Early Autumn

DistributorCapNY has written what I think is the most important political post I've seen in a long while. Here's the link, the text, and the text of my follow-on comment.

http://distributorcapny.blogspot.com/

He calls it, very appropriately,

DRESDEN ON THE HUDSON.

One of the more insidious cogs of the economic chaos that is befalling us, has the been the collapse of the U.S. Dollar. When Bush started his disaster of a presidency, the Canadian Dollar was worth around 70 cents US. Now the "Loonie" is worth more than the pieces of toilet paper that is called the US Dollar. The Euro, the Pound, the Swiss Franc, the Yen and even the Peso are all worth a lot more. Try going to Europe. Have fun spending $12 on a can of soda or $18 for a beer.

We do not directly see the impact of the falling dollar. But the implications are dramatic -- from imports, to travel, to oil, to investments. When people flee a currency, the results are dramatic. Prices rise and investments drops -- but worst of all are the psychological and intangible effects. I have written about this several times -- it is called roll out the (wheel) barrel.

from Reuters:

In the latest example that the U.S. dollar just ain't what it used to be, some shops in New York City have begun accepting euros and other foreign currency as payment for merchandise.

"We had decided that money is money and we'll take it and just do the exchange whenever we can with our bank," Robert Chu, owner of East Village Wines, told Reuters television.

The increasingly weak U.S. dollar, once considered the king among currencies, has brought waves of European tourists to New York with money to burn and looking to take advantage of hugely favorable exchange rates.

"We didn't realize we would take so much in and there were that many people traveling or having euros to bring in. But some days, you'd be surprised at how many euros you get," Chu said. "Now we have to get familiar with other currencies and the (British) pound and the Canadian dollars we take," he said.

While shops in many U.S. towns on the Canadian border have long accepted Canadian currency and some stores on the Texas-Mexico border take pesos, the acceptance of foreign money in Manhattan was unheard of until recently.

Not far from Chu's downtown wine emporium, Billy Leroy of Billy's Antiques & Props said the vast numbers of Europeans shopping in the neighborhood got him thinking, "My God, I should take euros in at the store." Leroy doesn't even bother to exchange them.

"I'm happy if I take in 200 euros, because what I do is keep them," he said. "So when I go back to Paris, I don't have to go through the nightmare of going to an exchange
place."

The King of currencies is now like the Shah of Iran was in 1979 -- on the run and just waiting for its ultimate demise.....

If you walk around the main shopping areas of Manhattan - 5th Avenue, Lower Broadway, 34th Street/Herald Square, Bloomingdale's -- you hear more Italian, French, Spanish, German, Russian, and Hungarian than English. For Europeans, this is one giant garage sale. For those of you from New York --- it is John's Bargain Stores meets Korvette's. It is cheaper to come to New York and buy the same goods that are made in their own countries and exported. Clothing, accessories, cosmetics, shoes, iPods, jewelry, cameras and video equipment - everything other than electronics (due to electric current differences and TV format standards) are all found at K-mart prices. The airlines have become shipping companies.

Yes it is great that tourists are flocking to New York to buy, shop and inject money into the local economy. But the long term implications of a worthless dollar are dramatic. And awful. And disastrous. Beyond the consumer goods -- real estate and companies are cheap to buy for the Europeans, Japanese, Chinese and Arabs. They will soon more of New York than New Yorkers do. Remember the old line, have I got a bridge to sell you....don't laugh, it might happen.

So not only are foreign governments supporting our economy by loaning us money to cut stimulus checks (knowing full well they are going to get that money right back since we will allegedly run out and buy the goods they have produced and exported), they are also buying companies, real estate, and large assets. And for the cherry on the parfait -- with a worthless dollar at their beck and call they are buying all the shit we have in Macy's.

When I walk into a store on Union Square and they are taking Euros you KNOW something is just not kosher in Denmark. Is there ANY clearer sign that the economic policies of George W. Chimpenator are leading us right into the abyss.

MY COMMENT:

D-CAPny: Thanks for this invaluable post. I'm a geek and a nit and I don't write about finance or economics in plain English. I like the jargon and the complexities!

With that in mind, I'll support and add on to your fine post.

I'm assuming that at some point in your professional life you've encountered the concept of embedded optionalities. The pioneers in this area of finance are Eduardo Schwartz and Michael Brennan in case this interests you and you want to do any more research.

Did you know that a bond or, for that matter, a loan of any kind carries an implicit call option on the assets of the debtor? Of course you did. This means that if, as a creditor, your debtor defaults you are entitled to an amount of his assets equal to the size of the default.

So, while the USA is off the gold-standard and it is said that its debt is only backed "by the full faith and credit of the United States Of America," that just isn't so. The debt is backed by every asset owned by the federal government. A perfect analogy is health insurance. You may not have insurance but no state or municipality is allowed to refuse to treat you if you are ill. You won't get great care but they must make a best-effort to heal you.

Right now, the US Debt is about $9 trillion. It is mostly held by foreign governments and entities, principally China, the EU, the UK, the OPEC nations, Russia, Canada, Switzerland, Norway, Australia, New Zealand, South Africa, Nigeria and assorted other South American and European nations. Let's say the effective interest on the $9 trillion is 6% payable quarterly. It's payable daily, but let's keep it simple. One-quarter of 6% of $9 trillion is not a small number. It is $135 billion. About what the US asks for every quarter for ongoing GI Joe wars.

The USA is bankrupt although it has yet to be placed into bankruptcy. So, each quarter the US just prints more money to make good on the debt service and the additional war funding.

What would happen if a large holder of US debt, China, say were to say one of these quarters "hell no, we don't want dollars anymore we wan't to be paid in real estate. Give us Yellowstone Park."?

The US would say "screw you, you're stuck with what you've got, like it or lump it...here's your payment in freshly printed greenbacks."

And China would respond by losing faith in the USD and selling all its USD paper into the market. Everyone else would follow suit.

You'd have a EEU/USD rate of around 1/50 and a CAD/USD rate of about 1/30. [dcny: i fixed typo]

This isn't some dry boring economic or financial bullshit. Does everyone realize the implications of this? If not, this is what would happen. Every city and town in America would become like New Orleans during Katrina.

Americans love to shed crocodile tears over "the tragic events of 9/11." Well, gee whiz, again does anyone realize just how much WORSE than 9/11 this kind of economic and financial meltdown would be? Of course not, because there is a startling lack of economic and financial literacy out there.

I'll spell it out. This would be a slow motion holocaust. Do not think for a second that your government is not aware of this.

What would be the likely US response. Well, it certainly wouldn't be to sell every scrap of national park, ANWAR, all its nukes, and every US military base now, would it? If you're George W. Bush or John McCain or Barack Obama with Lieberman whispering in your ear or maybe even Hillary Clinton, you're going to start nuking all your creditors to de-stabilizes their currencies and to bring the dollar back close to parity.

THAT is the significance of D-CAPny's post.

Thanks, D-CAPny, I guess for bringing up THE MOST IMPORTANT FOREIGN AND DOMESTIC POLICY ISSUE FACING THE USA AND THE WORLD. And these fuckers are arguing over who's the real agent-of-change and who hates gays, abortion and taxes more?

Fuck.

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