PUBLISHER’S PERSPECTIVE
The Financial Crisis:
Finding the Bottom
By David Whitehead
“The recession is over!”
So proclaimed our perpetually upbeat sales manager as he saun-
tered into an early morning meeting in the spring of 1994. The au-
thority he relied on to substantiate this dubious claim was an overly
optimistic news report. His dutiful employees, including myself,
didn’t quite know what to make of this. We were still encounter-
ing enormous resistance while good customers continued to call on
us to advertise their “going out of business” sales. This depressing
stream of new business predicated on helping long-time companies
liquidate their inventories in short order continued for some time.
In fact, the national recession was officially over by the time Bill
Clinton entered the White House in 1992. However, defense cut-
backs following the 1991 Gulf War kept the pain lingering in the
South Bay for several years. Most businesses didn’t see real prosper-
ity take off again until 1997 when the dotcoms and a newly revital-
ized real estate market moved things up again. We had to wait for
the recession to end and look back at the historical data to know
where the bottom that mattered actually was. And I expect we will
have to do that again in a few years when things settle down. Per-
haps asking, “When will we find the bottom?” is the wrong ques-
tion. Instead we should ask, “What is the bottom?”
The “bottom” in an economic downturn is the point when enough
money has been eliminated from the economy from interest paid
on current and previous debts for the maestros of finance to orches-
trate another money bubble to move things up again. That’s what
the dotcom and real estate booms were really all about. And not
surprisingly, both of these booms crashed as quickly as they rose.
What’s different this time is the economy has become so bloated
with debt that government officials and central bankers are hor-
The modern U.S. economy relies on
foreign investment to provide the cash
necessary to run the financial and service
sectors where most Americans earn
their living. ..The next four decades will
require something entirely different that
probably won’t involve our precious
“dead presidents.”
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rified to let the economy find the bottom on its own. Hence the
unprecedented waves of multi-billion dollar bailouts and stimulus
packages created out of thin air.
If “bottom” is supposed to mean the lowest point the economy can
fall, then what we are looking for is not really a bottom at all. It’s a
low point in a continuous cycle that has had many low points. But
it certainly is not the lowest point attainable. That means it is not
inconceivable for the aggregate burden of debt to create the kind of
“bottom” that is really a precipice for a greater fall. Could this be
the bottom tantamount to Wall Street’s greatest nightmare? If the
economy ends up where it appears to be going, the answer is a re-
sounding “yes.” However, the same maestros of finance who brought
us to this point have shown remarkable creativity in developing new
economic models flashy enough to perpetuate lucrative business cy-
cles for decades. The current model is undoubtedly reaching its end.
So what could they do to save us from our impending oblivion? It
certainly can’t be another stimulus that can never be supported by
our economy. Or can it?
Spring Blooms Uncertainty and Special Drawing Rights
The only thing that bloomed this spring was more uncertainty.
The first quarter of 2009 saw multi-billion dollar bailouts, reversals
of fortune for global manufacturers and desperate anticipation for
this economic crisis to find its “bottom.”
However, consumer confidence soared in May as the Obama ad-
ministration’s $787 billion stimulus packages started to take hold—
at least in people’s minds. An industry group called The Conference
Board told Reuters in late May that its index of consumer attitudes
jumped to 54.9 in May, up from a revised 40.8 in April. This is well
above earlier forecasts centered around 42.0. This represented the
biggest one-month jump since April 2003, attributed to belief at
the time that the Iraq war was coming to a rapid conclusion. How-
ever, does this mean a genuine recovery is in progress?
Death and taxes are not the only things in life that are certain.
We forget about interest due on the money we create through bor-
rowing at the central banking level. That means the $787 billion
stimulus is certain to lead to an even deeper bottom to be averted
by, well, another multi-billion or perhaps trillion dollar stimulus the
economy could never hope to support. This is a bad habit we just
can’t seem to break.
Does this mean the financial judgment day is close at hand? Can
we expect to see Seven Horsemen from the Bank for International
Settlements appear to reveal our final dispensation? The best finan-
cial experts cannot agree on this point. However, it would behoove
us to examine some alarming events that have recently taken place.
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 Special Drawing Rights Paint Bleak Picture for the Dollar
The G20 nations recently authorized the International Monetary
Fund, the post-war global banking house run by Europeans, to in-
ject $250 billion into the global economy using an obscure mecha-
nism called “Special Drawing Rights.” SDRs bypass the leading
reserve currency to instead issue funds based on a basket of major
world currencies. This relic of the post-war Bretton Woods agree-
ment is a tool that has “lain dormant for half a century.”
In effect, SDRs create a super global currency to help relieve the
financial crisis. But wait a minute; don’t we already have a super
global currency? Well since the end of World War II at least, we did.
It was called the U.S. dollar. Before that, it was the British pound.
And as long as the dollar keeps its official designation as the world’s
key reserve currency, it technically is the global currency of choice
for international settlements. In fact, despite the dollar’s rapid de-
cline, 64.5 percent of international settlements are still transacted
in dollars.
However, SDRs are a serious challenge to the status quo because
they decrease global investment in U.S. dollars. This is not a ho-
hum financial detail. It could be catastrophic for the nation’s econ-
omy if the dollar loses its special status. The modern U.S. economy
relies on foreign investment to provide the cash necessary to run
the financial and service sectors where most Americans earn their
living. The last 38 years of deindustrialization made running the
economy on foreign debt business as usual for the United States.
The next four decades will require something entirely different that
probably won’t involve our precious “dead presidents.”
China has been pushing hard for SDRs to assist it in dealing with
its “dollar glut” created by the massive imbalance in foreign trade.
That means it would no longer be obliged to reinvest these excess
dollars back into the U.S. economy. I know many people have the
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misconception that China has accrued most of America’s wealth.
The reality is that it is addicted to our currency to keep its own
economy from collapsing, and it does hold most of our foreign debt,
which may never be repaid.
Remember, China created an enormous monster it needs to feed
with a currency much stronger than its own. If dollar dope won’t
cut it anymore, China will turn to the financial pushers in Europe
willing to service its habit. If this sounds like the 18th Century opi-
um trade reemerging in another form, you’re not far off.
And don’t forget, this is the same monster that produces just about
everything we use while Chinese workers earn less than a dollar
an hour in our money for their efforts. In some ways, the Asian
economies are worse off than we are. But the imbalances are more
to blame than policies of any particular nation state that is trying to
cope with the situation.
Could SDRs signal the demise of the U.S. dollar? This of course
depends on how and to what extent they are used. However, it is
generally agreed the dollar can’t retain its value if foreign investment
flees on a large scale. And the Achilles Heel of foreign investment is
debt. That’s why the ability of central bankers and the US Treasury
to deliver bailouts to deal with the financial crisis won’t address the
underlying reasons why the financial system continues to collapse.
The world’s nations cannot go on indefinitely investing in a cur-
rency so heavily laden with debt that it is no longer a sound invest-
ment by any practical economic standard. The paradigm is shifting
because it must. But what form will the new global economy take?
Read the column: “The Empire With the Invisible Throne” (page
16) for a deeper perspective.”n
David Whitehead is the Publisher of Business Insider Magazine. He
can be reached by email at Publisher@BusinessInsider.us.
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