Financial Advice, pt. 5

So here we are, halfway through, Charles R. Morris’s The Trillion Dollar Meltdown and it’s Friday.  Last night T and I hosted our monthly Cashflow 101 game and get together for about 15 people.  We had a guest speaker from the real estate world talk about lease purchase options.  I could not help but hear echoes and see the shadows of Morris’s book in his presentation.  Deals within deals, make a million using OPM, buy low and use the margin.  It almost made me eager to get back to our review.

Chapter Five:  A Tsunami of Dollars

Joel Grey as the stage manager in Cabaret comes to mind.  Money, money, money . . .  As you all probably know, everyone else’s currency is tied to the U.S. dollar.  How could you not know, since every financial report these days is headlined with a new comparison of how badly it’s doing.  The dollar is falling, the dollar is falling . . .  Ah well, what are we to do.  

After the meeting at Bretton Woods following WW II, “The value of the dollar, …, was fixed by a long standing commitment to redeem dollars for gold at the rate of $35 per ounce.  Virtually all prices in international trade were set in dollars.”  An agreement that lasted until 1971, when Nixon removed the US from the gold standard and we entered our current Fiat money system.   

The Fed has two ways it can affect our money.  Interest rates can be changed and/or the supply of money can be increased.  Even my untutored financial mind can see that if a government, the one that sets the standard BTW, can flood the marketplace with untethered money bad things can happen.  As Morris points out, a country’s finances can be seen “through the status of its current account, a kind of international profit and loss statement.”  Money travels in via export sales, and out via import expenses.  The negative difference between the two amounts is called a deficit.  In the US,”The 2006 trade dificit was over $750 billion, and the total current account deficit topped $800 billion.  The accumulated deficit for 2000 to 2006 is about $4 trillion.”   

Think of it this way.  If you take a dollar and you devide it into 10 equal parts and then you call each new part a dollar, you may have more dollars but clearly they are devalued quantities.  When your economy’s GDP  is growing, then expanding dollar availability via credit lines or new dollars is one thing.  But when the economy is in decline, a deficit, or recession it is quite another.  And since, the dollar is the comparison standard for the rest of the world, so to speak, our actions pull the rest like the winning side in a tug of war towards a deep and muddy hole.  Yet, that is where we find ourselves since Bretton Woods II.  Our present Fed chair, Ben Bernanke,  took this position:

 Everything is the result of market forces shaping events toward a high-efficiency outcome.  The Fed’s free-money policy was predetermined by the tidal wave of foreign savings.   Alan Greenspan was an agent, not an independant actor.  America’s housing and debt binge was made in China, and for large and good purposes.


On closer examination, the central premise of the BW2 hypothesis, that large foreign dollar-holders have no choice in the matter, is simply not true; indeed holding dollars is increasingly against their interests.

Morris’s grasp of the global marketplace must be trusted as he continues to discuss Russia’s, OPE C’s, Asia’s, and especially, China’s dollar-based economical development away from dollar dependence and toward a basket of currencies.

The rise of the Sovereign Wealth Funds was inevitable.  What country with enormous currency reserves wouldn’t want one?  “An SWF is a private investment fund under the broad control of a government but almost always outside of the official finance apparatus, free of the investment limitations that apply to official reserves.”  At this printing, “At least twenty-five surplus countries already have SWFs or are in the process of setting them up.”  If you are wondering where America is borrowing its money from these days you need look no further.

In this chapter, Morris returns to the main thesis of the book, unregulated free markets lead to a prideful fall.  This time with the facts and figures to back it up.

All in all, it’s hard to imagine a worse outcome – the United States, the “hyperpower,” the global leader in the efficiency of its markets and the productivity of its businesses and workers, hopelessly in hock to some of the world’s most unsavory regimes.  But that’s where a quarter-century of diligent sacrifice to the gods of the free market has brought us.

I have to agree with him.  At this point, “It’s a disgrace.”

Next up: The Great Unwinding


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