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BIG FLOAT: The American Damocles

by L. Reichard White

What's the "current account deficit" and why is it like the water in your flush tank? If you own dollar denominated assets of any kind, you might want to know.

Let's begin with something a little familiar. The U.S. trade deficit for 1998 came in at $168.6 billion, up 50% from 1997 and at an all-time high. Continuing the trend, the January 1999 trade deficit was $16.99 billion, another all-time monthly high.

You've probably seen such so-called "trade gap" figures before. As presented by most experts and the media, this evokes fear for American jobs. But as is often the case these days, things aren't quite "as presented," probably because most experts and the media don't usually grasp the wider implications of trade deficits. Do you?

The first problem is that trade-gap figures, like most state-based economic figures, are questionable -- very questionable. For example, the main u.S [1] trade gap has traditionally been with Japan. Here are a few of the problems with the Japanese trade gap figures -- which can be generalized to all such state-based figures:

"These [trade deficit] data, remember, do not count the revenues from services, licenses, or intellectual property, or from goods manufactured by U.S. firms in third countries but sold in Japan, or from goods both manufactured and sold in Japan by U.S. firms. All they count is that relatively small universe of things physically produced in the United States, crated, loaded onto ships or planes, passed through customs, and then uncrated and sold in Japan." -Kenichi Ohmae, The End Of The Nation State, (New York: The Free Press 1995), p. 17 &18.

The next part of the trade-deficit-figure problem is the emphasis; much more than a few American jobs are at stake. As he so often does these days, Federal Reserve Chairman -- and gold bug -- Alan Greenspan points in the right direction:

"I'm not one of those who subscribes to the issue that the whole question of trade relates to jobs; I think that's a mistaken view. Where there is a problem is somewhere else and that is in the broader notion of trade, namely our current account deficit." -Humphrey-Hawkins testimony to the Senate Banking Committee, 25 Feb 1998 [2]

The U.S. current account deficit figure -- separate from the trade deficit figures -- for the April to June quarter of 1999 came in at a new record high of $80.7 billion, up 17.5% over the previous quarter which, at $66.6 billion, had been the previous record holder.

The current account what?

OK, you say. Yawn!! "I don't ever remember hearing about this 'current account deficit,' and I'm not sure I want to now." Stick with me here -- I think you'll find this intriguingly arcane - - -

As Greenspan says, "We're seeing a major increase of dollar holdings by non-Americans, which is obviously the other side of the trade deficit." That is, while non-Americans have shipped us lots of goods, trade deficits also mean that in return, we've shipped them lots of dollars.

The CAD (my chosen abbreviation for "Current Account Deficit") is a measure that includes not only America's over-all trade deficit but net foreign dollar investments by Americans, and a few other things as well. A significant one of those "few other things" is U.S. "national debt" interest payments made overseas [3] to non-Americans:

Interest on the national debt is redistributed from taxpayers whose taxes pay that interest and who, on the whole are less rich, to buyers of government bonds who, if they can afford to buy bonds, are clearly richer. Large amounts of this interest go to richer people in other countries who buy US Treasury Bonds and T-Bills. -testimony to Joint Economic Committee of Congress, 12 February, 1993

Since the "current account deficit" is just a broader and more comprehensive measure of the same thing as the trade deficit, the same interpretation -- increased holdings of dollars by non-Americans -- also applies to the CAD as a whole. The least misdirective way to view the "CAD" then, is that it continually adds to the already huge stock of U.S. dollars --and dollar equivalents-- held by non-Americans.

And despite the difficulties in state-based economic statistics, there are a lot of dollars, including even actual paper dollars, held by non-Americans. Consider: In 1993 the U.S. Secret Service seized three times as much counterfeit U.S. currency overseas as it did at home. As I discovered myself in October and November of 1998, the dollar is the preferred currency in Russia, for example -- and dollar bills of all denominations are as common as rubles (rhymes with "bubbles"). As of 1994, the Federal Reserve estimated that of the approximately $365 billion of American currency in circulation, 60 percent was held somewhere outside the country. Other experts put the figure as high as 80 percent.

"The amount of U.S. currency going into domestic circulation each year has not varied much over the past two decades, while the amount of currency going abroad has risen strongly, particularly in the 1990's; ...these same broad conclusions emerge regardless of which measurement technique or set of source data was used; and all measurement techniques identified the same periods of major accelerations and decelerations in net outflows of currency." -Christopher L. Bach, U.S. International Transactions, Revised Estimates for 1974-'96, From the July 1997 SURVEY OF CURRENT BUSINESS

So what?

The "current account deficit" rarely get's major news coverage because most people don't understand that the CAD measures the overseas build-up of dollars (and dollar surrogates), and even if they did, few would understand the significance of that build-up. How about you?

"We've had a very substantial current account deficit for a very protracted period of time which effectively has moved us from a very large net creditor [nation] to a very large net debtor. And we have a significant amount of net interest payments that we pay on that debt which are added to our trade imbalance and creates still larger current account balances and still larger net debt." -Alan Greenspan, Humphrey-Hawkins to the Senate Banking Committee, 25 Feb 1998

In other words, dollar trade imbalances, measured by current account deficits, converted the U.S into "a very large net debtor." But Mr. Greenspan is modest: Through the process he has described just above, the U.S. has become by far the biggest debtor in the history of the world. And by proxy, those living in the u.S. or holding U.S. dollars are, for good or ill, the beneficiaries of this process. According to The Economist, "America's total foreign INDEBTEDNESS, a measure of the difference in value between American investments abroad -- everything from government securities, shares bonds and overseas factories -- and foreign investments in America, rose once again in 1998, to $1.24 trillion." This amounts to about $4,770 for every man, woman, and child in the country.

But how does a huge supply of overseas dollars make the U.S. more of a debtor nation? To the extent these "dollar" promises to pay are held overseas, it means we domestic dollar holders collectively have, in essence, been loaned whatever was bought and paid for by the dollars "we" shipped overseas. For example, some of us who live our economic lives in "dollars" have gotten imported stuff like TV sets, oil and cars. The U.S. Government has been able to pay $500 dollars for toilet seats and buy $225 hammers, etc. As Case Sprenkle of the University of Illinois puts it, "Insofar as the money remains abroad and is not used to purchase goods or services from the country that printed it, it serves as an interest-free loan from poor countries to the rich."

Foreigners accept these dollars fully expecting they can trade them back to "us" for goods and services -- "stuff" -- that they want at some later date. In other words, these "foreigners" have given us "stuff" we want today in trade for dollars -- essentially I.O.U.s -- they can trade back to us for stuff they want later. My wife dubbed this situation "Big Float."

These "dollars outstanding are what make the uS the largest debtor in the history of the world. "I'll gladly pay you Tuesday for a hamburger today," has become "our" motto. "Dollars" are just more formal than Wimpy's verbal assurances. But what happens Tuesday?

Supply, demand, and money

Before we can proceed, I need to take you on a short side trip. The "Law of Supply-And-Demand" is based on the observation that the more of something there is, the less valuable people perceive it to be. Thus, since there's lots of ice in the Arctic, it's tough to sell refrigerators to Eskimos. But since gold and rubies are universally rare, nearly everyone -- even Eskimos -- perceive them to be very valuable.

The surprising thing is that supply-and-demand applies to money as well as to rubies and refrigerators. Prof. Gilkey, a socialist, verified my startling (at the time) insight that by supply-and-demand logic, when the Federal Reserve, in cahoots with USA Corp, increases the money supply, that causes the value of money to decrease. That is, since by creating new money they increase its supply, there is more of it and thus it becomes less valuable.

However, this decrease in the value of money is interpreted and reported as price inflation. Interpreting a decrease in the value of money as "price inflation" is extremely misleading and causes no end of confusion. We tend to think and say "Prices are going up!" What we should be saying is "The value of this money is going down!"

In fact, such a monetary supply increase is the only cause of what is reported in the news as the "rate of inflation." So anytime you are experiencing an increase in the "rate of inflation" it is almost certainly because the Federal Reserve has by hook or by crook, at some time in the past, increased the amount of "money" in circulation. [4] As Economic Nobel Prize winner Milton Friedman puts it:

"There is perhaps no empirical regularity among economic phenomena that is based on so much evidence for so wide a range of circumstances as the connection between substantial changes in the quantity of money and in the level of prices." ... "It follows ... that inflation is always and everwhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output." -quoted in Judy Shelton, Money Meltdown (New York: The Free Press 1994), p. 176 & 177

That is, anytime the quantity of money is increased eventually you can always expect an equivalent increase in prices sometime down the road. [5] Well, perhaps not quite always. We can always hope ---

Big float calls home

You see, for the time being at least, and for those living their economic lives in "dollars," there seems to be an exception to Friedman's observation, a loophole in Friedman's Rule. Well, sort-of.

We know that the Federal Reserve has been expanding credit (expanding the money supply) at a rapid rate for quite awhile -- especially since the early 1990s -- and we already know where a lot of that money has been going. Overseas.

Now remember Case Sprenkel's quote? "Insofar as the money remains abroad and is not used to purchase goods or services from the country that printed it, it serves as an interest-free loan ..." But suppose the money doesn't remain abroad.

What would happen if these "foreigners" showed up in the US and started buying things with their dollars? Suppose Big Float calls home. This has happened more than once. On August 15, 1971 U.S. President Richard Nixon "closed the gold window." As a result, foreigners perceived dollars losing value because they were no longer redeemable for gold. Chiefly because of this, a wave of foreign-held dollars came home in the late 1970's and early 1980's.

Overseas dollars started showing up here in the uS in the late 1980s as well. It was during this period when the Japanese bought-up such American icons as Pebble Beach, MGM, etc. with some of these formerly expatriated dollars. Americans at the time didn't like this much -- but, well, afterall, the "foreigners" were just trading "dollars" back to us "for stuff they wanted later."

Those unpopular acquisitions by foreigners were only the most visible symptom. In both periods, all those foreign dollars returning home increased the money supply. So tell me. What happened as a result? - - - If you said "inflation," you get a gold star! If you said, "the value of the money dropped," you get five gold stars.

In fact in the late 1970's, "inflation" here in the uS reached an official rate of about 18% per year, while more accurate estimates put it as high as 21%. This was perilously close to "hyper-inflation." People who retired just before this period lost as much as a third of the value of their retirement checks in a few years because "dollars" lost about a third of their buying power during this period. Those retirees, including my mother, are called the "notchers." Many "notchers" ate dog food because they could no longer afford anything better, and, for a long time, they were disproportionately represented in the ranks of "bag ladies" and the other homeless Americans.

The runs

In a very unusual circumstance, the almost hyper-inflation America experienced in the late 70's early 80's subsided. Why? Quite frankly I don't know -- that's a research topic for another time and probably another writer. But such a recovery is the exception.

What normally happens, once "foreigners" start repatriating their money is essentially a sort-of financial catharsis. Anticipating that everyone else will unload (repatriate) their supplies of the currency too, everyone starts "selling" the currency, that is, trading it for almost any financial instrument denominated in any currency but their own. Inventive local folks without access to such foreign financial instruments even resort to more creative alternatives:

At a luxury-car dealership in downtown Jakarta, salesman Shierly Wijaya faced another problem: a run on BMW's. In an odd mirror image of the panic in the supermarkets, wealthy Indonesians snapped up every BMW in the showroom, apparently reasoning that, unlike currency, cars would keep their value. One thirtyish businessman bought two cars at the same time, a $36,000 323iA and an $83,000 735iL. He paid on the spot with a thick wad of cash. By the end of the two-day panic in Jakarta, every single one of the 200 BMW's in city show-rooms had been sold. -Marcus Gee, "Globe and Mail" (centrist) Toronto, Feb. 5, 1998 [World Press Review, April 1998, p.8]

What happens when, as above, folks start spending their thick wads of cash, is that the available supply of that "cash" skyrockets and, by operation of supply-and-demand, the value plummets. This plummeting value is interpreted as "inflation" and once widely perceived, causes more and more holders of the currency or any assets denominated in that currency to act likewise, which causes more "inflation," which causes more unloading, more inflation, etc.

The closest analogy to this process is the much fabled and dramatized "bank run." As American President William Jefferson Clinton put it in an address to the World Bank and the IMF, October 6, 1998, "We must [now] address not only a run on a bank or a firm, but also a run on nations." This wasn't just rhetoric. It was prompted by real examples and consequences from the immediate history of the time:

Currencies and stockmarkets plunged across EAST ASIA while banks, builders and manufacturers went bust in their hundreds. Worst hit were Thailand, Indonesia and South Korea, whose currencies all fell by more than 40% against the dollar ... -The Economist, Wed, 31 Dec., 1997

- Most of the Asian tigers [Indonesia, Korea, Thailand, etc.] are now creating money at the rate of ~20% since the beginning of the crisis. This results in inflation and will further devalue these currencies. This is a result of prompting by the IMF [International Monetary Fund]. The result is that the workers' salaries and the people's savings are decimated [by inflation]. This results in various forms of civil and political unrest, and if this continues, we'll see more. -Lawrence Kudlow, CNBC, 8 Jan 1998

JAKARTA, Indonesia -- "As the roof of a blazing central Jakarta police station caved in a few yards away, rioters roared their approval and a shop owner named Joko broke into a grin. This makes me happy. I support it," he said, while nervously declining to reveal his full name. ... Demonstrations that began two weeks ago with university students shouting for democracy have turned into riots driven by a frustrated and rapidly expanding population of poor people who can't afford many of life's basic necessities. -"Economic despair turns peaceful protests violent" by James Cox, USA TODAY, FRI./SAT./SUN., MAY 15-17, 1998, COVER STORY, pg. 1

- The World Bank reports that [as a result of the Asian currency crisis] the number of poor in Asia (Malaysia, Thailand, Indonesia, and the Philippines) may double to 90 million over the next three years, and there is a desperate need to reduce the prices of basic supplies [food, etc.]. -News World Iinternational, 30 Sep 1998

The loophole in Friedman's Rule, then, is that if the money the FED (or another country's Central Bank) prints or otherwise creates migrates into foreign hands - - and as long as it stays there - - it doesn't increase the money supply and thus reduce the value of the currency at home. But this build-up of overseas dollars is like the water that builds up in your toilet tank. If someone hits the lever and Big Float comes lumbering home, it can end up as quite a spectacular flush! Is one heading our way?

Mr. [Albert] Friedberg [famed Austrian economist, currency specialist and head of Canada's Friedberg Mercantile Group] points to the monetary policy of the Federal Reserve as the fundamental cause of the currency debacle. He notes that since the early 1990s, the Fed [Federal Reserve] has backed a credit expansion policy that it has exported abroad. He also predicts that "the crisis will widen. It will travel from Asia to Russia, Greece, Brazil. Eventually it will come back to the United States." -TORONTO GLOBE AND MAIL (January 10, 1998)

As of April 1, 2000, the only part of Mr. Friedberg's prediction that hasn't come to pass is the part that says "Eventually it will come back to the United States." Brazil stopped supporting its currency, called the "real" on January 15, 1999, allowing it to devalue by as much as 50%.

Don't worry ...

But what are the chances of all those individual non-American foreigners holding that huge stock of overseas dollars deciding to suddenly redeem them, causing a "run" on USA Corp.? As Mr. Greenspan testified to the Senate Banking Committee, 25 February, 1998:

"The desire to hold dollars, claims on the United States, is very strong because this is a very sound economy, and in that sense, there is no near term problem nor, in fact, any obvious economic difficulty that one can infer from the existence of this current account balance." . . . . "We do not see any facts at the moment --- there is no evidence of weakening of demand for dollars or the accumulation of dollars for a store of value throughout the world. Indeed, if anything it's going up, not down."

The pro-dollar psychology around the world is indeed very strong. Don't worry: According to a David Brinkley commentary on ABC This Week for example, "Three quarters of all green-backs in circulation are overseas, mostly $100 dollar bills, stashed in mattresses because they think of the dollar as hard currency." Argentina's currency board, prompted by similar thinking and under pressure from Brazil's devaluation, is in talks with The United States to do away with the Argentine peso, and have nothing but the U.S. dollar circulating in Argentina. Similar sentiments emerge from Russia in the following news story from the front page of The Moscow Times, SATURDAY, OCTOBER 24, 1998:

Amidst this chaos, Sverdlovsk Governor Eduard Rossel walked out of Boris Yeltsin's office earlier this month claiming that the president liked his suggestion that Russia outlaw the U.S. dollar on its territory. Public reaction was an earthquake. The head of the Kremlin administration, sensing the first tremors, had to summon reporters back within 15 minutes of Sverdlovsk's [Rossel's] remarks for a damage-control session, and [Prime Minister Yegveny] Primakov went on television to reassure the country the dollar was not to be touched. That was actually a rare moment of unified, purposeful action. -Gary Peach and Matt Bivens, Primakov's Six Weeks Magically Confused

All those different individual folks holding all those dollars stashed in all those mattresses -- having them all suddenly decide to dump their dollar stashes all at once would be about as likely as suffocating because all the atoms of oxygen in the room decided to hang-out in the upper left-hand corner --- right? Don't worry.

As "investment biker" and economist Jim Rogers points out, "The US dollar has been going sideways [only depreciating slowly] despite the fact that we've had this huge trade deficit, despite the fact we're a debtor nation. But again foreigners keep putting money in -- " Don't worry!

Speculators and computers vs. mattresses

As you have probably already guessed, there's a wee bit of a problem with our rosy scenario. If you listen to Mr. Greenspan long and carefully, he'll tell you something about the first part of it:

"The problem that we run into unfortunately, is that as our net foreign debt rises, that the amount of interest we must pay and indeed dividends as well, continues to rise, and that process itself creates a type of situation that if at some point foreigners stop wanting to continue to accumulate dollars, it creates a major reverberation back on the American economy ...And the question is, what does that mean, where is the end of that rise, and the question we have addressed ourselves to in some considerable detail. We have not yet been able to answer it effectively." -to House Ways and Means Committee, 20 January, 1999

The second part of the problem is more abstruse. You see, most expatriated dollars aren't held by people under their mattresses anymore. In fact, most dollars are no longer even actual physical pieces of printed paper. Instead, about 92% of them are now "virtual" dollars held only as binary zeros and ones in computer memories. Because of this computer-memory-only existence, these virtual dollars (as well as virtual yen, pounds, marks, lira, francs, etc.) have been dubbed "megabyte money" by financial writer Joel Kurtzman and others.

The computers that hold these megabyte dollars as accounting entries in their memories are located all over the world. So these days most expatriated dollars aren't stuffed in mattresses -- and they're not exactly "overseas" either: They're in cyberspace -- and they can be transferred around the globe en masse and at nearly the speed of light. Can you see why this means Rosy Scenario could develp a sudden case of "dropsy?"

Most of these megabyte dollars are controlled and traded by professional traders, -- read "professional gamblers" called "quants" in the business -- who would unload their megabyte dollars literally in a second if that looked profitable -- and these quants, including especially American quants, are highly motivated to watch such things very closely. Thus, "if at some point foreigners stop wanting to continue to accumulate dollars," you might want to hold your breath -- those wild and crazy oxygen molecules just might surprise you! [6]

The so-called Federal Reserve admits to being somewhat aware of the situation, though they don't seem all that anxious for the general public to understand it. When I asked a retired banker aquaintence of mine about this situation, he suggested it was just as well that "the people" be kept in the dark about it.

"It's just that the [current accounts deficit] arithmetic over the very longer run creates a big question mark as to whether that is sustainable indefinitely in the future. And I must say to you that that is one of the issues that the Federal Reserve has been spending in recent years a considerable amount of time thinking our way through to make certain that if we spot any material erosion that suggests that this stability is subject to unwinding, that we will have some significant advance notice on it." -Alan Greenspan, to the Senate Banking Committee, 25 February, 1998

What 'fast' is

OK. Fine. But how long, exactly, does Greenspan have in mind when he suggests that, "we will have some significant advance notice?"

"As I testified before this committee in the midst of the Mexican financial crisis in early 1995, major advances in technology have engendered a highly efficient and increasingly sophisticated international financial system. ...But that same efficient financial system, as I also pointed out in that earlier testimony, has the capability to rapidly transmit the consequences of errors of judgement in private investments and public policies to all corners of the world at historically unprecedented speeds." -Alan Greenspan to House Banking Committee, 16 September, 1998

Here are a few examples of some of the "historically unprecedented speeds" Mr. Greenspan may have had in mind:

The DOW transportation average jumped 75 points, about 7%, in about half an hour starting about 12:30, a "startling move," apparently in response to news that Northwest Airlines was increasing fares. -Bob Pisani, CNBC, 29 Jan 1999

The South Korean Won has depreciated 40% in the last four days, down 10% in the first three minutes of trade last night... and it is predicted that the won will likely drop another ten percent, the limit, again tonight. -CNBC, December 11, 1997

But do such mega-byte speeds really have any relevance to the U.S dollar?

- The dollar at its low was down 11 yen, at 120.3 yen per dollar from 132 yen per dollar yesterday. This is better than an 8% drop in the dollar, the bulk of this happening in about three minutes in the middle of the night. This is an "astounding drop" in the world's largest currency. -MSNBC etc., 7 October, 1998 -"This is the biggest one day dollar drop in 25 years." -Kathy Jones, Prudential Securities, 7 October, 1998

An 8% drop in about three minutes -- that is pretty fast don't you think? I heard no attempted explanation; apparently it was just an economic anomaly. You see, it wouldn't have to be just foreigners losing interest in dollars. Quants are looking for any edge, any excuse to trade, any predicted fluctuation, no matter what the cause. These fluctuations are their bread-and-butter. The business is so competitive that financial companies even keep their quants' identities secret for fear their educational background or some other factor, should it become known, might give the opposition an edge. Further, the foreign exchange markets where these quants largely trade resemble a giant poker game where counter- bluff follows bluff, sometimes without any real connection to the external non-financial world at all. Could such a bluff-gone-wrong -- or other unintended factor -- precipitate a dollar-dumping?

...Be happy

REPRISE: "...there is no near term problem no, in fact, any obvious economic difficulty that one can infer from the existence of this current account balance." -Alan Greenspan

COUNTERPOINT: ... "history suggests that they [judgements of market value] also reflect waves of optimism and pessimism that can be touched off by seemingly small exogenous [external] events. -Alan Greenspan, New challenges for monetary policy, Jackson Hole, Wyoming August 27, 1999

Currently -- apparently -- there's really no place for the phenomenal mass of "dollars" to go, the dollar being the most abundant monetary token in the world. So while a partial meltdown of the dollar, precipitated by who-knows-what, is possible, a complete meltdown is less likely -- though not impossible.

Maybe an alternative currency will evolve. Perhaps the "euro" may catch on. United Islam is considering a gold-backed "dinar." Gold itself has always been the premiere alternative to paper currencies, and so it has been unmercifully manipulated by the world's central bankers in recent years. And for good reason from their viewpoint -- but that's a whole 'nother article. [7] Finally, the internet may make direct barter possible without ever using any nation-state based monetary tokens what-so-ever.

If all other alternatives fail though, remember the choice of discerning Indonesian rich folks. There are plenty of BMW dealerships around. Etc. Of course if any of their financial officers have read this article, they may be reluctant to part with their wares for a wad of rapidly plummeting dollars.

Will anything actually come of all these excess dollars? Well, according to Andrew Dickson White in his classic Fiat Money Inflation in France, which chronicals the devastating results of large issues of unbacked currency:

Thus was the history of France logically developed in obedience to natural laws; such has, to a greater or less degree, always been the result of irredeemable paper, created according to the whim or interest of legislative assemblies rather than based upon standards of value permanent in their nature [gold and silver] and agreed upon throughout the entire world. Such, we may fairly expect, will always be the result of them until the fiat of the Almighty shall evolve laws in the universe radically different from those which at present obtain.

Fiat Money Inflation in France, was last revised by Mr. White in 1912. At that time, he was 80 years old, the Federal Reserve Act hadn't yet been passed and The United States was safely on the gold standard. Perhaps Mr. White just didn't understand modern economics. Perhaps modern economists are just smarter than the Almighty -- or maybe HE changed the rules.

Unless you believe there will be a "political solution" from the pols in Washington, D.C. (District of Criminals), -- the tooth fairy, and "the check's in the mail" -- there will be a severe reckoning at some point in the future. Alan Greenspan tells us so:

"The continued increase in our net external debt and its growing servicing costs clearly are not sustainable indefinitely." -to House Ways and Means Committee, 20 January, 1999

That observation is explained by investment biker Jim Rogers:

... "people are going to say 'I'm taking my money out.' Remember most of the countries that have gotten into trouble in the last three or four years are countries that have been living on borrowed money and then suddenly people [quants? -LRW] have said 'I'm not going to do anymore.'" -Jim Rogers, Rogers Holdings, 11 Dec 1998

The US July trade deficit came in at a record $25.18 billion, up from it's previous record high of $24.6 billion --- in June . . . .

So what's going to happen with Wimpy on Tuesday? Can he successfully defer payment? For how long? Is someone finally going to flush?


[1] This abbreviation, u.S., is NOT an error. "u.S." refers to the 50 geographical "States united" as opposed to the Corporate United States, headquartered in Washington, D.C.(return)

[2] Semi-annual Humphrey-Hawkins testimony happens, by law, twice a year. Each consists of one day of testimony to the House Banking Committee, the second day to the Senate Banking Committee. Greenspan now delivers the same prepared text to both House and Senate, and this text is available from the FED website [ http://www.bog.frb.fed.us/boarddocs/speeches/ ]. However the most interesting part of the testimony is often in remarks during the question and answer period. The only way I've found to get these remarks so far is to tape and (laboriously) transcribe them, which is how I obtained most of Greenspan's quotations used in this article.(return)

[3] All you economics buffs out there probably realize many of these "dollars" are not actually "overseas." But even most of the ones held by U.S. banking institutions aren't exactly in the "States united" (nor the U.S.) either. I'll clarify the true situation a bit later.(return)

[4] If "inflation" is caused by an increasing money supply, you're probably wondering why even financial news sources almost never mention "inflation" and "money supply" in the same breath these days, but instead look for increases in wages and salaries as indicators of "inflation." The answer is simple: Monetary "authorities" have already created the money -- most of it just hasn't shown up widely, bidding for food, clothes, etc. Yet. This already-created money can't bid for such goods, and thus cause "inflation," until it escapes into the hands of everyman -- through increases in wages and salaries. As the argument goes, the rich can buy only so many houses, cars, TV sets and frozen dinners on their own. However, there may be one unexpected escape route for this inflationary money, perhaps analgous to how certain particles are thought to escape black holes. This unexpected route into the hands of everyman, which doesn't show up in wage and salary figures, is the so-called "wealth effect."(return)

[5] Milton Friedman got his Economics Nobel Prize for proving that money manufacturers could increase the money supply by an amount equal to the value of any increase in goods and services traded in a currency without causing the value of that currency to drop. A school of economics called "monetarism" and embodied in the "Chicago School" was founded as a result. What actually happens is that the "inflation" caused by the money creation is masked by the productivity increases. This allows the money manufacturers to, undetected, create and spend an amount of money equivalent to the increased production. This amount is essentially stolen from buyers who would otherwise receive it as decreased prices -- if there were a truly stable money supply, such as provided by an honestly convertible gold standard. (return)

[6] You can find one really good reason for foreigners to stop "wanting to continue to accumulate dollars" at Zola Times. (return)

[7] As of this writing, spot gold has jumped $52 to about $308 per ounce in the last five trading days, one of the largest rises in over 15 years.(return)

by L. Reichard White
June 3, 2000
Comments to L. Reichard White may be sent to lreichardwhite@yahoo.com
Copyright © 2000 by L. Reichard White. All Rights Reserved.

Reprinted by USAGOLD with permission of L. Reichard White. No further reproduction without permission.

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