The Paulson plan - violates the principles of American capitalism

Foreign Exchange Currency Rates : It doesn’t matter whether we approve of the $700 billion plan—Congress is not consulting us—but it does matter whether the market likes it. We say Kentucky Senator Bunning is right--it violates the principles of American capitalism. Forget whether it’s “socialistic”—that’s just a word with little real meaning in the US. But it means we do not really believe our system is valid. A loss of confidence in the system by the very people hired to oversee the system, the Treasury secretary and the head of the Fed—is extremely bad for the image of the US.

How can anyone trust a US security from now on except US government paper, and with the rising deficit, perhaps not even that?

The Paulson plan would raise the ratio of government debt to GDP to 70%, the highest since 1954, according to Bloomberg. Something named TD Securities Ltd. In Sydney says this number could drive the dollar to $1.95 against the euro. The firm claims to be able to show a correlation of the deficit ratio to the dollar.

We continue to believe that the Fannie/Freddie bailout and then the AIG takeover were motivated in large part by concerns over getting capital inflows from Asian and Middle East investors, including central bank reserve managers. Overnight there was a run on a bank in Hong Kong rumored (falsely) to have giant losses from Lehman, and Market News Singapore reports that investors feel swindled by Lehman-based derivative offerings. Well, too bad.

They were aiming for high yield, right?

We hear from Bernanke this morning starting at 10 am. Today will be interesting—let’s watch to see how and to what extent opposition rises to the Paulson plan, not least the urgency part. Congress is showing a commendable reluctance to be stampeded. We are suffering from the Chinese curse of living in interesting times. And speaking of the Chinese, what lesson are they taking from all this? That Paulson was speaking with forked tongue when he urged them to deregulate their own markets.

We say the US dollar cannot be favored in this environment. It seems not to be under much pressure at the moment, but just wait—unless we get more Buffett-style votes of confidence in the US system, the US system weak and being kicked while it’s down, and by the very people charged with supporting and defending it.

We would not go as far as to predict 1.95, but the days of 1.40 and the glimmer of hope for 1.35 are fading fast, even if crude oil were to fall again. At a guess, the dollar will reach the July high of 1.6038 within a week or two, depending on the outcome of the Paulson plan. Note that this $700 billion crisis is overwhelming the oil factor. If oil keeps rising, it’s another leg kicked out from under the dollar. Europe and G7 are clamoring to be heard and to have a voice in the outcome in the US.

This is going to be interesting—foreigners often have a sounder grasp of US principles and ideals than the citizens themselves.

Bye for Now

Barbara Rockefeller

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