Fasten your seat belts

One by one, the world's leaders rise. Solemnly, sincerely, they call for absurd measures - every one of which involves grand larceny. A few billion for this project...a few more billion for another. And not a penny of it out of the pockets of the great and good who, when not pompously grandstanding, are enjoying the caviar and champagne at Davos - usually, at someone else's expense. With a few notable exceptions, such as Bill Gates, none of those present has ever done anything but make the planet worse. They call for an end to world hunger - but none has planted a single turnip. They want to raise the Africans out of poverty - but who among them has started a business or built a bridge on that Dark Continent? They say they are for peace, but nearly everyone proposes some form of meddling in the affairs of others - almost sure to provoke an outbreak of violence at some point.

No, dear reader, these people are not doing good. They are doing very well - for themselves.

But, our beat is money; we have to keep reminding ourselves. And yesterday, the world of money seemed to stand still

The dollar is holding at $1.30 per euro.

The Dow is holding around 10,400.

Gold is holding near $425.

Meanwhile, the United States is holding its course to financial doom. And U.S. consumers are holding the bag!

[...]

The big news out of Davos was the speech we reported yesterday - Chinese economist Fan Gang told the world that the dollar's days are numbers. The greenback won't stop "devaluating," he said. So, China will look elsewhere to place its reserves.

America desperately needs China's cooperation. U.S. current account deficit is at a record high of about $650 billion; that is, it is greater than it was before the dollar fell. And the U.S. federal deficit is on course for a new record too - at about $427 billion for this year. And according to most recent reports, 83% of this shortfall is financed by foreign central banks. The overseas banks already hold more than $1 trillion of U.S. Treasury debt, $906 billion of which is just two places - Tokyo and Beijing.

There is a limit, said Alan Greenspan a few months ago, "to the willingness of foreign governments to finance U.S. current account deficits." Fan Gang seemed to be saying that the limit had been reached.
  The Daily Reckoning article

China's central bank denied Friday that Beijing plans to soon loosen the link between its currency and the U.S. dollar, though remarks by economists suggesting a change was imminent briefly shook financial markets.

A member of the monetary policy committee at the central bank, Yu Yongding, told journalists attending the World Economic Forum in Davos, Switzerland, that given the dollar's recent weakness, "now is the time to revalue ... We need more flexibility. That means revaluation."

However, an official in the People's Bank of China's information office said Friday that Yu was an academic adviser, not an official, and that his opinion did not reflect official policy.

"(Yu Yongding's) remarks are only his personal view, and the opinions of an academic. It does not represent the central bank's policy," an official in the central bank's information office said.

The official spoke on condition of anonymity.

[...]

Earlier this week at Davos, another prominent Chinese economist said Beijing has lost faith in the dollar's stability.

China's first priority was to broaden the exchange rate from the dollar to a more flexible basket of currencies, said Fan Gang, who as director of the National Economic Research Institute at the China Reform Foundation is also not a government official.
  Forbes article

The EU gained ground without the slightest help from its central bankers. Kurt Richebacher explains:

"During the past few years, there has not been the slightest effort in Europe to stimulate the economy with artificially low interest rates because we don't believe in this. It's not because we are stupid, but because we don't believe in it.

"Meanwhile, the Federal Reserve has boosted its deficit over this time by 7% of GDP. In Europe the deficit today is the same as five years ago."

Americans cut rates to increase consumption. In the span of four years, 2000-2004, consumption increased more than 100% of GDP growth. They actually consumed more than they made, with the extra consumption coming from imports. If you consume more than you produce, you have nothing left over to build factories, develop infrastructure improvements and make the kind of investments that lead to higher wages and real economic growth. Not surprisingly, real wages fell in 2004. Americans grow poorer.
  The Daily Reckoning article