The Three Trillion Dollar War

Apple s stock capitalization has soared, and it became the first trillion dollar company.

It was hard work engineering a five trillion dollar deterioration in America s fiscal position.

Fully two thirds of that total around 2 trillion is invested in dollar based assets, largely US Treasuries and agency securities (i.e., Fannie Mae and Freddie Mac).

US debt exploded to nearly 12 trillion ( 16.7 trillion if intragovernmental holdings are included).

Finally, investors are adding nearly a trillion dollars worth of net dollar securities to their positions every year, thus increasing the risk of continued dollar accumulation.

Especially as the dollar lost its sacred place as a store of value under the Bush administration, rebalancing these multi trillion dollar portfolios entails selling off dollar holdings, contributing to the dollar s weakening.

For example, U.S. farmland had a total value of 1.9 trillion in 2010, compared with 16.5 trillion for the US stock market and 16.6 trillion for the US housing market.

Indeed, since late 2003, when the Fed first cut interest rates to 1 , triggering the US housing bubble, dollar reserves in emerging markets have increased six fold, reaching 7 trillion by 2011.

Estimates of the losses on US loans and securities range from under 1 trillion to almost 4 trillion.

The US deficit for 2010 is roughly 1.3 trillion.

First, a trillion dollar bailout package in May prevented an immediate default by Greece and a break up of the eurozone.

Official foreign exchange reserves will soon reach US 2 trillion.

For this, the US alone spent up to 3 trillion.

The Financial Stability Board has estimated that total global shadow banking assets in 2011 amounted to 67 trillion, with the US accounting for 23 trillion, the eurozone for 22 trillion, and the United Kingdom for 9 trillion.

But I read this fact the other day, that one trillion seconds equals 32 thousand years, so if you think about that, the context, the casualness with which we talk about trillion dollar bailout here, and trillion there, we are stacking ourselves up for long term leverage.

Annex I, table 1 US dollar statements

In the two decades that followed, America s debt usually was around 3 trillion, rising or falling with the exchange rate of the dollar.

Japan, China, and other export oriented East Asian economies are indeed eager to keep the value of the dollar relatively high, and their central banks have piled up close to 2 trillion in dollar denominated assets.

Another Fed governor, Jeremy Stein, has pointed out that foreign banks have dollar liabilities of roughly 8 trillion, much of it short term wholesale funding.

The weaker dollar reduces the US standard of living.

My latest estimates are 3.6 trillion in losses for loans and securities issued by US institutions, and 1 trillion for the rest of the world.

The US Defense Department has valued Afghanistan s untapped mineral deposits at 1 trillion.

Chinese demand for Treasuries has enabled the US to increase its government debt almost threefold over the last decade, from roughly 6 trillion to 16.7 trillion.

Moreover, the Lebanese pound is pegged to the US dollar.

The dollar is declining because only a more competitive dollar can shrink the US trade deficit to a sustainable level.

It is said that the International Monetary Fund, which earlier this year revised upward its estimate of bank losses, from 1 trillion to 2.2 trillion, will announce a new estimate of 3.1 trillion for US assets and 0.9 trillion for foreign assets, figures very close to my own.

Indeed, the US remained the world s premier creditor nation until 1986 1987, when it became a debtor nation again. In the two decades that followed, America s debt usually was around 3 trillion, rising or falling with the exchange rate of the dollar.

NEW YORK A year ago, I predicted that the losses of US financial institutions would reach at least 1 trillion and possibly go as high as 2 trillion.

For now, the US dollar remains the most important international currency.

Indeed, even when problems originate in the US, the dollar strengthens.

Fewer foreign purchases of US assets again imply a weaker dollar.

The exchange rate was approximately Rp 9.000, to One US Dollar.

These inflows are expected to top US 1 trillion in the not so distant future.

China s existing portfolio of some 3 trillion worth of dollar bonds and other foreign securities exposes it to two distinct risks inflation in the United States and Europe, and a rapid devaluation of the dollar relative to the euro and other currencies.

Moreover, as Bilmes and I argued in our book The Three Trillion Dollar War, the wars contributed to America s macroeconomic weaknesses, which exacerbated its deficits and debt burden.

Meanwhile, many of these gases need to be curbed because of their wider environmental impact on public health, agriculture, and the planet s multi trillion dollar ecosystems, including forests.

One shudders to think what lessons the US financial sector will draw if, after the multi trillion dollar bailout, there are only superficial, toothless reforms. And will China s coastal export interests again prevail in exchange rate policy decisions, at the expense of poor inland consumers?

Do people think it is easy for a 12 trillion dollar economy to spend beyond its means year after year just to prop up other countries reputations for stability?

Have those who pushed deregulation ten years ago learned their lesson? Or will they simply push for cosmetic reforms the minimum required to justify the mega trillion dollar bailouts?

The net effect will be a construction shortfall in the US of at least 1.7 trillion.

It is the largest bank in the United States, with total assets of US 2.57 trillion.

One answer, of course, is a complete collapse of the US dollar.

Unless the US economy improves its trade balance, the dollar will fall.

But the US cannot improve its trade balance unless the dollar falls.