The world economy depends on the dollar.
It is the most important currency in global trade.
Aircraft, oil, steel,and most natural resources are priced in dollars. Central banks around the world invest a substantial share of their currency reserves in dollars. The economies of entire continents depends on changes in the value of the American dollar.
For these reasons, the dollar's decline has the potential to send the world economy into a crisis.
Americans have been living beyond their means for years. That includes both consumers, who often buy their houses, cars and other consumer items on credit; and the government, which is adding billions to the national debt to pay for its programs, especially to fight terrorism and wage the war in Iraq and Afghanistan.
For a long time, this constant borrowing wasn't a problem, because Americans enjoyed a virtually limitless credit line at low interest rates. Credit card offers flood in on an unprecedented tidal wave of junk mail. If you got into trouble you could refinance, consolidate your bills and roll it all into one low monthly payment.
Then start all over again.
But that confidence is now gone. Once the real estate bubble burst, it has become clear just how shaky the foundation of America's economic growth really is.
Banks have tightened credit and borrowing to a whole class of people. That's right. First time home buyers, young people, working class poor, less than perfect credit scores and "targeted" unidentifiable high risk groups. (hmmm)
From The Center for Statistical Research Inc.
Restricting mortgage availability to protect a certain group of Americans from the risk of foreclosure raises difficult policy choices. The available regulatory and capital market tools are not refined. As a result, not just the few people who would actually experience foreclosure would be denied credit by a restrictive regulatory policy. Instead,a whole class of borrowers in a particular risk category would be denied, even though the vast majority of them would use the credit successfully.
If regulatory policy caused a 20% reduction from 2005/6 lending levels,
approximately 1.1 million Americans would be unable to obtain a loan,
about 2.3% of 2005 households owning their own home and having a
mortgage. Approximately $188 billion would not be loaned to American
consumers.
But the lending crisis does not end with housing, mortgages or real estate estate bubbles. Americans have watched record Wall Street profiteering cashing in on the debt and spending of a war in the Middle East. Corresponding Tax Cuts for the wealthiest citizens has driven the national debt to a record $9 Trillion. A virtual Republican spending binge of unprecedented magnitude not since the days of Reaganomics and it's aptly named trickle down effects.
Simultaneously, we consume more than we produce by driving our trade deficit from $70 billion in 1990 to over $ 700 billion in 2007.
America has paid for its economic boom in recent years by borrowing money. Lots of money. Its current double deficit is the monetary evidence that the world's biggest economy has been living beyond its means for years. That money must be paid back too. Even if it takes generations to pay back... our children and grandchildren will pay back the pipers and paupers that we exploit today.
China holds the astonishing sum of more than $1.4 trillion in its reserves. The Chinese have invested most of their money in US Treasury Bills, a low-risk but also relatively low-return investment. In doing so, they have kept the dollar high and their own currency low, ensuring that their exports remain competitive.
While Asia finances America's excessive consumer spending, Americans buy Asia's cheap clothing, cars, furniture, food and TVs.
"Getting this much into debt while at the same time enjoying returns on long-term government bonds of less than 5 percent -- I'd call it the biggest free lunch in modern economic history," says Harvard historian Niall Ferguson, referring to the audacity with which Americans take advantage of their privileges as holders of the world's reserve currency.
Rarely has the world economy been so out of whack or have global imbalances been greater. Americans were the world's financiers for years. Today they are its biggest borrowers, while the Asians serve as America's bank.
And you thought undocumented workers from Mexico were responsible for all our economic woes? Most of them all pay in cash in an underground economy that theoretically props up the electronic credit economy of Wall Street. (just a thought.)
A manufacturing meltdown and declining wages have caused serious damage to the US economy. The new service sector jobs are generally lower paying, and they produce no exports. The concept of the working poor has become a mass phenomenon in America.
The crisis for the real estate market is both a direct result of general weakness in the economy and a cause of further weakness in the value of the world's reserve currency. It is now becoming abundantly clear that the banks have generated the growth of recent years with loans that will likely turn into bad debt. They will massively write off this bad debt, lower their tax burdens and significantly shift the burden to working class America by compounding the situation of increasing the debt and devaluing the dollar.
With credit tightening, the dollar dropping in value and real estate prices plummeting; the specter of a serious financial slowdown is a hope that the end result will not be quite as bad as many fear.
Hope.
However, in the meantime Buddy... could you possibly spare maybe a... dime?