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The Dollar's Full-System Meltdown

by Mike Whitney

October 31, 2006

http://globalresear php?context= viewArticle& code=WHI20061031 &articleId= 3651

The U.S. Dollar is kaput. Confidence in the currency
is eroding by the day.

A report in The Sydney Morning Herald stated,
“ Australia ’s Treasurer Peter Costello has called on
East Asia ’s central bankers to ‘telegraph’ their
intentions to diversify out of American investments
and ensure an ‘orderly adjustment’….Central banks in
China , Japan , Taiwan , South Korea , and Hong Kong have
channeled immense foreign reserves into American
government bonds, helping to prop up the US dollar and
hold down interest rates,’ said Costello, but ‘the
strategy has changed.’”

Indeed, the strategy has changed. The world has come
to its senses and is moving away from the green slip
of paper that is currently mired in $8.7 trillion of

The central banks now want to reduce their USD
reserves while trying to do as little damage to their
own economies as possible. That’ll be difficult. If a
sell-off ensues, it will start a stampede for the

There’s little hope of an “orderly adjustment” as
Costello opines; that’s just false optimism. When the
greenback begins listing; things will turn
helter-skelter quickly.

In September, we saw early signs that the dollar was
in trouble. The trade deficit registered at $70
billion but the Net Foreign Security Purchases (NFSP)
came in at a paltry $33 billion. That means that our
main trading partners are no longer buying back our
debt which puts downward pressure on the greenback.
The Fed had two choices; either raise interest rates
substantially or let the currency fall. Given the
tenuous condition of the housing bubble and the
proximity of the midterm elections, the Fed did

A month later, in October, the trade deficit hit $69.9
billion but, then, without warning, a miracle
occurred. The Net Foreign Security Purchases
skyrocketed to a “historic high” of $116.8 billion;
covering both months’ shortfalls almost to the penny.


Not likely. Either the skittish central banks decided
to “stock up” on their dollar-denominated investments
or the Federal Reserve (and their banking-buddies) is
buying back its own debt to float us through the

This is exactly the kind of hanky-panky that people
expected when Greenspan stopped publishing the M-3
last March keeping the rest of us in the dark about
what was really going on with the money supply.

Are we supposed to believe that the skeptical central
banks suddenly doubled up on their T-Bills while
they’re (publicly) moaning about the dollar’s weakness
and threatening to diversify?

That’s a stretch.

According to the Wall Street Journal the Chinese
Central-bank governor Zhou Xiaochuan stated
unequivocally that “We think we’ve got enough.” The
Chinese presently have nearly $1 trillion in USD and
US Treasuries.


The United States runs a $200 billion per year trade
deficit with China . If they’ve “got enough” we’re
dead-ducks. After all, it doesn’t take a sell-off to
kill the dollar, just unwillingness on the part of the
main players to stop purchasing at the same rate.

Of course, everyone in Washington already knew that
doomsday was approaching. That’s the way the system
was designed from the very beginning. It’s all part of
the madcap scheme to “starve the beast” and transfer
the nation’s wealth to a handful of western
plutocrats. That’s explains why the Fed and the White
House whirred along like two spokes on the same wheel;
every policy calculated to thrust the country headlong
toward disaster.

The administration never created a funding mechanism
for the $400 million tax cuts or for the 35% expansion
of the Federal government. Defense spending increased
by leaps and bounds as did the “no-bid” contracts for
friends of the Bush clan. At the same time, interest
rates were lowered to rock-bottom to put as much money
as possible into the hands of people who couldn’t meet
the traditional criteria for a mortgage. And, if
gluttonous waste, reckless overspending and “Mickey
Mouse” loans were not enough; the Fed capped it off by
doubling the money supply in 7 years; a surefire
prescription for hyper-inflation.

So, which one of these policies was not deliberate?

The financial crisis that we now face was created by
design. It is intended to destroy the labor movement,
crush the middle class, quash Medicare, Medicaid and
Social Security, reduce our foreign debt by 50 or 60%,
force a restructuring of America ’s debt, privatize all
public assets and resources, and create a new regime
of austerity measures which will divert more wealth to
the banking and corporate establishments.

The avatars of neoliberalism invariably use crooked
politicians to spawn enormous “unsustainable” debt so
that the nations’ riches can be transferred to ruling
elites. It works the same everywhere. It’s a form of
corporate colonization, only this time the victim is
the good old USA .

“The Phase of Impact”

According to Richard Daughty in his prescient article
“The Phase of Impact” the Federal Reserve and the
Treasury Dept have already manned the battle-stations.
Here’s an excerpt:

“Mr. Paulson, the Secretary of the Treasury, is, by
virtue of his ascension to the throne, now the head of
the shadowy President’s Working Group of Financial
Markets (which was created by Presidential Order
12631) and he is insisting that they meet more often,
namely every 6 weeks!

This whole Working Group thing was originally set up
as a fallback, ad-hoc, if-then defense to deal with
possible economic emergencies, but now they are
routinely meeting every 6 weeks. He has even ordered
Jim Wilkinson, his chief of staff, to ‘oversee the
creation of a Treasury Command Center to track markets
world-wide and serve as an operations base in a
crisis”! (Wall Street Journal) World-wide!! The
American government is moving to take control of the
world-wide economy as the result of an anticipated
crisis? Yikes!”

Daughty goes on to say: “So a lot of the hubbub is
obviously being caused by some approaching upheaval,
perhaps reflected in something sent to me by Phil S.,
which is the Global Europe Anticipation Bulletin No8
which reminded us that last May they predicted that
the economy would have a ‘phase of acceleration’ that
would begin in June, and it “would be spread out over
a period of a maximum of 6 months’, which it
subsequently did. They said then, and are saying again
now, that a ‘phase of impact will begin in November
2006’, and that this impact phase would be the
‘explosive phase of the crisis’.

This ‘phase of impact’ that is due to begin
momentarily is, they explain, ‘a period when a series
of brutal crises starts affecting by contamination the
total system. This explosive phase of the crisis,
which will last 6 months to one year, will affect
directly and very strongly financial players and
markets, the owners of investment schemes with fixed
incomes in dollars, pension funds and the strategic
relations between the United States on the one side,
and Europe and Asia on the other.” (Richard Daughty;
“The Phase of Impact”

Predictions, of course, are rarely reliable and
Daughty’s scenario may be a bit too apocalyptic for
many. But if we accept the premise that the tax cuts,
the expansion of the federal government, the doubling
of the money supply, and the $10 trillion that was
sluiced into the housing bubble were not merely
“honest mistakes” made by “supply side” enthusiasts;
then we must assume that this is all part of a loony
plan to demolish the economic foundation-blocks of the
current system and remake society from the ground up.

Domestically, that plan appears to involve the
activation of the police state.

In the last few weeks the Bush administration has
passed the Military Commissions Act of 2006 which
allows the president to arrest and torture whomever he
chooses without charging him with a crime. Also,
unbeknownst to most Americans, Bush signed into law a
provision which, according to Senator Patrick Leahy,
will allow the president to unilaterally declare
martial law.
By changing The Insurrection Act, Bush
has essentially overturned the Posse Comitatus Act
which bars the president from deploying troops with
the United States . The John Warner Defense
Authorization Act of 2007 (as it is called) also
allows Bush to take control of the National Guard
which has always been under the purview of the state
governors. Bush now has absolute power over all armed
troops within the country, a state of affairs which
the constitution purposely tried to prevent.
administration’ s dream of militarizing the country
under the sole authority of the executive has now been
achieved although the public still has no idea that a
coup that has taken place.

Internationally, the falling dollar means that
America ’s debt will be reduced proportionate to the
percentage-loss of the dollar in relation to other
currencies. This is a great deal for the U.S. First
the Fed prints fiat money to buy valuable resources
and manufactured goods and then it nabs a discount by
depreciating its currency. It’s a “win-win” situation
for Washington , although it will undoubtedly cheat
unwitting foreign-creditors out of their hard-earned
profits. It’s doubtful that their interests will weigh
very heavily on the money-lenders at the US Treasury
or the Federal Reserve.

The dollar faces a second crisis at home which is
bound to play out throughout 2007. The $10 trillion
dollar housing bubble is quickly losing air causing a
precipitous drop in GDP. The housing industry is
seeing its steepest decline in 30 years and home
equity is beginning to shrivel. Housing has been the
one bright spot in an otherwise bleak economic
landscape. With the housing market slowing down and
prices decreasing, the $600 billion of consumer
spending which was extracted in 2005 from home equity
will quickly evaporate triggering an overall slowdown
in the economy. (Consumer spending is 70% of GDP)

By the Fed’s own calculations; “The total amount of
residential housing wealth in the US just about
doubled between 1999 and 2006 up from $10.4 trillion
to $20.4 trillion. (“Times Online”) If these figures
are accurate than we can assume that much of America ’s
“perceived” growth has been nothing more than the
expansion of debt
. In fact, that seems to be the case.
Wages have been stagnant since the 1970s, 3 million
manufacturing jobs have been outsourced, savings have
shrunk to below 0%, and personal debt is soaring. We
have become an “asset-based” society and when the
principle asset begins to loose its value, we are in
deep trouble. As housing prices continue to decline
through 2007 we can expect a full-blown recession. If
energy prices rear their ugly head again, (were they
lowered for the elections?) it will just be that much

So, how will recession affect the dollar?

Capital has no loyalties. It follows the markets. When
America ’s bustling consumer market stalls, we’ll
undergo capital flight just like everywhere else. The
3 million lost manufacturing jobs, the 200,000 lost
high-paying high-tech jobs, the tax incentives for
major corporations doing business outside the country;
all signal that corporate America has already loaded
the boats and is headed for more promising markets in
Asia and Europe . A sluggish consumer market could
further weaken the dollar and force Americans to begin
saving again but, (and here’s the surprising part) the
decision-makers at the Federal Reserve and the
Treasury Dept don’t really care if the face-value of
the greenback goes down anyway.

What really matters is that the dollar retains its
position as the world’s reserve currency
. That allows
the Federal Reserve to continue to print the money,
set the interest rates, and control the global
economic system. The dollar presently accounts for 66%
of foreign currency reserves in central banks across
the globe, an increase of nearly 10% in one decade
. The dollar has become the international
currency, a de-facto monopoly. This is the goal of the
globalists and the American ruling elite who dream of
one system, the dollar-system; with us running it.

So, how will this cadre of plutocrats coerce the other
nations to continue to use the dollar while it
plummets from its perch?


As long as oil is denominated in dollars, the central
banks will be forced to stockpile American scrip
regardless of its value. It’s no different than
holding a gun to someone’s head. They will use our
debt-plagued greenbacks or their cars and trucks will
sputter, their tractors and factories will wheeze, and
their economies will grind to a halt. It’s just that

America cannot maintain its superpower status unless
it continues to control the global economic system.
That means the linkage between the dollar and oil must
be preserved. The Bush troupe sees this as an
existential issue upon which the future of America ’s
ruling class depends. By 2020, 60% of the world’s oil
will come from the Middle East . Bush will do
everything in his power to control the resources of
the Caspian Basin , thereby expanding US
dollar-hegemony and paving the way for a new American

Disclaimer: The views expressed in this article are
the sole responsibility of the author and do not
necessarily reflect those of the Centre for Research
on Globalization.

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© Copyright Mike Whitney,, 2006