11/26/2004 An Open Letter to the U.S. Dollar *

The holiday shortened week provided a good opportunity to ignore the deepening dollar crisis and push equities higher.  For the week, the Dow gained 0.6%, with the S&P500 adding 1%.  Economically sensitive issues continue to shine, with the Transports (up 21.3% y-t-d) and the Morgan Stanley Cyclical (up 12.6% y-t-d) indices rising 2.2%.  The Utilities gained 2.4% (up 21% y-t-d), while the Morgan Stanley Consumer index added 0.8%.  The broader market rally continues, with the small cap Russell 2000 jumping 2.8% (up 13.3% y-t-d) and the S&P400 Mid-cap index gaining 2.1% (up 11.2% y-t-d).  The NASDAQ100 rose 1.7%, and the Morgan Stanley High Tech index gained 1%.  The Semiconductors were about unchanged.  The Street.com Internet Index rose 1.8% (up 30.3% y-t-d), and the NASDAQ Telecommunications index advanced 2.1% (up 4.3% y-t-d).  The Broker/Dealers gained 2.3% (up 10.3% y-t-d), and the Banks added 1.1%.  With bullion up $4.90, the HUI Gold index gained 1%.  For the week, 2-year Treasury yields jumped another 9 basis points to 3.01%, the first time above 3% since June 2002.  Five-year Treasury rates increased 6 basis points to 3.63%.  Ten-year Treasury yields were up 3 basis points at 4.23%.  Long-bond yields ended the week at 4.89%, about unchanged on the week.  Benchmark Fannie Mae MBS yields were unchanged.  The spread (to 10-year Treasuries) on Fannie’s 4 5/8% 2014 note narrowed 4 to 39, and the spread on Freddie’s 5% 2014 note narrowed 4 to 35.  The 10-year dollar swap spread declined 1.25 to 39.25, the narrowest since March.  Corporate bonds continue to trade well, with junk spreads narrowing again this week.  The implied yield on 3-month December Eurodollars rose 0.75 basis points to 2.475%.  Holiday week corporate debt issuance dropped sharply.  Investment grade issuers included TXU $3.5 billion, Wynn Las Vegas $1.3 billion, ASIF Global $1.0 billion, and Caterpillar $350 million.              Junk bond flows reversed to a small ($4.97 million) outflow (from AMG).  Issuers included Owens-Brockway $400 million, Altra Industrial Motion $165 million, Propex Fabric $150 million, and Cascades Inc. $125 million.  Foreign dollar debt issuers included Lebanese Republic $1.05 billion, CaisseD’Amort $1.0 billion, Canadian Natural Resources $700 million, African Development Bank $500 million, and AES Chivor $170 million. Japanese 10-year JGB yields dipped 2 basis points to 1.44%.  Brazilian benchmark bond yields sank 14 basis points to 8.18%.  Mexican govt. yields ended the week at 5.23%, about unchanged for the week.  Notably, Russian 10-year dollar Eurobond yields jumped 17 basis points to 5.89%.  Freddie Mac posted 30-year fixed mortgage rates dipped two basis points this week to 5.72%.  Fifteen-year fixed mortgage rates were unchanged at 5.15%.  One-year adjustable-rate mortgages could be had at 4.27%, up a notable 10 basis points (up 27bps in three weeks!).  The Mortgage Bankers Association Purchase application index was down 3.5% last week.  Purchase applications were up about 2% from one year ago, with dollar volume up 14%.  Refi applications dropped 8.3% during the week.  The average new Purchase mortgage slipped to $232,200, while the average ARM increased to $308,300.  ARMs were again last week 34% of total applications.     Broad money supply (M3) declined $7.5 billion (week of November 15).  Year-to-date (46 weeks), broad money is up $475.9 billion, or 6.1% annualized.  For the week, Currency added $1.8 billion.  Demand & Checkable Deposits rose $6.6 billion.  Savings Deposits gained $300 million, with a year-to-date gain of $351.8 billion (12.6% annualized).  Small Denominated Deposits dipped $400 million.  Retail Money Fund deposits declined $4.4 billion, while Institutional Money Fund deposits dropped $13.8 billion.  Large Denominated Deposits dipped $200 million.  Repurchase Agreements jumped $9.3 billion, and Eurodollar deposits declined $6.7 billion.            Bank Credit expanded $4.8 billion for the week of November 17 to $6.734 Trillion.  Bank Credit has expanded $459.3 billion during the first 46 weeks of the year, or 8.3% annualized.  For the week, Securities holdings declined $2.9 billion, and Loans & Leases increased $7.6 billion.  Commercial & Industrial loans dipped $0.9 billion, while Real Estate loans jumped $5.8 billion.  Real Estate loans are up $288.5 billion y-t-d, or 14.6% annualized.  Consumer loans were up $0.9 billion for the week, and Securities loans added $0.4 billion. Other loans increased $1.3 billion.  Elsewhere, Total Commercial Paper rose another $6.2 billion ($19.9bn in 2 weeks) to $1.3884 Trillion.  Financial CP gained $4.2 billion to $1.254 Trillion, expanding at an 8.9% rate so far this year.  Non-financial CP added $2.0 billion (up 27% annualized y-t-d) to $134.4 billion.  Year-to-date, Total CP is up $119.9 billion, or 10.5% annualized.  Fed Foreign “Custody” Holdings of Treasury, Agency Debt increased $3.0 billion to $1.318 Trillion. Year-to-date, Custody Holdings are up $250 billion, or 25.9% annualized.  Federal Reserve Credit added $1.3 billion for the week to $779.9 billion, with y-t-d gains of $33.3 billion (4.9% annualized).  Currency Watch: The dollar index was hit for 1.8% this week to close at 81.81.  The Euro traded to another all-time high, the Canadian dollar to a near 13-year high, the Swiss franc to a 9-year high, the New Zealand dollar to an 8-year high, and the Russian ruble to a 4-year high.    Commodities Watch: November 26 – Bloomberg (Petter Narvestad):  “Shipping costs for iron ore, coal and other dry-bulk commodities rose to records for a second day as China buys more raw materials and port congestions tie up ships.  ‘The market is in a frenzy at the moment and reaching levels beyond anyone’s expectations,’ said George Leventis, director of Brave Maritime Corp. in Athens… ‘The port delays and congestions worldwide are certainly acting in our favor.’ The Baltic Dry Index, which measures the cost of shipping dry-bulk goods, rose 136 points, or 2.4 percent, to a record 5870 today. The index has surged 19 percent this month and 8.8 percent this week…” November 26 – Bloomberg (Francine Lacqua and Stuart Wallace):  “Arcelor SA, the world’s biggest steelmaker, may pay as much as 80 percent more for coking coal next year, an increase bigger than previously forecast, Chief Executive Guy Dolle said. Contract prices for coal used in steelmaking may rise by 60 percent to 80 percent, Dolle said…” November 24 - Bloomberg (James Cordahi):  “Saudi Arabians bought more gold jewelry in the third quarter than in any quarter for three years as record high oil prices boosted their income, the World Gold Council said.  Gold purchases in Saudi Arabia, the world’s fifth-largest gold consumer and largest oil producer, rose 12 percent to 32.9 tons in the three months to Sept. 30, compared with 29.4 tons in the year-earlier period, according to the industry group… Jewelry accounts for about 90 percent of gold consumption…” November 26 – Bloomberg (Helen Yuan):  “Copper Stockpiles in Shanghai Futures Exchange warehouses fell 5.1 percent this week, adding to concerns about supplies that have driven prices of the metal used in wiring and plumbing up 49 percent in the past year…” November 23 - Bloomberg (Jason Gale):  “Record cheese prices are eroding profits at Masamichi Hanasaki’s Tokyo pizza bar, as the cost of mozzarella surged 58 percent the past two years.  ‘We’d like to raise our pizza prices, but we care about keeping our customers,’ said Hanasaki… Global stockpiles are the lowest since 1971 as rising incomes boosted demand in Russia and the Middle East and drought eroded milk output in Australia, which supplies 17 percent of cheese exports. Cheddar prices have risen 81 percent since November 2002…” Gold today closed at $451.95, nearing highs going all the way back to the tumultuous period of late 1987.  Cattle prices rose to a 17-week high today.  January Crude Oil rose 55 cents this week to $49.44.  The Goldman Sachs Commodities index gained 1.4% for the week, increasing year-to-date gains to 34.2%. The CRB index added 0.8%, with 2004 gains of 14.1%.     China Watch: November 22 – Financial Times (James Kynge, Chris Giles, James Harding):  “In a mark of China’s growing economic confidence, the country’s central bank has offered blunt advice to Washington about its ballooning trade deficit and unemployment… Li Ruogu, the deputy governor of the People’s Bank of China, warned the US not to blame other countries for its economic difficulties.  ‘China’s custom is that we never blame others for our own problem.  For the past 26 years, we never put pressure or problems on to the world.  The US has the reverse attitude, whenever they have a problem, they blame others.’  Mr. Li insisted an appreciation of the Chinese currency would not solve the US’s structural problems and that although China was ‘gradually’ moving towards greater exchange rate flexibility, it would not do so under heavy external pressure.  ‘Under heavy speculation we cannot move [towards greater flexibility] and under heavy external pressure we cannot.  So the best environment for us to gradually move towards a more flexible exchange rate is when people don’t talk about it.’”  The FT also quoted Mr. Li as saying, “The savings rate in China is more than 40 per cent.  In the US it is less than 2 per cent.  So the problem is that they spend too much and save too little.” November 22 - Bloomberg (Wing-Gar Cheng):  “China’s crude oil imports rose 34 percent in October as domestic output failed to keep up with soaring demand for gasoline and other fuels. Crude oil imports rose to 9.27 million metric tons in October. The cost of buying the fuel overseas surged 96 percent from a year ago, to $2.86 billion…” November 26 – Associated Press:  “Hong Kong’s economy grew by 7.2 percent in the third quarter from the same period a year earlier, boosted by strong global demand and consumer spending… The July-September economic data by far exceeded market expectations…” Asia Inflation Watch: November 22 - Bloomberg (Theresa Tang):  “Taiwan’s unemployment rate fell last month to its lowest in more than three years as companies added staff to cope with rising overseas sales. The seasonally adjusted jobless rate was 4.2 percent, down from 4.4%...” November 25 - Bloomberg (Laurent Malespine and Arijit Ghosh):  “Thailand’s exports rose 22 percent last month to a record $9 billion from a year earlier because of rising demand for electronics and other goods before Christmas, the commerce ministry said.  Imports gained 19.4 percent to $8.3 billion as the Southeast Asian nation posted a trade surplus of $673.2 million…” November 26 - Bloomberg (Kate Mayberry):  “Malaysia’s vehicle sales rose for a ninth month in October as new models, attractive financing and faster economic growth encouraged Malaysians to buy cars. Sales of passenger cars and commercial vehicles last month rose 26 percent from a year earlier…” Global Reflation Watch: November 24 - Dow Jones (Marietta Cauchi):  “Institutional investors worldwide plan to increase their exposure to private equity and hedge funds in 2005, buyout firm Coller Capital said Monday.   Of the 105 private-equity investors polled by Coller Capital… 56% said they expected to invest more in alternative assets overall next year, with 43% planning to increase allocation to private equity and 45% doing the same with hedge funds.  A significant number of institutional investors in private equity, or limited partners, is also expecting better returns from the asset class. Of those polled, 75% expect net portfolio returns of 11% to 20% over the next three to five years…” November 25 - Bloomberg (Lily Nonomiya):  “Japanese exports rose 11.8 percent to a record in October, led by steel, ships and autos, supporting growth in the world’s second-largest economy. The gain in overseas sales widened the trade surplus to 1.16 trillion yen ($11.3 billion), 8.8 percent higher than a year earlier. From the previous month, exports rose 3.2 percent, seasonally adjusted, after falling 2.4 percent in September.” November 25 - Bloomberg (Kartik Goyal):  “India expects overseas investment in the country to almost double in the fiscal year to March 31, said the country’s trade minister. ‘We are anticipating that overseas investment will go up to $5 billion from $2.8 billion last year,’ Commerce Minister Kamal Nath told reporters…marking a recovery to levels reached in the year previous.”  From the FT:  “Foreign direct investment inflows to India leapt by almost 70 per cent in the first six months of the year…” November 23 - Bloomberg (James Cordahi):  “Saudi Arabia, Kuwait and four other Persian Gulf monarchies will increase oil sales 46 percent to a record $204 billion this year… a United Arab Emirates bank said. The average price of crude for the countries, which include the U.A.E., Qatar, Bahrain and Oman, will rise 27 percent to $35 a barrel this year… The six countries generated $140 billion of oil sales last year…” November 24 - Bloomberg (Trygve Meyer and Petter Narvestad):  “Norwegian consumer confidence rose to the highest in almost seven years this quarter on expectations the central bank will keep interest rates at a record low.” November 26 – Bloomberg (Adriana Arai):  “Mexico’s central bank lifted interest rates for a fifth time since July to halt rising inflation and ‘quickly’ bring it back to target…  Central bank Governor Guillermo Ortiz, 56, must keep raising interest rates to show his commitment to the 3 percent inflation target after consumer prices rose 5.4 percent in the 12 months to October…” November 25 - Bloomberg (Alex Emery):  “Peruvian exports rose in October for the 30th straight month, led by increased sales of copper, gold, fishmeal and coffee.  Exports last month jumped 39.3 percent to $1.11 billion…” Dollar Consternation Watch: November 26 – Market News International (Courtney Tower):  “Bank of Canada Governor David Dodge said late Wednesday the huge accumulation of United States debt and massive buildup of Asian reserves from financing that debt is a problem that could lead to ‘a big crash.’  Dodge, appearing before the Banking Committee of the Canadian Senate, drew a picture of a looming crisis in what he called the ‘international monetary order.’  The United States has been ‘relatively slow in moving to correct its fiscal deficit’ and has a ‘very weak’ savings record --- Americans ‘continue to consume more than they produce’ --- Dodge said.” November 22 - Bloomberg (Andreas Cremer):  “The U.S. current-account and budget deficits may spark a ‘disorderly’ decline in the dollar, which is trading within a cent of its record low against the euro, the German BDB banking association said.  The ‘high’ budget and current-account shortfalls ‘could lead to a disorderly depreciation of the dollar and spark worldwide currency turbulence,’ said the BDB, which represents about 240 German banks including Deutsche Bank AG and HVB Group…” November 25 – XFN:  “China has reduced its holdings in US dollar assets and added to its positions in euros and other currencies as well as gold in order to avoid the impact of the weakening dollar, a Chinese financial specialist told XFN-Asia.   The specialist, who is close to central bank policy makers but declined to be identified by name, said that Beijing’s holdings of Treasuries and other dollar assets had been trimmed.  ‘This is indeed the case,’ the financial specialist. ‘This is related to the weakness in the dollar.’  The financial specialist said that the euro was the main beneficiary of the initial switch but a broader diversification had later been implemented to include the Swiss franc and gold.” November 23 - Bloomberg (Vladimir Todres):  “Russian Central Bank First Deputy Chairman Alexei Ulyukayev said the country may increase the amount of euros in its foreign exchange reserves.  ‘Most of our reserves are in dollars and that’s a cause for concern,’ Ulyukayev told reporters in Moscow.  ‘It’s a real problem. Looking at the dynamics of the euro-dollar rate, we are discussing the possibility to change the reserve structure.’   Russia keeps about a third of its reserves in euros and the rest mainly in dollars…” November 25 - Bloomberg (Vladimir Todres):  “Russia’s central bank expects to buy fewer dollars on the market next year to control the ruble next year, because it will be targeting the ruble’s rate against a basket of currencies, rather than against the U.S. dollar.  ‘We are moving from targeting the ruble’s rate versus the dollar to targeting its rate against a basket of currencies – we will complete this transition next year,' central bank Deputy Chairman Konstantin Korishchenko said…‘We don’t want an extra-fast and excessive strengthening of our currency - that would hamper the competitiveness of our industry.’” November 26 - Bloomberg  (Shanthy Nambiar):  “Indonesia may reduce holdings of dollars and U.S. Treasuries in its foreign-exchange reserves, said Aslim Tadjuddin, deputy governor for monetary policy at the central bank… Demand for the dollar has waned on concern for funding of the record U.S. current-account deficit. Indonesia’s comments follow those of a Russian central bank official who this week said some of its reserves would be switched into euros.  ‘The possibility is there if the dollar continues its weakness,’ Tadjuddin said. ‘We will monitor and see what happens to the dollar. There's the possibility we may trim our dollar position.’” California Bubble Watch: There are further signs that the California housing market is coming off the boil.  Median prices ($460,370) are about unchanged over the past five months, although they are still up 21.4% from one year ago.  At the same time, Condo median prices set a new high at $373,340, up an astonishing 47.2% from twelve months ago.  Home prices are up $135,700, or 42%, over two years, $187,800, or 69%, over three years, and $265,410, or 136%, over six years. “While the median price of a home continued to charge ahead in October compared with a year ago, sales moderated to a more sustainable pace, typical for this time of year,” said California Association of Realtors President Jim Hamilton. “The inventory of homes for sale also increased to nearly a four-month supply, compared with about a two-month supply a year ago.  This is giving buyers a greater number of options when looking for a home, and also is reflected in the time it’s taking to list and sell a home, which has increased to 37 days – its highest level since July 1999.” Bubble Economy Watch: November 26 – The Arizona Republic (Mark Shaffer):  “The locals call it poverty with a view.  And whether the view is rugged Granite Mountain or the towering San Francisco Peaks in Flagstaff or the sharp escarpment of the Mogollon Rim in Payson, Arizona’s mountain communities all have one thing in common:  Working Joes can’t afford to live in these increasingly tony places anymore.  Hyperinflation in housing prices, caused primarily by moneyed California retirees and Valley second-home owners, is pushing lower-middle-class people farther and farther beyond city limits.  During the past three years, the median price of a home in Flagstaff has skyrocketed almost $100,000 to $270,000…” Both New and Existing October Home Sales were stronger-than-expected.  At an annualized 6.75 million pace, Existing Home Sales were up 5.6% from strong year ago sales.  Year-to-date sales are running 8.1% above 2003’s record.  October Average Prices were up 9.9% to $239,800, with annualized Calculated Transaction Value (CTV) up 16.1%.  CTV was up 42% over two years (sales volume up 20%, prices up 19%), 69% over three years (volume up 28%, prices up 32%), and 103% over six years (volume up 33%, prices up 52%).  October New Home Sales were reported at a stronger-than-expected 1.226 million pace.  Sales were up 7.4% from October 2003, with year-to-date sales running 9.4% ahead of last year’s record.  October Average Prices jumped 18.1% to a record $286,700.  CTV was up 27% to a record $351.5 billion pace.  CTV was up 51% over two years (volume up 22%, prices up 24%), 96% over three years (volume up 42%, prices up 38%), and 115% over six years (volume up 37%, prices up 57%).  And up 14% from twelve months ago to 412,000 units (est. dollar value up 35%), the Inventory of Unsold Homes jumped to the highest level since 1979. Combined New and Existing Home Sales were up 5.9% from October 2003, with combined y-t-d sales running 8.3% above 2003’s record pace.  October’s combined CTV was the second highest at $1.97 Trillion, up 17.9% from one year ago. Mortgage Finance Bubble Watch: It was another slow month for Freddie Mac (losing business to Fannie and others).  For October, Freddie’s Book of Business expanded at a 3% rate to $1.493 Trillion, reducing year-to-date growth to a 6.7% rate.  The company’s Retained Portfolio decreased slightly to $660.3 billion, lowering 2004’s growth rate to 2.8%.  November 24 - Bloomberg (Dianne Finch):  “Massachusetts single-family home sales fell 5.3 percent in October, the third decline in three months, the Boston Globe reported, citing data from the Massachusetts Association of Realtors.  ‘The pendulum is swinging back from a seller’s market to a buyer’s market,’ Chuck Lemire, vice president of Re/Max of New England, told the newspaper.  The median sales price of single-family homes in the state jumped 12.4 percent to $344,950 from a year earlier…” November 24 – PRNewswire:  “As Florida heads into the prime winter season, residential real estate activity is moving back to a normal pace in the state’s major metropolitan  markets, according to Realtors… While Hurricanes Charley, Frances, Ivan and Jeanne dealt heavy blows to localized coastal markets in August and September, Miami, Fort Lauderdale, Tampa Bay and Jacksonville were largely untouched.  ‘The Florida market has been strong, and remains strong, despite the hurricanes," says Russell Grooms, 2004 president of the Florida Association of Realtors.  ‘We’re hearing very little concern from buyers about moving to Florida, and there is every indication that flow will continue.’” November 24 - Dow Jones (Greg Edwards):  “H&R Block Inc. Chairman and Chief Executive Mark Ernst said it’s a tough year in the mortgage business, and that led his company to cut its earnings estimate for the fiscal year.  ‘It’s a very aggressive pricing environment, and we’re having to match that,’ Ernst said in an interview…” Open Letter to the U.S. Dollar: Dear Mr. Dollar: I have for some time expounded your shortfalls and frailties.  And now, with your soundness and future status having been elevated to the crucial issue in global markets and economics, it is appropriate that I address my heightened concerns to you directly.   There are some critical issues that I want to ensure you are aware of.  As much as I have criticized you in the past, I today fear for your future. First of all, there is great confusion and misinformation as to who you really are and what role you play.  Some believe – and many would like to perpetuate the myth - that you are the “currency” created and managed by the Federal Reserve.  I think even you would admit that this is an expedient and false impression.  Federal Reserve liabilities are but a small and shrinking portion of dollar-denominated claims, and the Fed has quite limited capacity to support you during episodes of faltering confidence and market tumult.  The Fed’s previous effort to support you by increasing the attractiveness of U.S. securities is at this point a largely spent force.  And while the consensus view holds that the Federal Reserve and Administration have advantageously used your devaluation as a policy tool – the Fed to “fight deflation” and the Bush team to buoy U.S. manufacturers and employment – it is more accurate to recognize that the actual policy mechanism has been to incite the (mindless) creation of additional dollar claims (Credit inflation), thereby stimulating expenditures and asset inflation (real estate, bonds and equities, in particular).  The policy has been to perpetuate Bubbles, and only talk as if they were concerned about your strength and welfare.  “Strong dollar” blather has similarly lost efficacy. Many confuse you with dollar “bills” – Federal Reserve Notes - and Treasury debt.  Others commonly mistake you for numerous Credit instruments issued by various types of institutions that can be used these days to consummate transactions in the real economy or financial markets.  Some erroneously presume that scores of previous gross financial transgressions and policy derelictions – not to mention the consequent deep structural economic maladjustments and endemic inflated asset prices - will somehow be forgiven if only the federal budget is balanced.  If it were only that easy, Mr. Dollar.  I wish it were true.  Many refer to you as “fiat,” insinuating that you are authorized or sanctioned by the U.S. government.  This is inaccurate.  The Fed enjoys no dollar “monopoly power,” while Secretary Snow and the Department of the Treasury today possess virtually no power.  The issuance of dollar debt is open to virtually all, while the size and nature of the dollar trading market – dominated today by derivative trading, “hot money” speculative flows, and foreign central banks - is massive and unlike anything in history. There were long periods when you were backed by gold and other precious metals. This provided inherent value for dollar instruments, as well as an effective mechanism to restrict over-issuance.  And there were also decades when the Federal Reserve and government authorities thoughtfully regulated the creation of additional dollar financial claims.  Indeed, closely-regulated commercial banks were the chief non-federal government entities sanctioned with the capacity to create new dollar-denominated purchasing power.  In such a circumstance, the terminology “fiat currency” was generally applicable.  But today, in a Fancy-Free Marketable Securities-Based Financial New World Order - with myriad institutions creating liquid dollar-denominated liabilities, and securities playing such an instrumental role in the global system’s payments settlement mechanism - the term “Global Wildcat Finance” is much more legitimate than “fiat currencies.” Mr. Dollar, it is today more factual and certainly analytically advantageous to think of you in the context of a “unit of account” in the global pricing of U.S. assets.   Your value is determined in the marketplace (currency futures trading), and then is used to impute value for a vast array of claims throughout the global “ledger” of financial assets and liabilities.  As a unit of account your intrinsic value would generally move inversely with the quantity of financial claims created.  However – and we will return to this crucial issue - any chasm that develops between market perceptions and reality creates fragilities and the potential for dislocation.  Your market value will always be relative to other units of account (currencies) and, at times, to perceived superior stores of value (gold, precious metals, crude and energy). Without the traditional anchor of inherent fundamental value and/or constrained issuance, the vagaries of marketplace perceptions play an instrumental role.  This role has risen in conjunction with the rising prominence of marketable securities throughout global Credit systems.  For years (especially the eighties and nineties), your relative value was supported by fragilities and recurring crises in “competing” currencies or currency blocks.   The dollar was increasingly perceived as a universal safe haven (remember gold at $255 and the euro at 85?).  For a few (“blow-off”) years your perceived worth was completely overblown by massive speculative (“king dollar”) flows into U.S. securities markets.  This inflated demand (fostered by the Fed and the leveraged speculating community’s attendant desire to play the Greenspan bond Bubble) accommodated an historic Bubble of non-productive debt and asset inflation – self-reinforcing dynamics that have placed you at extreme risk.  The past two years of massive global central bank buying has only augmented these dysfunctional Monetary Processes and incited acute Monetary Disorder.  And while your relative value did decline, the gap between the massive inflation of debt and the underlying limited capacity to create economic wealth remained extraordinarily wide.  Remarkably, confidence in you remained high. Most importantly, you are the “unit of account” for financial claims created by the U.S. Credit system.  Regrettably, for some time the “activist” Greenspan Fed has nurtured - and the U.S. financial sector has enthusiastically delivered - an unprecedented inflation of new Credit instruments (financial claims).  And the greater the Credit Bubble, the more committed the Fed has been to providing unlimited liquidity to the markets.  Unlimited marketplace liquidity?  Mr. Dollar, this is where they ensured your downfall.  Moreover, a very large percentage of these new financial claims were created in the process of financing consumption (especially imports and “services”), asset inflation (real and financial), and real investment of dubious long-term economic value.  Massive foreign dollar claims have been accumulated that cannot be matched against true economic wealth.  And I fear a large amount of this risk has been “hedged” in the derivatives markets, which implies the potential for a catastrophic market dislocation in the event of panic “portfolio insurance”-type forced selling. A myth has been propagated by no less of an authority than our top central banker that the U.S. economy is both wonderfully productive and resilient, and that the magic of the market mechanism will painlessly rectify U.S. imbalances.  But the reality of the situation is so much different:  unrelenting inflation of dollar financial claims has fueled unsustainable economic and asset Bubbles and these powerful Bubble dynamics have been mistaken for economic efficiencies and resiliency.  And, importantly, the Fed is determined to perpetuate Credit inflation and liquidity excesses in a desperate gamble to avoid asset price and debt collapse.  Indeed, Mr. Dollar, it is the pyramid of dubious dollar denominated claims – and the Greenspan Fed’s determination to sustain it – that are at the core of your risk to collapse.  You’ve been hung out to dry. Mr. Dollar, no one knows better than you how present-day notions of monetary and fiscal policies - along with New Age Finance, have left you unguarded and vulnerable.  Considering your role as the “world’s reserve currency” and the eminent “unit of account” for global prices, to not assiduously guard your wellbeing is an outrage.  The complacent consensus view nonetheless takes comfort from the historical ebb and flow in your relative value to other currencies.  I would, instead, suggest that the ongoing saga of contemporary finance and its recurring currency crises and collapses leave zero room for complacency.  And as you know, there is a consensus view that holds that your value is being somewhat sacrificed by the Fed as it sticks with its accommodative monetary policy (“peg” interest rates low and let your value “float”).  Few in the U.S. see much risk with this strategy, with most in Washington and Wall Street content to enjoy the seductive “debtors’ blessing” delusion of devaluation and inflation.  This is a quagmire.   And if I had any hope that low interest rates and the status quo would rectify acute U.S. financial and economic fragilities I would not be writing to you this evening.  But I fear the worst:  the Fed is immersed in a trap of runaway Credit and asset inflation.   Global players – including central banks – are coming to recognize there is no way out.  Almost anything non-dollar is viewed as a superior store of value to investors and the massive speculating community.  And perhaps others see dollar vulnerability as a potential countervailing force to aggressive U.S. foreign policies.  Things don’t look good Mr. Dollar.  Confidence is faltering, financial fragilities provide little room for error, and I fear we have passed the point where a dollar crisis is unavoidable.     I wish you the best in what will likely be a difficult and tumultuous period.  And I do sincerely hope you can muster all your strength and surprise us with your resiliency.  It certainly didn’t have to be this way.  I hope the Greenspan Fed (and the “inflationists”) will be held accountable.  Too much lunacy has been spoken and written, while the scourge of financial folly worked furtively to destroy you.  The world’s preeminent currency was a terrible, terrible thing to waste.  There will be huge costs to pay, and I’m saddened and sorry it happened.