The dollar is trading at all time lows against the euro and gold for good reasons. The Bush Administration has flooded the world with greenbacks, and global investors have little confidence in the management of the U.S. economy.

During the Bush years, the U.S. trade deficit has doubled. Thanks to dysfunctional energy policies and tolerance for Chinese mercantilism, the deficit has exceeded $700 billion each of the last three years and is more than 5 percent of GDP.

The Bush energy policy emphasizes incentives for domestic oil production and letting rising prices instigate conservation but those have failed. Domestic crude oil production is falling, the price of gas has risen from $1.51 to $3.21, automakers have populated U.S. roads with fuel guzzling SUVs, and petroleum now accounts for about $380 billion of the trade deficit.

Cheap imports from China have chased millions of Americans from manufacturing jobs, as the U.S. purchases from the Middle Kingdom exceed sales there by nearly five to one. The trade deficit with China is about $250 billion.

China has engineered this competitive triumph by keeping its yuan even cheaper than the dollar, euro and gold. Annually, it sells at deep discount about $460 billion worth yuan for dollars, euros and other currencies in foreign exchange markets. That provides a 33 percent subsidy on Chinese exports and keeps Chinese goods cheap on the shelves at Wal-Mart.

The Bush Administration has sought changes in China’s currency policies through diplomacy and has failed. Paradoxically, Treasury Secretary Henry Paulson has managed to tar as protectionist any proposal for U.S. government action to offset Chinese subsidies.

The remainder of the trade deficit is largely autos and parts from Japan and Korea, who through various means have kept the yen and won cheap too.

The huge trade deficit must be financed either by attracting foreign investment in new productive assets in the United States or by printing IOUs. Investment has only provided about 10 percent of necessary cash, so each year the United States sells currency, bank deposits, Treasury securities, bonds, and the like to foreigners. Those claims on the U.S. economy now total about $6.5 trillion.

That floods world financial markets with U.S. dollars and paper assets that function much like U.S. dollars—what economists call liquidity. And, it evokes an iron law of the universe. If you print too much money, it won’t have any value.

Until recently, most of that borrowed purchasing power was put into the hands of U.S. consumers by the large Wall Street banks. Essentially, through mortgage brokers and regional banks, those Wall Street banks loaned Americans money to buy homes and refinance their mortgages. In turn, the banks got the cash needed by bundling mortgages, as well as auto loans and credit card debt, into collateralized-debt-obligations—bonds backed by consumer promises to pay—for sale to fixed income investors, hedge funds and others.

The bankers could get reasonably rich on this scheme but got greedy. Last summer, we learned that the banks were not creating legitimate bonds. Instead they sliced, diced and pureed loans into incomprehensibly arcane securities, and then sold, bought, resold, and insured those contraptions to generated fat fees, big profits and generous bonuses for bank executives.

Now investors ranging from U.S. insurance companies to the Saudi Royals are not much interested in buying bonds created by large U.S. banks, and the banks can no longer make loans to many credit-worthy consumers and businesses. Without credit, the U.S. economy cannot grow and prosper.

The Federal Reserve has direct regulatory responsibility for the large U.S. banks, and it is Ben Bernanke’s job to require them to fix their business practices and resurrect the market for bonds backed by bank loans.

Yet, Federal Reserve Chairman Bernanke has offered no plan to address these problems, or even acknowledged the urgency of the situation. And, without a well functioning banking system, the U.S. economy heads into recession of uncertain depth and duration.

International investors, recognizing the U.S. economy lacks competent helmsmen at Treasury and the Federal Reserve, are fleeing the dollar for the best available substitute–the euro and gold.

When George Bush was inaugurated, the euro was trading at 94 cents and gold cost $266 an ounce. Now they are trading at $1.52 and $985 an ounce. That is a plain vote of no confidence in the Bush–Bernanke economic model.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.

The economy is not doing very well, I see.

The economy shed 63,000 jobs in February, the government said on Friday, the fastest falloff in five years and the strongest evidence yet that the nation is headed toward — or may already be in — a recession.

President Bush acknowledged on Friday afternoon that it is “clear our economy has slowed.” But he said he was confident that the recently enacted stimulus package, which will soon put checks in the mail for millions of Americans, would indeed be the “booster shot” the economy needs.

I watch Kudlow occasionally and a few months ago he could care less about how the dollar was doing. Now, he’s yelling that it’s all about the dollar. The economy will hurt McCranky more than anything else.

Bush on 10/04 : I love the fact that more and more people are opening up the front door of their home and: Welcome to my piece of property, welcome to my home.”

Too bad those homes are being boarded up and Repo man’d.

March 6, 2008
Weak economic reports that indicated declines in the job market, slowing in manufacturing and low consumer confidence drove bond yields lower this week and mortgage rates followed. Interest rates for 30-year fixed-rate mortgages are now at the same levels as they were over the week ending February 21st.

The housing market continues to take a toll on the rest of the economy. Residential fixed investment shaved 1.25 percentage points off economic growth in the fourth quarter of 2007. More recently, the median sales price of new homes fell 15.1 percent in January, representing the largest annual drop on record. The value of residential construction put in place fell 19.7 percent over the twelve-months ending January 2008, the largest decline since March 2007.

In addition, falling house prices, a weaker economy and tighter lending standards have helped contribute to greater mortgage defaults. For instance, serious delinquencies (90 days or more delinquent plus loans in foreclosure) for prime mortgages nearly doubled to 1.67 percent over the year ending December 31, 2007, according to the Mortgage Bankers Association; subprime mortgages also nearly doubled to 14.44 percent over the same period. The brunt of these defaults occurred in adjustable-rate mortgages which many borrowers used to stretch affordability based on lower teaser rates perhaps in combination with no or negative amortization terms. Interest-rate resets are certainly impacting borrowers but our research has found that roughly one-third of the nearly 1.5 million subprime loans scheduled for a first interest-rate reset 2008 were already delinquent as of September 2007.
» Next Commentary: March 13

* Reuters
* , Thursday March 6 2008

By Masayuki Kitano
TOKYO, March 6 (Reuters) - The dollar hovered near a record
low against the euro on Thursday as data showing a fall in U.S. private sector employment and a contraction in the service sector reinforced worries of a U.S. recession. While the Institute for Supply Management’s non-manufacturing index for February beat expectations with a rise to 49.3, it still showed that the service sector shrank for a second straight month.

The better-than-expected reading did little to dispel concerns about the U.S. economy, especially since ADP Employer Services said on Wednesday that the private sector cut 23,000 jobs in February, traders said.

The ADP report raised concerns that U.S. jobs data due on Friday could also come in below market expectations.

“I think we will see another bout of dollar selling if (Friday’s) jobs data comes in weak,” said a trader for a European bank. The euro stood at $1.5281 hovering near a record high of $1.5305 hit on electronic trading platform EBS on Wednesday. The dollar was also stuck near a record low against a trade-weighted basket of major currencies, with the dollar index standing near 73.405 just above an all-time low of 73.368 hit on Wednesday.

The New Zealand dollar gained after the Reserve Bank of New Zealand kept interest rates steady at 8.25 percent as expected, but said inflationary pressures remained persistent. The high-yielding currency stood at $0.8025 up from around $0.7975 just before the rate decision.
The yen edged higher after slipping broadly on Wednesday due to a rise in U.S. shares.

Moves in share prices are regarded as a barometer of investors’ risk appetite, and a rise in equities can fuel demand for carry trades, which involve selling low-yielding currencies such as the yen to invest in higher-yielding currencies.

The dollar slipped to 103.76 yen down from around 104.00 yen in late U.S. trading on Wednesday, despite an early rise in Tokyo share prices.

Any gains in the dollar against the yen could be limited, as Japanese exporters may try to sell the dollar on any rallies towards 105.00 yen, said a trader for a Japanese trust bank.
Investors are still waiting to see how U.S. bond insurer Ambac Financial Group Inc’s plan announced on Wednesday to raise at least $1.5 billion of new capital will turn out, the trader added.

The Bank of England and the European Central Bank are both expected to keep interest rates unchanged when they announce their rate decisions later on Thursday. The focus will be on any statements following their decisions. (Editing by Hugh Lawson)

http://www.hereinreality.com/carlyle.html

Carlyle founder sees industry consolidation, IPOs

By Megan Davies

MUNICH (Reuters) - Once private equity firms emerge from their current “pause” in activity, they will consolidate into mega-brands and most, if not all, of those will likely go public, Carlyle Group CYL.UL founder and managing director David Rubenstein said on Wednesday.

Talking at the 11th Super Return private equity and venture capital conference in Munich, he also said he isn’t forecasting that the U.S. will go into recession, but he does see a period of low growth.

Markets seized up in the summer after the subprime loan crisis turmoil, bringing to an abrupt halt a buyout boom that had broken deal records. The financing of large leveraged buyouts virtually ended, putting deals not completed on shaky ground.

“When (the pause) is over, there will be some transformation of the private equity industry,” Rubenstein forecast.

“More and more money will go to those firms with the brand names and operations to absorb more money. Increasingly you will see six to eight global brands in private equity which will probably dominate,” he said. “Increasingly, you will see private equity firms going public; when the market comes back, probably most of the larger ones will probably be public, if not, maybe, all of them, and they will begin to buy other private equity firms.”

Rubenstein declined to comment, on the sidelines of the conference, whether Carlyle, one of the leading private equity firm, would be one of those going public.

Blackstone Group (BX.N: Quote, Profile, Research) went public in June when conditions for private equity and the markets were strong. Its shares have suffered along with the market, falling from an IPO price of $31 to a current price around $17.

Commenting on the economy, Rubenstein said: “It’s not as likely that the U.S. will go into recession as some people predicted a few months ago … I do think that this year, it doesn’t seem like we will go into recession, but it may be a low-growth period.”

His comments are more optimistic than those of some speakers at the conference.

Both Blackstone Chief Operating Officer Hamilton James and Providence Equity Partners Chief Executive Jonathan Nelson said Tuesday they were running their businesses as if in a recession.

And Scott Sperling, co-president of Boston-based private equity firm Thomas H. Lee Partners, said: “I think we are seeing a meltdown in the credit markets that has some life in terms of the downside left to it.”

Earlier in the day, Rubenstein, in a separate talk at the same conference, said leverage would not be back for “quite a while, but that doesn’t mean the industry will fall apart.”

Rubenstein forecast that banks would sell some of their debt backlog of about $200 billion over the next year or so, although probably at lower prices than they had hoped.

“You will see leverage come back to the industry,” he said.

In the meantime, buyout firms would pursue other options, such as investing more in emerging markets, making minority investments in developed markets and committing more capital to distressed companies.

“I don’t think we have seen the high-water mark. We have seen these downturns before and each time … have emerged stronger and stronger,” Rubenstein said.

(Reporting by Megan Davies; editing by John Wallace and Gerald E. McCormick)

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