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Americans must prepare themselves for a massive collapse in the dollar as investors around the world dump their US assets, a former Bank of England policymaker has warned. The long-held assumption that US assets - particularly government bonds - are a safe haven will soon be overturned as investors lose their patience with the world’s biggest economy, according to Willem Buiter. Professor Buiter, a former Monetary Policy Committee member who is now at the London School of Economics, said this increasing disenchantment would result in an exodus of foreign cash from the US. The warning comes despite the dollar having strengthened significantly against other major currencies, including sterling and the euro, after hitting historic lows last year. It will reignite fears about the currency’s prospects, as well as sparking fears about the sustainability of President-Elect Barack Obama’s mooted plans for a Keynesian-style increase in public spending to pull the US out of recession.

Writing on his blog , Prof Buiter said: “There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard. The US dollar and US Treasury bills and bonds are still viewed as a safe haven by many. But learning takes place.” He said that the dollar had been kept elevated in recent years by what some called “dark matter” or “American alpha” - an assumption that the US could earn more on its overseas investments than foreign investors could make on their American assets. However, this notion had been gradually dismantled in recent years, before being dealt a fatal blow by the current financial crisis, he said.

“The past eight years of imperial overstretch, hubris and domestic and international abuse of power on the part of the Bush administration has left the US materially weakened financially, economically, politically and morally,” he said. “Even the most hard-nosed, Guantanamo Bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed.” He said investors would, rightly, suspect that the US would have to generate major inflation to whittle away its debt and this dollar collapse means that the US has less leeway for major spending plans than politicians realise.
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Ian Bell
Sunday Herald
HOW WOULD YOU FEEL, RUNNING A MODEST business, if the money fairy came along and promised you would never, ever go bust? How much of a spring would it put in your step if the nice imp then said she had cast a spell guaranteeing all your lending, all your borrowing, and 98% of your customers’ cash? “Yes,” you might just say, clapping your sticky little hands, “I do believe in fairies!” This hard-to-swallow tale has more than one happy ending. While your godmother hopes you will become a good little banker one day, she doesn’t want to be too stern. It’s not her place. So if she sprinkles some of her magic dust and shrinks the cost of money, she won’t force you to share your good luck with anyone. She’ll “urge” you instead. But only a very naughty banker would ignore that, surely?

After all, you owe the good fairy something. In fact, you owe her billions of things. They are the reasons why you are still able to frolic as a happy little banker. They also explain why you are still looking forward to big Christmas presents and the chance, some time very soon, to tell fairy godmother where to stick her advice and all those tiresome homilies on the need to be nice to poor folk. Whatever Alistair Darling was waving at the bankers during a breakfast meeting on Friday morning, it was not a magic wand. He can urge to his heart’s content, but they intend to go on treating the Bank of England, its base rate and its monetary policy committee (MPC) as fictions only children would believe. Most may have buckled, belatedly, under an avalanche of bad publicity, but the chancellor doesn’t frighten them.

True, they told him to “get his finger out” and save them from themselves. True, it was they who demanded dollops of other people’s money or it would be the worse for the chancellor (and all those other people). True, they asked for public trust when the facts indicate that they do not trust one another to lend to one another, even though Darling has guaranteed all transactions. But they know that he knows that they know: once the chancellor was forced to promise the survival of every bank in every circumstance, happy days were here again.

They had him over a barrel. The first rule of the capitalist purist had been breached. An enterprise that believes it cannot fail cannot be governed, brought to heel or obliged to do anything it does not wish to do. The bonus culture can resume and the government can be sent packing as soon as the banks have screwed the public for the money to repay the government. More

Rupert Wright
“The first barons of banking”
Among the captains of industry, spin doctors and financial advisers accompanying British prime minister Gordon Brown on his fund-raising visit to the Gulf this week, one name was surprisingly absent. This may have had something to do with the fact that the tour kicked off in Saudi Arabia. But by the time the group reached Qatar, Baron David de Rothschild was there, too, and he was also in Dubai and Abu Dhabi. Although his office denies that he was part of the official party, it is probably no coincidence that he happened to be in the same part of the world at the right time. That is how the Rothschilds have worked for centuries: quietly, without fuss, behind the scenes. “We have had 250 years or so of family involvement in the finance business,” says Baron Rothschild. “We provide advice on both sides of the balance sheet, and we do it globally.”More

Ilargi
The Automatic Earth
Wherever I look this morning, Asia, Europe, Wall Street, I see journalists and analysts claim that bargain hunters are causing the rising stock prices. They’re not. There is something different going on. Prices these days fall when and because large investors need to sell assets in order to get cash. Prices rise when large investors need to cover their shorts.

The investors involved in both cases are largely identical, though not entirely. It’s important to understand that while, obviously, price drops cause loss of capital, price rises are now the result of the same. Everybody still tries to hide their losses, but it’s getting much harder. That’s what happens in casino’s: there comes a point where you have to show your hand. And when things get bad, sometimes you have to show both.

After Porsche said it wanted 75% of Volkswagen, VW went up 150% yesterday, and 93% more today, to become the biggest company in the world. Not because it’s doing great; in fact, it’s rumored to be drowning. Which is why parties like Morgan Stanley, Goldman Sachs and major hedge funds were shorting the stock. Porsche’s announcement forced them to cover their shorts and buy VW like mad men. And so you get to be the global no.1 because gamblers are paying off their losses.

The Bank of England reports today that the total cost of taxpayer funded bail-outs has surpassed $7 trillion. As insane as that is, it’s just the start. Now even Roubini wants to add another $500 billion plan in the US. That’s his second whopping no-no in a week. His first was a claim that the worst in the credit markets was over, and the real problems would from now on in be in the real economy.

Yes, Libor and other spreads are down a bit, and yes, the real economy now hits the real trouble. But the credit markets are still getting worse by the minute. That is because the underlying reason for the crash, the casino toilet paper is still being hidden, protected and even bailed out. A plan like Roubini’s, half a trillion dollars more for ‘infrastructure’, is a dead in the water duck -or worse- as long as it’s kept away from daylight. And Roubini should know that.

Turns out, the banks that got the bail-out billions are not using it to lend out, and they don’t give a hoot about Congress threatening to give them a grilling. They’ll use the taxpayers’ cash to buy other banks. Small fish gets eaten by bigger fish gets eaten by biggest fish, with Hank Paulson deciding who gets to be big.

And even that’s just a humble beginning. The IMF is running out of money to put thumbscrews on the world’s poor. But that won’t deter the fund, it can simply start issuing AAA rated bonds, which are rated by the …. IMF, and in real life are simply more casino bathroom paper. And if you don’t like that one, they’ll move to the most perverted financial instrument in centuries, the Special Drawing Rights, also called paper gold, introduced in 1969, in anticipation of Nixon’s 1971 decision to not honor US gold liabilities.

Who do you think determines the value of an SDR? Yup, you’re right, it’s the IMF. They can buy the world. That may seem far-fetched, but don’t forget that for a few billion dollars in loans that have to be paid back at high interest, they’ve bought themselves financial control of the likes of Hungary, Iceland, the Ukraine and soon Pakistan, Serbia, Croatia, Latvia and Turkey. And their eye is on Russia.

I was wondering last night how much money it would have taken me to drive up oil prices to $147 a barrel, go short oil all out, drive prices back down to $40, make a killer of a profit, and kill off OPEC control, Putin and Venezuela in the process. I concluded that $1 trillion would have been enough, when carefully utilized.

I’ve long since realized that it’s no use to fear for the future of mankind, since there’s nothing kind about man. But I still am surprised at how little people focus on the symbiosis of crisis and opportunity. There are people out there busy bankrupting the entire planet, and buying it back for pennies. Just like in the 1930’s, but this time on a global scale. More

THE severity of the current economic downturn has been likened to the Great Depression of the 1930s by the new deputy governor of the Bank of England. The slowdown, which has threatened to plunge the world’s major economies into recession, was likely to drag on for “some time”, according to Charles Bean, Britain’s second most senior banker. And he raised the spectre cited by other economists that the combination of market upheavals and soaring oil prices could trigger conditions similar to the depression that started in the late 1920s and dragged on for a decade.

His warning came amid reports that the International Monetary Fund (IMF) has scaled back forecasts for global growth made just a month ago. The IMF is predicting world growth of 3.9 per cent in 2008, compared to the 4.1 per cent estimated in its July World Economic Outlook. It also forecasts growth next year of 3.7 per cent instead of 3.9 per cent. “It’s fair to say that if you look at the shocks impinging on us this is at least as challenging a time as back in the 1970s,” Mr Bean said at the annual conference of the world’s top central bankers in Jackson Hole, Wyoming. “Some people have said it’s as big a financial shock as the Great Depression and as far as the oil shock goes the rise in oil prices is in the same order of magnitude that we had to deal with in the 1970s.” More

After years of boom, official figures on the economy published today will show that growth has slumped to nearly zero, leaving the nation already in, or close to, recession. The Office for National Statistics figures for growth during the second quarter of this year are forecast to show a rise of between zero and 0.3 per cent on the first three months of 2008. That would push the average annual growth in the economy down from 2.3 per cent to about 1.6 per cent – the sharpest deceleration since 1995. Yesterday, the deputy governor of the Bank of England, Charlie Bean, warned that “there is a risk that the credit crunch leads to a deeper and more prolonged slowdown”. More

The City watchdog has laid out plans to allow banks to tap the Bank of England for emergency funding without informing the market, in a move which might avoid a repeat of the run on the bank which led to the collapse of Northern Rock. Under the European Union’s market abuse directive, regulated firms have to disclose price sensitive information. However, the Financial Services Authority yesterday said there were potentially situations where banks would be allowed to keep it secret if they had applied to the Bank. The main case for an exception would be if disclosure could panic investors and lead to fears for a bank’s solvency, the regulator said. The FSA laid out a series of proposals in a consultation document. It invited industry groups to respond by September 30.

Critics may say the move comes too late. The Government has been attacked over Northern Rock, which, following a leak, confirmed to the stock market in September that it had appealed to the Bank for emergency funding. The announcement prompted thousands of its customers to queue to withdraw their money, and led to a plunge in the bank’s share price. The Bank was forced to lend billions of pounds to Northern Rock before it was nationalised in February. More

The Telegraph
The Treasury may be planning to raise the limit on public borrowing in an effort to give it “room for manoeuvre” for a potential rescue operation for the banking system, a leading expert has suggested. Alistair Darling’s review of the borrowing rules he inherited from Gordon Brown may have been influenced by plans under consideration for a rescue of struggling mortgage banks, according to Peter Spencer, economic adviser to the Ernst & Young Item Club. It comes amid growing disquiet about the funding position of Britain’s biggest mortgage lenders, with banking groups urging the Treasury or Bank of England to extend its mortgage support scheme to cover home loans issued since the start of the year. More