Red October looms for Abhisit and the US dollar

Published on September 4, 2009

EVERY MONTH is the same, except October, Mark Twain warned us.

You may need to keep an eye on the US financial system next month. At the same time, you should closely follow signals from Prime Minister Abhisit Vejjajiva, who will come under pressure to dissolve Parliament.

Next month, US financial institutions will have to repay their debts owed largely to foreign creditors. The amount is at least US$5 trillion (Bt170.5 trillion). Will the US institutions, which have trillions more in debt obligations, be able to roll over their debts? I am not sure about this. Then the US banks may default. But the US banks will not go down easily. They will turn to the Federal Reserve's printing press. But the Fed has already pumped more than $2 trillion into the US financial system to keep it alive, otherwise it would have collapsed in October last year. The Fed also plans to spend another $1.7 trillion to purchase US government bonds and corporate paper to nurture the liquidity in the financial system.

The question is whether the Fed can pump $5 trillion or more into the US financial institutions. Will the financial markets tolerate the Fed's printing of $5 trillion or more? The fresh liquidity going into the US banks will disappear in a hurry because the creditors are knocking at the door.

Can he pull off the economy? No, we can't.

In 1997, Thailand collapsed because foreign creditors suddenly withdrew their dollar credit from Thai banks. Thailand went under and had to seek an IMF bailout because capital was flowing out of its financial system en masse. Then investors and creditors were concerned about the deteriorating asset quality of Thai banks and more importantly they did not have confidence in the Thai exchange-rate system. After the July 1997 currency devaluation, Thailand continued to suffer from bleeding in the ensuing years. But it was saved by the export surplus and, to a lesser extent, the IMF credit line to shore up the Bank of Thailand's foreign-exchange reserves.

Now the US is facing exactly the same predicament. If the foreign creditors want their money back - and they will want it back because they no longer have confidence in the US dollar - the US banks will not have the money to make the repayment. Most US bank loans are stuck in real estate and other consumer loans, which have already become rotten. If the Fed hands out trillions of dollars to the US banks to repay the debt, it will come under a sustained political attack. The people on Main Street are suffering while the bankers' need for bailouts never seems to end. On the other hand, if the Fed were to print more dollars, it would destroy the value of the dollar, as Warren Buffet has warned.

In effect, the US financial system is locked in a box, with no way out. Without a bailout, it will crack. With a bailout, the value of the US dollar will be destroyed.

US won't be able to export its way out of the crisis because it is a debt-driven economy. It won't be able to seek an IMF bailout because the IMF does not have the money.

This is basic financial economics. Thailand has, I hope, learnt the lesson. But the damage in the US financial system will be several hundred times larger than what the Thai financial system experienced in 1997-1998. It is no wonder that Russian Professor Igor Panarin has shocked many by predicting that the US will start a process of disintegration by November this year. He knows what he is talking about.

"Today I received another confirmation that the collapse of the dollar and the US is inevitable. Japan's Democratic Party won the election, and I'd like to remind you that its leader [Yukio Hatoyama] has the snubbing of the dollar among his economic plans. In plainer words, he plans to transfer Japan's monetary reserves from US dollars into another currency. The move will accelerate the dollar's exchange slump as early as this November. Disintegration will follow shortly," Panarin said on Tuesday. He added that next year China would also begin to massively dump the dollar and that Russia would begin to sell oil and gas for roubles. (See http://www.infowars.com/russian-professor-collapse-of-america-could-begin-in-two-months/)

Returning to Thailand, since Abhisit is facing pressure from his coalition partners and all the other political problems, he might need to dissolve Parliament by October. Between now and then you will have to keep your eye on September 19, when the red-shirts plan to stage yet another rally to mark the third anniversary of the coup that toppled the Thaksin government. Abhisit will be in the US during that time at the UN and G-20 meetings, and will give a speech at Columbia University. It sounds as if the red shirts are planning revenge.

My warning to Abhisit: Sir, you must avoid the jinx by not staying at the Grand Hyatt Hotel in New York, where Thaksin stayed and enjoyed his role as prime minister before quickly discovering that he was an ex-prime minister after the coup back home was staged.