Abandoning the Dollar is another aspect of The Won’s assault on American Exceptionalism.

The Dollar is a sacrifice 
to The Won!

The easiest, fastest and cheapest defense of the Dollar is talk.  The Won will not even talk in defense of the dollar.  Talk is what The Won does best.  He won’t even do that.

The next easiest and fastest defense is raising interest rates.  The Won will not do that because it will raise the projected costs of his massive deficits – increasing the price of his massive re-do of America – thus increasing opposition to his proposals.  Never mind that this is real life arguing against The Won’s fantasy; anything (including reality) that stands in His way is to be denied and otherwise resisted.

The near-zero interest rates are not increasing credit or promoting general economic recovery.  The near-zero interest rates are accomplishing only two things

• Reducing the projected costs of The Won’s absurd make-over of the U.S.
• Temporarily inflating profits (and bonuses) in the financial sector.

Let's see what a small increase in interest rates does for the value of the dollar and the forecast profligacy of The Won!

Near-Zero interest-rates are The Won’s drug of choice . . .

For the Benefit of Those Too Young to Know . . .

Normal people, in normal times, used to live on the interest from their savings.  No one can live on zero or near-zero interest rates.  Grandmothers and grandfathers used to live on interest, then they lived on reverse-mortgages and now they live on principle. 

You may think of that as your parents

consuming your inheritance.

The foreign exchange rates for the dollar are – in normal times - largely a reaction to the interest rate paid on dollar deposits.  As interest rates go up, foreign investors buy dollars to earn the higher interest. 

You may think of this as interest rates going up

and the price of BMW’s going down.

The Won’s stated reason for near-zero interest rates is to accelerate business expansion by making borrowing less expensive.

            But banks aren’t eager to lend at all in this business environment.

            But businesses aren’t eager to borrow when changes to tax and employment policies are discussed without assurances or time-tables.

            But banks are making a fortune borrowing at near-zero interest rates and charging the moon on credit card and other debt.  Yes, I know that their back rooms are stacked to ceiling with bad debts on credit card, residential and commercial mortgages.  How that will shake out is anyone’s guess since the banks have special relations with Washington.

            You may think of that as your classmates in banking pocketing bonuses through the meltdown

and having no idea when the party will end

 . . .but probably very soon

 unless Washington bails them out again

 . . .and that’s a not a bad bet.

Interest rates are the cost of money.  Just like the cost of oil or BMW’s or bloomers, interest rates – the cost of money - determines what is worth buying or not . . .or, in the case of money, worthy of investment or not . . .or, whether consumption is worth deferring for the sake of the interest earned.  When interest rates are near-zero, there is no point in deferring expenditures. 
You may think of this as the Federal Reserve 
(contradicting your parents’ advice) 
encouraging you to spend 
as though there were no tomorrow.

For business, near-zero interest rates (a figment of Washington speechifying, at the moment, since banks aren’t giving low-interest loans) make investment less expensive.  But investments must generate the income to pay back the borrowed funds.  The economy is now being controlled by imperial edict, rather than by market forces; in this environment, near-zero interest (almost-free money) does not fix anything.  At the moment,

No one knows how long interest rates will remain low;

No one knows when the economy will improve;

No one knows what tax rates will be;

No one knows what the dollar exchange-rate will be.

This all rolls into a ball where the risks are cannot be measured.  In this environment, businesses avoid risk.  Near-Zero interest rates accomplish nothing but give banks a temporary boost in earnings (and bonuses) until the bad loans become impossible to ignore.

You may think of this as

the economic equivalent of crack cocaine.

You will find a concise and compelling restatement of this thesis in geek-speak here: http://www.ft.com/cms/s/0/9a5b3216-c70b-11de-bb6f-00144feab49a.html

The Pocketbook Nerve - the most sensitive nerve in the human body

People learn from pain.

The most sensitive nerve in the human body is the pocketbook nerve. Jab a person there and that person will learn and remember.

The Bush Administration's parting messages were that the economy wasn't that bad. The Obama Administration's theme song is that everything is getting better. At least, Obama believes it - see another post here as to why.

The general population is experiencing very little to confirm that the economy is getting better. yet the federal government repeats that conditions are improving.

People's own economic conditions bear no resemblance to statements by President Obama. State and local governments are confirming what people are experiencing in their own lives: that everything is awful and there's no improvement to be seen. Obama is out there all alone describing a reality that only he can see.

What people are learning is that their federal government and Obama's Promised Change are either lying to them or have no idea what they are talking about. That lesson is being reinforced by terrible pain; it will not be forgotten.

This is a turning point in American politics analogous to the public repudiation of the Viet Nam War. It will cross political lines and generational lines and racial lines. It's coming.