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P U B L I S H E R S P E R S P E C T I V E

The modern U.S. economy relies on

oreign investment to provide the cash

necessary to run the nancial and servicesectors where most Americans earn

their living. ..The next our decades will

require something entirely diferent that

probably wont involve our precious

dead presidents.

Te recession is over!So proclaimed our perpetually upbeat sales manager as he saun-

tered into an early morning meeting in the spring o 1994. Te au-thority he relied on to substantiate this dubious claim was an overlyoptimistic news report. His dutiul employees, including mysel,didnt quite know what to make o this. We were still encounter-ing enormous resistance while good customers continued to call onus to advertise their going out o business sales. Tis depressingstream o new business predicated on helping long-time companies

liquidate their inventories in short order continued or some time.In act, the national recession was ocially over by the time Bill

Clinton entered the White House in 1992. However, deense cut-backs ollowing the 1991 Gul War kept the pain lingering in theSouth Bay or several years. Most businesses didnt see real prosper-ity take o again until 1997 when the dotcoms and a newly revital-ized real estate market moved things up again. We had to wait orthe recession to end and look back at the historical data to knowwhere the bottom that mattered actually was. And I expect we willhave to do that again in a ew years when things settle down. Per-haps asking, When will we nd the bottom? is the wrong ques-tion. Instead we should ask, What is the bottom?

Te bottom in an economic downturn is the point when enoughmoney has been eliminated rom the economy rom interest paidon current and previous debts or the maestros o nance to orches-trate another money bubble to move things up again. Tats whatthe dotcom and real estate booms were really all about. And notsurprisingly, both o these booms crashed as quickly as they rose.

Whats dierent this time is the economy has become so bloatedwith debt that government ocials and central bankers are hor-

ried to let the economy nd the bottom on its own. Hence theunprecedented waves o multi-billion dollar bailouts and stimuluspackages created out o thin air.

I bottom is supposed to mean the lowest point the economy canall, then what we are looking or is not really a bottom at all. Its alow point in a continuous cycle that has had many low points. Butit certainly is not the lowest point attainable. Tat means it is notinconceivable or the aggregate burden o debt to create the kind obottom that is really a precipice or a greater all. Could this be

the bottom tantamount to Wall Streets greatest nightmare? I theeconomy ends up where it appears to be going, the answer is a re-sounding yes. However, the same maestros o nance who broughtus to this point have shown remarkable creativity in developing neweconomic models fashy enough to perpetuate lucrative business cy-cles or decades. Te current model is undoubtedly reaching its end.So what could they do to save us rom our impending oblivion? Itcertainly cant be another stimulus that can never be supported byour economy. Or can it?

Spring Blooms Uncertainty and Special Drawing RightsTe only thing that bloomed this spring was more uncertainty.

Te rst quarter o 2009 saw multi-billion dollar bailouts, reversals

o ortune or global manuacturers and desperate anticipation orthis economic crisis to nd its bottom.

However, consumer condence soared in May as the Obama ad-ministrations $787 billion stimulus packages started to take holdat least in peoples minds. An industry group called Te ConerenceBoard told Reuters in late May that its index o consumer attitudesjumped to 54.9 in May, up rom a revised 40.8 in April. Tis is wellabove earlier orecasts centered around 42.0. Tis represented thebiggest one-month jump since April 2003, attributed to belie atthe time that the Iraq war was coming to a rapid conclusion. How-ever, does this mean a genuine recovery is in progress?

Death and taxes are not the only things in lie that are certain.

We orget about interest due on the money we create through bor-rowing at the central banking level. Tat means the $787 billionstimulus is certain to lead to an even deeper bottom to be avertedby, well, another multi-billion or perhaps trillion dollar stimulus theeconomy could never hope to support. Tis is a bad habit we justcant seem to break.

Does this mean the nancial judgment day is close at hand? Canwe expect to see Seven Horsemen rom the Bank or InternationalSettlements appear to reveal our nal dispensation? Te best nan-cial experts cannot agree on this point. However, it would behooveus to examine some alarming events that have recently taken place.

The Financial Crisis:

Finding the BottomBy David Whitehead

8/14/2019 Finding the Bottom of the Economic Downturn - By David Whitehead

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Special Drawing Rights Paint Bleak Picture for the Dollar

Te G20 nations recently authorized the International MonetaryFund, the post-war global banking house run by Europeans, to in-ject $250 billion into the global economy using an obscure mecha-nism called Special Drawing Rights. SDRs bypass the leadingreserve currency to instead issue unds based on a basket o majorworld currencies. Tis relic o the post-war Bretton Woods agree-ment is a tool that has lain dormant or hal a century.

In eect, SDRs create a super global currency to help relieve thenancial crisis. But wait a minute; dont we already have a superglobal currency? Well since the end o World War II at least, we did.It was called the U.S. dollar. Beore that, it was the British pound.And as long as the dollar keeps its ocial designation as the worldskey reserve currency, it technically is the global currency o choiceor international settlements. In act, despite the dollars rapid de-cline, 64.5 percent o international settlements are still transactedin dollars.

However, SDRs are a serious challenge to the status quo becausethey decrease global investment in U.S. dollars. Tis is not a ho-hum nancial detail. It could be catastrophic or the nations econ-omy i the dollar loses its special status. Te modern U.S. economy

relies on oreign investment to provide the cash necessary to runthe nancial and service sectors where most Americans earn theirliving. Te last 38 years o deindustrialization made running theeconomy on oreign debt business as usual or the United States.Te next our decades will require something entirely dierent thatprobably wont involve our precious dead presidents.

China has been pushing hard or SDRs to assist it in dealing withits dollar glut created by the massive imbalance in oreign trade.Tat means it would no longer be obliged to reinvest these excessdollars back into the U.S. economy. I know many people have the

misconception that China has accrued most o Americas wealth.

Te reality is that it is addicted to our currency to keep its own

economy rom collapsing, and it does hold most o our oreign debt,

which may never be repaid.

Remember, China created an enormous monster it needs to eed

with a currency much stronger than its own. I dollar dope wont

cut it anymore, China will turn to the nancial pushers in Europe

willing to service its habit. I this sounds like the 18 th Century opi-

um trade reemerging in another orm, youre not ar o.And dont orget, this is the same monster that produces just about

everything we use while Chinese workers earn less than a dollar

an hour in our money or their eorts. In some ways, the Asian

economies are worse o than we are. But the imbalances are more

to blame than policies o any particular nation state that is trying to

cope with the situation.

Could SDRs signal the demise o the U.S. dollar? Tis o course

depends on how and to what extent they are used. However, it is

generally agreed the dollar cant retain its value i oreign investment

fees on a large scale. And the Achilles Heel o oreign investment is

debt. Tats why the ability o central bankers and the US reasury

to deliver bailouts to deal with the nancial crisis wont address theunderlying reasons why the nancial system continues to collapse.

Te worlds nations cannot go on indenitely investing in a cur-

rency so heavily laden with debt that it is no longer a sound invest-

ment by any practical economic standard. Te paradigm is shiting

because it must. But what orm will the new global economy take?

Read the column: Te Empire With the Invisible Trone (page

16) or a deeper perspective.n

David Whitehead is the Publisher of Business Insider Magazine. He

can be reached by email at Publisher@BusinessInsider.us.