'Tis Only My Opinion!

November 2004 - Volume 24, Number 11

Tasks Facing the Bush in his Second Term

Cleaning House at the State Department

The State Department under Colin Powell has continued to obstruct many of Mr. Bush's desires.  Many of the members of the State Department are entrenched liberal and hold-over appointees from the Clinton Administration.  In several instances, Secretary Powell has not forcefully presented the administrations case.

While Powell's own convictions play a part, many of the position papers are written by liberals immersed in the diplomatic culture at State for many years.  The middle and upper ranks have been largely drawn from liberal academic institutions.  The selection criteria for new recruits must be broadened to bring more balance to the personnel at State.  A department that votes over 80% Democratic is not going to be necessarily supportive of a Republican President and his foreign-policy initiatives.

Powell's resignation gives the President will have an opportunity to nominate a strong supporter.  One of the major problems facing the new Secretary will be how to revamp the culture at the State Department to enable the implementation of the President's foreign policy initiatives.  Hopefully, Condelliza Rice, currently the National Security Advisor, will pass the Senate approval process and be able to swing a wide broom in the


Revamping the Clandestine Services

With Porter Goss now in charge at the CIA and the recommendations of the 9-11 Commission before Congress, a major reworking of the intelligence community needs to be undertaken.  During President Carter's term along with the Church Committee, the intelligence community was effectively strangled and forced to rely largely on electronic gathering techniques.  When President Clinton issued the directive to stop using "tainted operatives," the remaining human intelligence operations were dealt a serious blow.

For years, there has been a faction within the CIA that has operated for its own agenda.  The black budget as well as the operations of the agency in the illicit drug and arms trade have provided much of the funding for these operations.  Some were in the national interest and some could be argued otherwise.  Nevertheless, the factions exist and only by removing many of the participants in the agency can control be regained.

Perhaps, a simple rule like retirement after 20 years is mandatory would go a long way towards eliminating some of the problems.

The Dollar Problem

The dollar continues its fall from the January 2002 peak.  However, it is not as bad as some people believe.  We have merely returned to the level where the U.S. dollar index as prior to Secretary Rubin's initiation of a "strong dollar" policy began as shown in this chart.

The dollar's role as the world's reserve currency is now tenuous, at best.  The combined trade and federal deficit for 2004 is about $1 trillion.  Since the 1980's when the trade surplus turned into trade deficits, a large portion of our twin deficits have been financed by "vendor financing" through the re-cycling of trade dollars into government bonds.

In the telecommunications industry, we saw the end-game in 2000 when the "vendor financing" of equipment ceased and the over-capacity within the sector caused many companies to either take major write-downs of account receivables or declare bankruptcy.  Even today, in the fiber-optic field, we see capacity utilization of less than 25%.

Now substitute fiat dollars for the account receivables in the "vendor financing" equation.  The over-abundance of dollars held outside the U.S. and the more than 50% of U.S. Treasury securities owned outside the U.S. has created a situation where the holders are becoming uneasy about the value those dollars and securities represent.

With the increase of the legal credit limit for the U.S. to $8.1 Trillion, or about 75% of our GDP, foreign holders of our dollars and government securities have become increasingly nervous.  The per capita debt for just the federal debt is now in excess of $25,000.  Moreover, this fails to include the off-balance sheet liabilities for Medicare , Medicaid and Social Security obligations.  The second chart shows the substantial increase by foreign holders and the current number now exceeds 50% as of September 30, 2004.


Clearly, this indicates that we have been living well beyond our means and the rate of acceleration since the beginning of the presidency of Ronald Reagan has been dramatic.

We have finally reached the point where our foreign holders have begun to consider the alternatives to holding the dollar as a storehouse of wealth.  Despite the current economic outlook in Europe, many nations are beginning to lower their dollar reserves and replace those holdings with currencies like the Euro or gold.  It started in the 1st quarter of 2004 but could quickly turn into a stampede.

The difference between a medium of exchange and a storehouse of wealth.

Fiat currencies are by definition just a medium of exchange and their value are based upon relationships between various parties to a transaction.  These currencies are not backed up by any hard asset.  Therefore, the old game of coin clipping, reduction of precious metals content, etc., by which sovereign nations formerly debased their currencies has become passť. 

A storehouse of wealth, however, is something different.  Yes, it can be a medium of exchange but more importantly, it represents an asset that has lasting value in the eyes of the beholder.  For centuries, precious metals including gold and silver and land have served as storehouses of wealth.  The storehouse of wealth is an asset that one can hold, feel, and convert into a medium of exchange.

Fiat currencies bear little relation to storehouses of wealth.  Japan, recently, increased their monetary base by 8% by just adding a few more electrons to a computer.  The computer network then sent those electrons to New York to purchase U.S. government bonds.  As a result, the Japanese government received additional interest from the U.S. taxpayers.  The real question is what underlies the Japanese monetary base.  After all, the Japanese debt position is higher as a percent of GDP than in the U.S.


Revamping the Debt Structure

  Interest rates will continue to increase as the Federal Reserve tries to mollify foreign holders of U.S. assets while engineering a soft landing.  The U.S. Treasury needs to reissue all the 30 year money at these rates in order to reduce interest costs in the future.



Does it matter who wins this election?  Absolutely!  The election may be close but with probably three Supreme Court Justices retiring during the next four years, the outcome is vitally important to our country.

If Bush fails to win a second term, it means that a majority of voters in this country have voted for an individual that was dishonorably discharged for consorting with the enemy.  Character is not longer a value that this country believes in. 

If that happens, perhaps, I will start looking for another place to live.  For the Constitution and the values of our founders will have been trampled upon by the voters.  There is a story, often told, that upon exiting the Constitutional Convention Benjamin Franklin was approached by a group of citizens asking what sort of government the delegates had created. His answer was: "A republic, if you can keep it."

In closing here are two pertinent quotes from Ben Franklin,

"Our new Constitution is now established, and has an appearance that promises permanency; but in the world nothing can be said to be certain except death and taxes."

And another . . .

"They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety."


But then - 'Tis Only My Opinion!

Fred Richards
November 2004

Corruptisima republica plurimae leges. [The more corrupt a republic, the more laws.] -- Tacitus, Annals III 27

This issue of 'Tis Only My Opinion was copyrighted by Adrich Corporation in 2004.
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