The Usdollar & Hindenburg

August 31, 2005

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On my mind lately has been the nature of the USDollar. It is not backed by any hard asset like gold, but rather by massive debt. It could thrive if backed by the commodity in greatest abundance in the United States, namely coal. Well, get serious. If the USA backed the USDollar by coal, Asians would own my Pennsylvania, along with Ohio, Kentucky, and West Virginia in a matter of a few quick months. Worker output from coal mines would be directed to Chinese power generating facilities. Talk about the United States being backed into a corner! We as a nation must choose what assets foreigners will take ownership of. So far they have been foolish enough to accept Treasury credit securities. Paper IOU's are a pure con game.

The USDollar bears a strong resemblance to the old zeppelin flying fortress. It looks powerful and impressive to the eye, certain to cast a long wide shadow on the ground. Catch sight of it and a sure "wow" is heard. However, its vulnerability is enormous as it floats without tether, without anchor, without any support. It acts like an experiment to mimic Ben Franklin's own for attracting the bolt from the blue as a lightning rod, even as sudden downdrafts can potentially bring the craft down to earth much like wind shear does a jet aircraft.

TITANIC IN THE SKY
The USDollar bears many critical similarities to the old clumsy zeppelin. It is very difficult to turn the dirigible, just as economies are difficult to react to the havoc imposed by currency shifts and interest rate policy changes. Fiscal changes such as prohibitive taxes and stimulative spending are much like cross currents in winds aloft. The zeppelin is at constant risk from inclement weather, heavy winds, sudden downdrafts, lightning bolts, static electricity, and rolling thunder. Economic reaction to an overvalued currency has a direct impact, much like winds and the wind shear of downdrafts. The lightning might be from political arenas or sudden changes to tax & expenditure policy. The credit dependence from Asia to the US Economy is vast and acts like a powerful jetstream current. With interfered financial market mechanisms, a large "electrical potential" is building, positive in Asia, negative in the United States. The spark or discharge might come from politically driven protectionism, such as in trade tariffs.

It is untenable to argue in favor of US strength when dependence upon world savings is so great, when dependence upon world energy supply is so great, when Asia gathers strength from industrial investment & production, when the USA derives its sustenance from powerful bond speculation & housing gains, when the US Economy relies upon consumption at shopping mall shrines as its foundation. The USS Zeppelin is vulnerable from any of a dozen major risks. Its flight is a false symbol of strength. It is both a dinosaur and a floating bomb.

Helium once filled the expansive zeppelin, named for Count Zeppelin and developed further by Hugo Echener. As an inert gas, helium is stable. Once backed by gold, the USDollar was stable and the US Economy was strong, growing in a healthy steady resolute fashion. All that changed in 1971, when the USDollar broke its earthly connection to the gold anchor. This is akin to the zeppelin abandoning helium in favor of hydrogen for supply of its expansive inner chambers. With no gold backing, the USDollar is subject to a vast array of risks. Each risk contributes to an increasingly hazardous and volatile condition for the zeppelin, whose hydrogen, although lighter in weight, is extremely combustible. Static charge release, spark ignition, and the friction from puncture can each lead to an explosion further fueled by the highly unstable hydrogen.

Governments and economies rely nowadays on funding from the printing press. Vast exports of money are evident in trade gaps. Asian Meltdown and LongTerm Capital Management fiascos dot the historical landscape along with currency failures in smaller economies. We as people and managers do not learn from past mistakes. Instead, we repeat them on different vehicles against a backdrop of arrogance and false bravado. Bubbles are a regular feature in the financial news, almost fully accepted as normal. Inflation, extinct throughout the entirety of the 19-th century, is considered a normal and commonplace entity in today's sickly landscape. Imagine cancer being a normal everyday malady in the household. Imagine sinkholes an everyday hazard in Florida. Imagine hurricanes an everyday scourge in the Gulf Coastline. Imagine earthquakes an everyday terror in California. Imagine volcanoes an everyday affliction in the Pacific Northwest. Imagine tsunamis an everyday horror in East Asia. No way.

THE EFFECTS OF THE ZEPPELIN
A zeppelin casts a large long shadow. Liken this to the currency wars, as foretold by Ludwig VonMises. As the USDollar came down in value since 2001, the victim of the long shadow was Europe. Well, so far. They might have relished the higher prestige from a currency pursued for value, following the euro's uneasy infancy. They might have felt satisfaction from reduced interest rates as their EuroBonds were pursued by central banks in their portfolios. They might not have wanted to play the inflation game promoted by hapless US economists, whose skill in economic theory is woeful, inept, destructive, as well as politically and corporately compromised and motivated. Now the European economy has felt the pain of lost exports, as the currency war shows its most recent victim on the financial battlefield. In a sense the shadow of the USS Zeppelin inhibited European crop growth by denying it sunlight.

A zeppelin is difficult to dock, much like an airborne version of a ship at sea without gold ballast, sloshing in the deep water wave ebb & flow. Try to board or disembark a sailboat on a stormy day with 3-foot swells. Good luck. Such is a day in the life of the currency wars, and the rooting and docking of economies. Companies must make decisions, sign and execute on contracts, hire and invest in equipment, commit on land space leases. These are the procedures rendered difficult by the absent monetary anchor. We as a nation hardly ever contemplate the hardship inflicted upon us anymore by unstable monetary and financial systems. Currencys go up and down, and markets go up and down, bla bla bla.

One key market changed the world as its fluctuation disrupted the future path, namely crude oil. In 1998 the crude oil price descended to $10 per barrel. Inhibited by future prospects, investment in energy technology, the movement toward an educated energy labor force, R&D on alternative sources, and progress on large marginal energy projects all came to a virtual halt. It was akin to a huge negative wake wash from the zeppelin, whose low swinging waves rendered an entire industry as unappealing, unexciting, and unprofitable. We now pay the price for the neglect.

The zeppelin is weighed down by rising commodity and energy costs, inversely counter-balanced to the declining USDollar. On the international markets, all commodities are priced and settlements cleared in US$ denomination. Well, for now they are priced in US$ terms. This weighs down the airborne flying fortress, kept buoyant by dangerously volatile hydrogen gas. Long gone is the wonderful stable inert helium (gold). Heck, gold forbids the fraud of inflation though. Add the drag from the rising cost of money (interest rates) which slows the propeller action on the lopsided airborne vessel. The swinging pendulum of exported recession (from overvalued currency) and imported asset bubbles (from easy credit supply) compounds risks toward stable flight for the airship fortress.

Foreign dependence is akin to overwhelming head wind current in the jetstream, sufficient to interfere massively with all navigation systems for the zeppelin. Look for the defining event to perhaps be a decline in the housing market, acting like a giant WIND SHEAR, the most severe of threats to flying objects in a powerful downdraft. If not downdrafts, then a burn of the outer skin might occur about the hapless fortress. The USDollar fashions a poor surface to the US Economy, akin to the dry burnable paper that is the US Treasury Bond. Widely held by Asians, USTBonds are put at risk by our trade friction, gaining momentum by the month. Dreaded sparks are likely to be generated all around our USS Zeppelin. Look for the defining event to perhaps be an unsustainable Fed rescue of USTBonds in the wake of Asian withdrawal, which has already begun, but which is absolutely positively not reported by the intrepid fully compromised US press & media.

As the unreliable zeppelin vessel suffers mounting challenges to negotiate unfriendly air currents, the risks grow for a crash and burn outcome scenario being realized. The unbacked USDollar, both the world banking reserve currency and the primary international transaction currency, acts like hydrogen, easily burned. Gather round the bonfire, kids, as we observe an event slowly building like a gathering storm.

THE HINDENBURG DISASTER
May 6, 1937 (Lakehurst, New Jersey): The "Hindenburg" has come all the way from Europe, a luxurious flying hotel, faster than any seafaring ship. The pride of the Third Reich prepares to land, and hundreds of onlookers have gathered to watch. Then, all of a sudden, a burst of flame is seen just forward of the upper fin. In a matter of seconds, the largest airship ever built goes down in a fiery blaze. In all 35 people died in the flames, and nobody knew why. Sabotage? A bolt of lightning? The mystery surrounding the disaster has never been resolved, until now. In many years of research, a NASA scientist at Cape Canaveral has found proof that neither the hydrogen in the hull nor a bomb was to blame, but rather the fabric of the Hindenburg's outer skin and a new protective coating. Flight during the zeppelin's voyage left the outer skin very dry. A single spark of static electricity was enough to make it burn like dry leaves. German engineers had designed a flying bomb just waiting to explode.

Careful investigation of the Hindenburg disaster verified the opinion of the engineers on the Hindenburg and proved that it was the flammable aluminum powder within paint varnish that coated the infamous airship, not the highly combustible hydrogen, which started the fateful fire. The Hindenburg repeated the famous experiment of Ben Franklin regarding collection of electric charge on an object in the sky. Ben Franklin flew a kite in a storm to learn about lightning. The captain of the Hindenburg provided the 800 foot long, 236 ton airship covered by aluminum powder varnish as a gigantic electric charge collector. As the Hindenburg was grounded with the drop of metal landing lines to moor the vessel, the experiment was complete. Electrical discharge in the Hindenburg's skin started the fire. The Hindenburg would have burned and crashed if it had been filled with helium or simply held in the air by some other force. However, the hydrogen fed the flames, much like kerosene provides the giant assist to a camp bonfire.

What will deliver the spark to the USS Zeppelin? Will it become a weenie roast? Please pass the marshmallows. My guess is hedge fund disasters, banking distress from a flattened yield curve, energy price spikes, housing decline, likely triggered by the end to US Federal Reserve rate hikes. Take your pick, perhaps all in combination. The risk of sparks is everywhere around us. Imbalances create such conditions for sparks. And yes, watch for the lethal friction from trade war, protectionist measures, and tariffs !!!

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 23 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com

Jim Willie

Jim Willie

Jim Willie CB, also known as the “Golden Jackass”, is an insightful and forward-thinking writer and analyst of today's events, the economy and markets. In 2004 he launched the popular website http://www.goldenjackass.com that offers his articles of original “out of the box” thinking as well as content from top analysts and authors. He also has a popular and affordable subscription-based newsletter service, The Hat Trick Letter, which you can learn more about here.  

Jim Willie Background

Jim Willie has experience in three fields of statistical practice during 23 industry years after earning a Statistics PhD at Carnegie Mellon University. The career began at Digital Equipment Corp in Metro Boston, where two positions involved quality control procedures used worldwide and marketing research for the computer industry. An engineering spec was authored, and my group worked through a transition with UNIX. The next post was at Staples HQ in Metro Boston, where work focused on forecasting and sales analysis for their retail business amidst tremendous growth.

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