped all over it.
                          Conservative leader Edward Heath has also appeared on television to reply to Mr Wilson's broadcast.

                          He accused the Labour Government of failing in one of its foremost duties - to safeguard the value of the country's money.

                          He said: "Having denied 20 times in 37 months that they would ever devalue the pound, they have devalued against all their own arguments."
                          Needless to say, the devaluation did NOT address the "root" problem. The "root" problem was that Britain had not yet dealt with the consequences of the reverse of capital flows from its former colonies that resulted after its empire ended in 1948 and continued to live beyond its means. Britain's economy finally hit bottom nine years later on September 29, 1976 when Britain under PM Callaghan applied to the IMF for a loan of $3.9 billion. To get an idea of how much money that was, in 1971 when the US defaulted on its gold obligations, it owed the world $50 billion. Today it owes $5 trillion. If the US were to need an emergency international loan under similar circumstances today, it would need to borrow on the order $4 trillion.

                          National currency devaluations and are always moves of desperation. Under the floating exchange rate system, these are no longer acknowledged as there is no drain on gold from the nation's treasury to explain. Two important points. One, the vast majority of the US population is too unaware of the consequences of dollar devaluation for President Bush to need to explain the 33% devaluation of the dollar against the euro since 2002 in the way Prime Minister Harold Wilson needed to explain a 14% devaluation to the British people in 1967. In fact, Bush's Treasury Secretary Henry Paulson continues to lie about the fact, at least "20 times in 37 months." Second, under the US single party state there is no need to apologize for fear of attack by the opposition party. There is no opposition party, and either party will do the same.

                          The question is, once the US is no longer able to sell long term bonds to Asia, Europe, and oil producing countries in amounts needed to support domestic spending and US leadership is forced by circumstances to stop lying about the fact, what will they do?

                          That is the real question we have been discussing here all these years.
                          But are Bernanke and Paulson devaluing the dollar just as an ill-fated attempt at propping up manufacturing? I have to think that cannot be just it, as manufacturing has suffered for a long time, and no one in power really cared, there has to be something more.

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                          • #14
                            Re: "We will heat our homes with your dollars!"

                            Originally posted by c1ue View Post
                            RJ,

                            It depends on who you are.

                            If you are in the country with higher inflation, then it is absolute inflation which matters.

                            If you are outside of the country in question, then relative inflation matters - but not in the way you think.

                            In this case, the change in prices of goods times volume, then compared to your own economy, is what matters.

                            Think of it this way: When the US had a strong dollar and Mexico went through their peso crisis, Mexico's problems had very little effect on the US since the US/Mexico trade was small and furthermore it was Mexico with the inflation problem.

                            However, if the US has an inflation problem, you can be pretty sure Mexico is affected as the same relative trade has a much larger impact on Mexico.

                            Thus our present devaluation/inflation is affecting everyone else in the world since the US is the big boy in terms of trade.

                            My mental analogy uses ice and fire as an example. Fire represents inflation; if your chunk of ice is on fire and sitting next to a big chunk of ice, the big chunk of ice doesn't get affected much. If you are the small piece of ice next to a large flaming glacier, well, you're going to get melted!
                            It's hard to think of these tiny desert sheikhdoms in the Arabian Gulf as "little chunks of ice" (it's November and I'm still running the air conditioners in my home), but your point is amply illustrated by the imported inflation, amplified by the pegged currencies, being experienced here half way around the world from the USA.

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                            • #15
                              Re: "We will heat our homes with your dollars!"

                              The last time there was a serious "third party" was Perot, and I believe that Clinton sized up the major issues (the federal deficit in particular) Perot was running on and changed course to address them.

                              I'd say you've got it right that the system is still in relatively good shape.

                              “The fault, dear Lukester, lies not in our stars, but in ourselves.”

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