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ECONOMIC ANALYSIS:

THINKING MONETIZATION

by FRED CEDERHOLM
Last week the US dollar took a further nosedive in its valuation relative to other free floating currencies on Planet Earth. Every 10% drop in the relative valuation of each $Trillion in debt held by other nations equates to a loss of “value” of 100 Billion for each of them. Such losses clearly do not make happy campers.
I’ve been thinking about monetization. Actually I’ve been thinking about the Dollar’s drop, creating money, form over substance, “full faith and credit,” and illusions. We are about to see the unfolding of a drama. Despite the gallows humor of this unraveling comedy of absurd reasoning and logic, I fear the real tragedy will be costly for most of the players - for many it will be devastating.

You see, last week the US dollar took a further nosedive in its valuation relative to other free floating currencies on Planet Earth. The Buck fell to at least a twenty month low. Last Friday, a Euro cost $1.33, a British Pound cost $1.98, and a Japanese Yen cost $.0087. This downward trend has been going on since Thanksgiving. Uncle $ugar is now a “net debtor” nation and “net interest” payer. Several nation states (Japan, China, UK...) as well as a couple of groups (the EURO Zone, and the Arab OPEC’s) are sitting on at least a Trillion of “Dollar denominated assets” – US Treasuries, stocks, bonds, mortgage backed securities, etc. Every 10% drop in the relative valuation of each $Trillion equates to a loss of “value” of 100 Billion for each of them. Such losses clearly do not make happy campers. Please read on.

Uncle $ugar’s National Debt stood Friday at $8.633 Trillion – at least $2.2 Trillion of which was held by foreign entities. On top of that, the broader M-2 Money supply stood at $ 6.399 Trillion. On top of them, our Current (Trade) Deficit has been running at $ 2 Billion a day for some time now. It is no wonder the world is sitting on Trillions of Dollars because US/us are functioning on both borrowed money and borrowed time. This game continues only as long as our foreign benefactors are willing to up the ante - or at least continue holding their existing Dollar denominated “investments.” Rumblings and grumblings worldwide suggest that something is about to change/happen in that regard.

Real money backed by assets has morphed into unreal money backed by only liabilities.
Real money backed by assets has morphed into unreal money backed by only liabilities. Look at any printed US currency in circulation and you see the words “Federal Reserve Note” printed across the top. This means that there is no intrinsic difference between $1, a $5, a $10, a $20, a $50, or a $100 bill. Each would generate the same amount of heat if ignited. The difference in value exists because our government says it does. The backing for the Dollar is heralded as the “full faith and credit of the United States of America.” While the phrase always gives me a surge of patriotic gooseflesh, I know as a CPA and forensic accountant it reduces to the fact that Dollars have perceived value only because the Federal Government has the ongoing power to tax! In the final analysis, it is only the future cash flow from US/ us which can pay down the debt or truly pay the interest on it - not just capitalizing it via still more debt.

At the macro or national level, we have been living well beyond our means because of the largesse of foreigners and foreign central bankers who have been willing to accumulate and hold Dollars. The fact that the US Buck was the “official” currency of OPEC gave US/us a clear advantage in our status as the World’s Reserve Currency. Until the 1980’s, the US was THE manufacturing engine that produced the goods and services the world wanted. We had huge trade surpluses, we were a “net creditor” nation, and we were a “net interest” receiver. How things changed in the last twenty five years! After that status changed, the world was willing to advance US/us credit because of the stability of the Dollar, our reputation, and our history. It is now the stability of the Dollar, our reputation, and our recent history which are causing the world to question the wisdom of continuing that policy. It gets worse...

At the micro or household level we have been living well beyond our means because of the largesse of mortgage bankers and credit card companies. I will stick my neck out and propose that a majority of US households have taken a page out of Uncle $ugar’s book and have been creating their own liability or debt-based money. Every new home equity loan and every newly accessed credit card has “created” money for the households (which they have spent) in a manner no different from the money “created” by Uncle $ugar’s Treasury and Central Bank. What is the sum total of this quantified? How will US citizenry bail out Uncle when a majority of them is as bad as or worse off than he is?

Debt based money is a relative newcomer in the broader scheme of this planet’s historical and incestuous love affair with its “moneys.” Throughout most history, real money at least had the intrinsic value of the guaranteed convertibility (or melt down value) of the metal behind it – be that platinum, gold, silver, copper, bronze, tin or even zinc! How did we ordinary folk become bamboozled by the central bankers of the world into believing/accepting that money backed by a liability (debt) was as good as money backed by an asset (substance with intrinsic value)? And... what will be the final (or resolved) outcome?

I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.


Copyright 2006 Questions, Inc. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at asklet@rochelle.net.

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This story was published on December 5, 2006.