Our price of keeping Pakistan as an ally is getting as onerous as that of bankrolling Israel and Egypt. George and the neocons are presently dispensing $3 billion in economic and military aid and have written off $2 billion in debt. They have a $1.2 billion arms package including eight P-3C naval reconnaissance planes, 2,000 TOW missiles and other weapons, which has deeply disturbed India. They are also demanding a free-trade agreement or alternative arrangements and access to international financial institutions. The US is in such an untenable position in the region that for services rendered they have to meet Pakistani demands.

            On Thursday 12/29/04, $24 billion in “new” two-year Treasury notes went at a high yield of 3.12%, the highest yield at such a sale since 5/02. The bid to cover was good at 2.2 times the amount on offer. Particularly troubling was the lack of bidding by foreign central banks. The foreign central banks and offshore secret bank accounts picked up just $7.90 billion, or 33% of the whole issue, down from 42% in the November auction. This was the lowest showing for a two-year auction this year, leaving primary dealers with the bulk of $15.23 billion worth of short-term debt. A good part of the offshore takedown of $7.9 billion could well have been the Fed.

            The wobblies are starting to show up in the housing industry. Homebuilders say demand has been leveling off and price weakness is showing up in Las Vegas, one of the hottest markets in the country. Lumber prices have fallen 30%, which augers a slowdown in homebuilding. Washington Mutual has a y-t-y decline in earnings of 35% and Countrywide’s earnings fell 47%. These are all indications of changes to come. Asset inflation of homes, stocks and other investments has not been driven by income gains, but by abnormally low interest rates and a giant infusion of credit that has distorted into a bubble. Consumers have an average of $14,000 on their credit cards and are deeply in debt. Wages have declined and inflation has risen, battering purchasing power. The costs of education, health care and transportation continue to rise. Mortgage growth was up $1.03 trillion or 12% plus as of 6/30/04, up $1.92 trillion for two years or $4.82 trillion, or 97% over seven years. 2005 will see the end for the housing refinancing boom. Falling house prices this year will negatively affect consumption. Do not be deceived by the platitudes by the housing industry, Wall Street, the Fed and our government. Housing prices are headed down in 2005.

            Health South defrauded the government and will pay $325 million plus interest over three years. All the government wants is the money and the fines and no one goes to jail.

            We mentioned in a previous issue the Bush neocon foreign policy is costing US corporations business overseas. They are Marlboro cigarettes, AOL, McDonald’s, American Airlines and Exxon Mobile, all elitist companies. One-third of all consumers in Canada, China, France, Germany, Japan, Russia, and the UK said American foreign policy, particularly the war on terror and the occupation of Iraq, constituted their strongest impression of the US, 29% of the respondents in Europe and Canada said they consciously avoided buying US products. Unfortunately, and understandably, current American foreign policy under Bush is affecting the sales of US corporations overseas. This is a widespread consumer black-lash. German restaurants are starting to refuse American Express credit cards; people are starting to drink Mecca Cola in large numbers. Two-thirds of European and Canadian consumers also said they believe US foreign policy is guided primarily by self-interest and empire building, while only 17% believe that the defense of freedom and democracy is the guiding principle. Fifty percent distrust US Companies, due to foreign policy. Seventy-nine percent say they distrust the government for the same reason and 39% distrust the American public. Eighty-seven percent of Germans, 84% of French and 71% of British respondents have negative feelings toward George W. Bush.

            An American who survived the recent catastrophe in Asia and lost all their belongings was at the Bangkok airport, said it took three hours to find American officials from the Consulate, because they were in the VIP lounge. The American needed a new passport but US officials demanded payment to take the passport pictures.

            The US military and the State Department were given advance warning of the disaster. The US Navy base at Diego Garcia was notified, yet fishermen in India, Sri Lanka, and Thailand were not alerted.

            Asian central banks have been closely watching US policy makers, to make sure there is no change in their support of Asian exports to the US. These are the nations that have been buying dollar-dominated assets, mainly Treasury bills, notes and bonds to keep their currencies from appreciating and at the same time to support the dollar and the US economy, which is one of their largest customers. On the other hand, the possibility exists that Asian nations may decide their industrial development is well enough advanced and that they no longer need to support the dollar and suppress the appreciation of their own currencies. In the Asian mind, there is always the possibility that the US might change their trade agenda. Perhaps a move back to tariffs. It does not really matter what the reason is as the potential exists for policy makers in a few Asian countries to immediately direct a sale of the holdings of their US assets, and re-direct the proceeds to other countries or to domestic uses. Such a shift would send US interest rates straight up and the dollar straight down. Stocks, bonds and real estate would fall and global trade would contract dramatically. There would be a reconfiguration of political and military alliances away from the US. Unfortunately, that is already in progress due to the invasion and occupation of Iraq and Afghanistan. There is no longer time left to slowly and methodically rebalance the system. The US has a limit to how many exports they can absorb and how much more debt the consumer can assume. There is no chance Asia can export its way out of its problem-dependence on US imports. It is now the policy of the administration to allow the dollar to slowly fall in value. This, of course, increases US inflation, interest rates and currency volatility without substantially improving the deficit. This is not the 1970s and 80s, we do not export enough goods now to substantially improve the balance of trade and our current account deficit. We advocate tariffs, which would work relatively quickly and would trigger counter-tariffs that would negatively impact the global economy. In place of that, someone has to show us a better idea because everything the US has done thus far by the administration, Congress and the Fed has not and will not work. The advocating of a new Marshall Plan for the world economy is unworkable.  It is just the creation of more debt. The system has to be purged of its excesses. That could be accomplished by boosting savings, paying off debt, curtailing barrowing, cutting the federal budget deficit and shifting priorities from excessive conspicuous consumption, which would bring the current account deficit into balance. We agree with that procedure, but we also realize it will usher in a world depression.  At this stage, in order to solve the problem a worldwide depression is totally unavoidable. Does anyone really think Asia and others are going to voluntarily revalue their currencies by 40% and allow the US to renegotiate its debt with the world for say, $.40 on the dollar? Foreigners would take the full hit and the US rewarded for its profligacy. The other new factor is 80% of those outside our country dislike George, the neocons, and their perpetual wars for perpetual peace. Does anyone seriously think foreigners, already furious with US foreign policy, will revalue and impose partial debt forgiveness? Hardly. The rest of the world has not been taken in by the fantasy of terrorism. They may be many things, but they are not dumb. The imbalance of our world financial system has been 65 years in the making. We never came out of the depression of the 1930s; we just had one war after another and a resultant piling on of debt. The world monetary system has not been stable since then and the flight from a gold-dollar standard on 8/15/71 sealed the fate of the dollar and the world monetary system, which are essentially almost all fiats.