FROM THE DAILY RECKONING

THE DAILY RECKONING The Consumer Collapse London, England Tuesday, November 4, 2008 EXCERPT: ...But one scam gives way to another. During the Great Moderation we were assured that our financial authorities had found the magic formula; henceforth, enlightened economic management, along with sophisticated, risk-dispersing financial instruments, would practically eliminate recessions and crashes. There was no need to save for a rainy day, we were assured; because it would never rain! But now we have a downpour...with markets crashing and the world facing its biggest slump ever. And now we are told that markets have failed. Now, we need Barney Frank, Ben Bernanke and Hank Paulson to run our financial system. Wait a minute...we don’t recall Ben Bernanke warning that the world faced a meltdown when he took over at the Fed in Feb. 2006. And wasn’t Barney Frank the chairman of the House Financial Services Committee even as Wall Street was running amok, inflating the biggest asset bubble in history? We don’t remember him holding hearings about the dangers it presented until after the thing blew up. And wasn’t Hank Paulsone the head of one of Wall Street’s most go-go, derivative saturated, billion-dollar-bonus-driven firms while all of this was going on? Well, never mind... But now we are supposed to believe that markets don’t work...and that these well-meaning public servants are going to save us from the evils capitalism...and that bureaucrats will be able to fix prices and allocate capital better than Mr. Market. Deception gives way to hallucination...correction is followed by depression... *** “Whoever wins the US Presidential election, America is in big trouble,” writes Ben Traynor at Contrarian Profits. “It will be hard to resist calls to whack up tariff barriers, and protect domestic jobs from foreign competition. A weakening dollar may help US exports a bit...but the US is in a bind. “If the dollar falls too much, foreign dollar holders (eg China and the oil-rich Gulf nations) will start dumping it. The US does well out of being the world’s reserve currency. Such a move would threaten that. “So what will the US do? It could pursue a strong dollar policy... But that would hit exporters, and hit jobs. So, in response, some bright spark will start banging the drum for protectionism. “You see, those foreign dollar holders can see the currency’s fundamentals are weak. They’re sitting on all this money whose value is in the hands of a monetary authority (the Fed) and a government whose sole concern right now is fighting the downturn. The Fed has slashed rates, and there’s a strong chance the printing presses will soon go into overdrive. “So why are foreign dollar holders playing ball? Because, as things stand, it’s still in their interests to do so. Why would they want to antagonise a nation they do so much business with? Why would they impoverish their best customers? “But throw protectionism into the equation, and the incentives change. This is particularly true in the case of goods exporters like China. Overnight, the US market is less important to them. “Now, will this be enough to tip the balance? Will it reduce their incentive to co-operate enough so that they take their ball back and stop playing? Hard to say... but I think we’re going to find out.” *** It could be that America no longer needs Smoot and Hawley. China’s sales to the United States are falling, simply because Americans no longer have the money to buy them. The Middle Kingdom has no choice, it has to shift production towards its own domestic market. One way or another, U.S. sales will become less important and China will have less of an interest in financing U.S. consumption and less interest in supporting the US dollar.