May 30 2006
Can Paulson Save the Dollar? Doubtful.
Goldman heavy insider, CEO Henry Paulson, is on tap to be the new Treasury Secretary. We find it interesting that Paulson should want the post given the dire straights of the U.S. balance sheet and what it implies for the dollar. Were it several years ago, we’d think much less about that question. But when Reuters is writing headlines such as “Not even Paulson can save the dollar“, you know the ‘dollar is doomed’ cat is out of the bag.
Why is the dollar in trouble, you ask? Consider:
- The official federal deficit is roughly $350 billion. But when you use GAAP accounting principles and require the government to responsibly accrue the promises of future obligations, such as Social Security and Medicare, the number is ten times that: $3.5 Trillion! You can tax 100% of all personal income in the U.S. and you’ll not have enough money to cover all the free lunches politicians have promised.
- Inflation, while under control according to the official government CPI number, is tracking probably closer to 7.5%-8%. That’s if you calculate the number the old fashioned way — without all the fancy gimmicks that have been used more and more over the last 30 years to make inflation seem less than it is. Consider that under the old, more honest CPI calculation last used in the 1970s, Social Security payments would be about 70% higher.
- GDP, like inflation, is a fudged number. First, its helped by an under reported CPI. Then, its padded with spending that didn’t really occur. For example, picture spending $1000 for a computer this year. Your government statisticians consider that this year your $1000 computer is 10% faster than last year, and therefore concluded for GDP purposes that you actually spent $1100. Nice boost to the economy stat’s, but its fantasy. Real GDP is much lower — probably in recession levels already.
- Official GDP had been supported by massive amounts spending financed through debt over the last 5 years. Consider that home equity withdrawal related spending contributed $670 billion of spending in 2004 and about $640 billion in 2005. That’s a massive percentage of overall GDP when you consider how dollars then move through the economy. Don’t forget, their is a limit to debt capacity, and it must be paid down tomorrow! Moreover, in a rising interest rate environment, the cost for carrying existing and future debts only makes the situation much worse!
And those points are just the tips of the many icebergs dead-ahead in the path of the S.S. U.S. Economy. That said, we can’t help but agree with Reuters — we’ve been saying it for years!
All that in mind, we suspect that Paulson will serve as a solid expert for the less discussed plunge protection team board, for whom his insider perspective will be invaluable. Keeping the U.S. economy afloat will be one heck of a battle.
Hold on tight, folks. The Storm Captain is readying to board the ship! Position yourself for the wild ride ahead!
