I've also said that it'll be the first time an empire gets taken out without a single shot being fired.

You watch.

Osama bin Laden :

"We are continuing this policy in bleeding America to the point of bankruptcy. Allah willing, and nothing is too great for Allah,"

CNN 11/01/20004

... a hint that another rate cut is coming (which in itself one would rationally think should be taken as a sign that the economy is in real trouble) ...

It's worth remembering that a stock surge, especially a sudden one, is almost as far from being an indicator of economic stability as is a plunge.

But that aside, the other factor to keep in mind is that declining foreign investment represents a lack of a very specific kind of confidence. Andrew Leonard alludes to this when he refers to national banks betting on the dollar's continuing value, and their subsequent anxiety — but not all central banks want dollars solely as a way to build investment value.

For instance the Chinese economy benefits tremendously from dollars remaining relatively scarce, and I'm sure China will be happy to keep the dollar-yuan balance as heavily in its favor as it can for as long as it can, regardless of whether the dollar is taking a bath compared to the euro. The last thing China wants is for American mass production to start becoming competitive in the world market again.

In fact, if it weren't for one glaring exception, a low dollar would represent a great opportunity for innovation. That exception is oil.

Apparently, a huge part of this is that everybody has stopped buying US debt. Would that not drive US interest rates higher? To attract more money?

Our interest rates have not jumped much. Why not? Why does the Fed keep cutting interest rates? Will this drive the US$ down to nuthin?

Is this a race to the bottom? Are wqe hoping low interest rates will help the purely domestic economy before they drive away all the foreign capital?

http://www.alleyinsider.com/2007/11/how-citi-merrill-hsbc-morgan-et-al-vaporized-billions.html

It is often forgotten that the number you hear when they tell you how the Dow Jones or the NASDAQ did is measured in dollars. If the dollar drops, and the market responds by going "up", the market cap of the Dow companies might just be remaining flat when measured in Euros. To the extent that the big companies in the Dow are multinationals, doing business all over the world, it should be expected that sometimes a company will do better than the dollar is doing.

It's unfortunate that chart doesn't go back to 98, because that would be the best point of reference. In any case, the data do not bode well, but this to me has explanations short of a total crisis of confidence in the US economy amongst our foreign creditors:

1) A fair amount of this can be described by the trouble in which the leveraged speculation community (i.e. hedge funds but also SIVs) finds itself. These heretofore huge players in the data, (though often times capitalized from US wealth, these largely exist for legal purposes in offshore vehicles, making their order flow appear to be foreign), they are now hurting as a collective. Or at least, they have to be- hedge funds were the largest buyers of CDO's (the instruments causing Citi and Merril to shed CEO's), out there- far more so than the banks. On that basis, one would expect their order flow to have unceremoniously shut down.

2) The credit community has been humming along since 1998 without any real serious problems (excepting the TMT fallout of ~ 2001 which was largely confined to telecom and US high yield) while HUGE segments of the bond market have ballooned overnight (CDS from nothing to around 40 trillion (!!), the mortgage market DOUBLED, most of which was private label and often times exotic, leveraged loans were increasing at quadruple digit clips, CMBS exploded such that MBS are now RMBS etc.). I suppose the world investment community is having something of a theodicy at the moment, trying to figure out whether the entire thing is a sham and basically where they stand.

3) Finally, the crisis to date has been totally US centric (credit markets everywhere are locked up, but expectations of default are not the cause per se). This is without precedent. However, the same conditions that exist in the US also exist in other regions, notably Eastern Europe, Australia, New Zealand and even the UK, and investment bubbles abound globally. It is conceivable that, in the eyes of some, the US may appear to be something of a safe harbor when (not if) the global ramifications of this are felt.

4) Plain and simple, the dollar can't go before the fall- i.e. before financial armageddon. It certainly won't be its cause, because the players involved always retain the capacity to manage the FX and all the incentive to up until the game is up.

That and all of the data issues inherent in that flows chart means I'm not sure we're interpreting this graph correctly. However, this does not mean it's not ominous. It is. The question for all when, as I believe will happen, the flows start to normalize, (probably following concerted central bank easing), will inflation explode. IMO, this, and of course the myriad other debt bombs, both USD and otherwise, that will soon threaten to detonate the way subprime has, are the other shoes waiting to drop...

When I ran across this article in the Herald Tribune, my first thought was of HTWW here at Salon.

"As towns go broke, subprime crisis hits Arctic Circle"

http://www.iht.com/articles/2007/11/28/business/bank.php

"A Norwegian brokerage that lost its license over its role in turning four remote towns around the Arctic Circle into victims of the U.S. subprime crisis said Wednesday that it would file for bankruptcy.

The main Norwegian financial regulator said that Terra Securities had violated the "good code of conduct" and failed to sufficiently inform four Norwegian municipalities of possible risks related to collateralized debt products that it had sold them before the credit crisis hit."

As news of this type gets around, you can bet every non-US investor is faced with the soft costs of investing in the US market. Does he want to go home and tell his wife that he put his money where that Norwegian town did?

- Dr. Mojo