A Serious Word About Mr. Dung's Dong

Until recently, the Vietnamese economy has been one of the most dynamic of all the emerging markets. That is, until they followed in America’s footsteps, and made a potentially fatal error for their currency, the ‘dong’. Bill Bonner explains…

"I, Franklin D. Roosevelt, President of the United States of America, do declare that said national emergency still continues to exist and pursuant to said…"

With those mealy words, America’s Depression-era president ventured from bad luck into treachery. The Executive Order he issued on the 5th of April 1933 confiscated Americans’ private holdings of gold, then valued at $20.67 per ounce. Then, in January, 1934, the U.S. president fixed the price of gold at $35. All of sudden, Americans’ dollars had been devalued by 69.3%.

Whether this act of nationwide larceny did the economy any good or not, we cannot say. It was not until after World War II that the economy fully recovered the spring in its step. And U.S. stock prices didn’t return to their ’29 highs until 1950.

But there is hardly an act of government so foolish or so maladroit that subsequent politicians won’t provide an encore. This week, the government of Nguyen Tan Dung moved to center stage. Vietnam had recently become the world’s largest importer of gold bullion. Investors and householders bought the yellow metal for the same reason people always have – as a way to protect themselves from paper. The paper at issue is called the "dong," the official currency of the Socialist Republic of Vietnam. Lately, the dong has been losing value against consumer prices at the rate of 25% per year.

A year ago, the typical Vietnamese investor might have turned to the share market for safety…and growth. But Ho Chi Minh’s stock exchange fell every single day in May and is down nearly 60% since January. Or, he might have bought property. Alas, the recent downturn has hit Hanoi property like Richard Nixon’s B-52s. Apartment prices in commercial centers, according to Morgan Stanley, have fallen in half so far this year. How about the dollar, another common refuge from shady money in sunny places? The dong has stayed fairly close to the dollar; but it must have felt as thought it was handcuffed to a leper. Since the Roosevelt era, the dollar has sunk from 1/20th of an ounce of gold down to 1/1000th. In dong or in dollars, the average price of gold so far this year is 250 above the average price in the same period last year – a loss of 37% in the value of the paper currencies.

But a year ago, the whole world was a sunnier place. Vietnam was so blessed you needed to wear sunscreen even indoors. It was the "next Asian miracle," with growth rates of more than 7% for the last decade. "Young, prosperous, and confident," was how The Economist described it. Wages were barely half those in China. And productivity was growing faster. Diem Bien Phu and the tiger cages had been forgotten; foreign investment was rolling in like new Mercedes off a transport ship.

But then, the monsoons began. And nowhere have the rains come down harder than in the streets of Ho Chi Minh City. The Vietnam stock exchange is the world’s worst performer so far this year.

The Vietnamese have always admired Americans. When Ho Chi Minh declared independence for Vietnam in 1945, after the August Revolution, he plagiarized directly from Thomas Jefferson: "All men are created equal," he began. "They are endowed by their creator with certain inalienable rights; among these are life, liberty and the pursuit of property."

No wonder the state bank of the Annamites handled this latest crisis just as FDR and Richard Nixon managed similar ones in the United States. FDR reneged on America’s historic obligation to its own citizens; after 1933, they could no longer redeem their paper money for gold. Richard Nixon stiffed the foreigners in 1971; henceforth, if the French wanted to trade their dollars for gold they were out of luck. Now cometh Mr. Dung, putting the gold importers out of business. He "temporarily" withdrew licenses for further imports, the FT reports.

In years past, if the U.S. economy sneezed, an Asian exporter like Vietnam would come down with a cold. Now, it’s Mr. Bernanke’s quack medicine that staggers the foreigners.

The problem for Vietnam is no longer that it is so backward, but that it is so forward. All nations must pay, more or less, the global price for rice…and bear the consequences of Mr. Nixon’s dollar-based financial system. But some are more vulnerable than others. With imports and exports equal to 160% of GDP, Vietnam has one of the world’s most globalized economies. So, when the Fed tries to stimulate the U.S. economy with loose credit, the extra liquidity drives up prices faster in Hanoi than in Houston.

The IMF puts average inflation worldwide at 3.9% for ’07 and 4.7% for ’08. But emerging markets suffer higher rates of inflation – almost 12% says the IMF. The reason for this is simple enough: emerging markets are big importers of raw materials, which they turn into finished products. And unlike the United States, their economies are still running hot – which puts upward pressure on labor rates. Also, food is nearly a third of family budgets in emerging markets; in the U.S. and Europe, it is only half as much. Since commodity prices and food have soared in dollar terms, so has the cost of living.

"Vietnamese investors have taken a rational decision that this is a hedge against higher inflation and a weak dollar," said a director of Dragon Capital, based in Ho Chi Minh City, to the Financial Times. The Vietnamese, seeing the handwriting on the wall, bought so much gold, imports of the metal into Vietnam more than doubled in the last year. While neither Americans nor Vietnamese can still redeem their paper currencies for gold at a fixed rate, up until this week, they could both trade in their dongs and dollars for gold, at a moving rate. Investors everywhere might want to make that rational decision too – while they still can.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

June 27, 2008 — Paris France

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now.

Yesterday, there were more ghost sightings. Many analysts and commentators thought they saw the spectre of the ’30s. Others could have sworn it was a poltergeist from the ’70s.

The U.S. stock market got smacked down yesterday – ending the day with a loss of 355 points on the Dow.

The proximate cause of this punishment, according to the papers, was yet more bad news from the oil market. The oil pot bubbled up yesterday. The price of crude rose more than $5 to close at its highest point ever – $139.

Hey, where’s all that cheap oil the neo-cons promised when they invaded Iraq? We seem to recall three major routes to the war. First, of course, was the high road – we were going overthrow the wicked Saddam Hussein; the Iraqis would kiss our feet and become good democrats; the world would be a better place for it.

Second, there was the hard road – where the world’s leading hegemon shouldered its imperial responsibility by dutifully eliminating weapons of mass destruction, establishing a base of freedom and military force in Mesopotamia; as a result, the world was supposed to a safer place, remember?

And then, there was the low road – where if we could knock off Iraq’s legitimate leaders, we would have the country’s oil to ourselves; we could pump up the world’s supply of oil and lower its price; the world would surely be more prosperous as a consequence.

But all the roads led to Hell. (More below…) And today’s news tells us that 75% of Americans blame George W. Bush for it.

Wait a minute. That’s a lot of blame to lay on single man. It doesn’t seem fair. Poor George W. is getting the highest DISapproval ratings of any president in history. He’s dissed because he got us into the Iraq War…he’s dissed because oil has gone up 40% this year…he’s dissed because houses are falling in price…and he’s even dissed because inflation is increasing.

We hate to kick a man when he’s down. But we like kicking George W. Bush so much, we’ll make an exception. Better yet, we’ll prop him up…just so we can have the pleasure of kicking him down again.

Let us make one thing perfectly clear; as another disgraceful ghost of the ’70s would put it, all these problems are not the president’s fault. Let’s face it, invading Iraq seemed like a good idea at the time – at least to most right-thinking Americans. And as for the price of oil, who could have imagined that all those people in the East would start using so much of the stuff? And who could have imagined that the Iraqis would be such meatheads as to drag this war out so long…and make such a mess of their own most profitable industry? Well, anyone might have, but we’re talking about George W. Bush.

Yes, poor George II lacked imagination. But is it his fault that houses are going down in price, or that Americans have too much debt, or that when the going was good, Wall Street went too far?

Meanwhile, our favorite metal seemed to take advantage of all the commotion yesterday to sneak up a full $32.

Before 1935, you could have bought a whole ounce and a half of gold for that money. Today, you get 1/27th of an ounce. Of course, you could have bought the whole Dow for the amount the Dow fell yesterday, too. And, not forgetting the black goo, you could have purchased a barrel of oil for yesterday’s price increase.

As to the ’30s, the ghost apparently spooked Wall Street…and then flew off to scare ordinary people coast to coast.

"More Pain Seen for US Banks," reported the International Herald Tribune.

"Low rated borrowers squeezed out of debt markets," the Financial Times followed up.

"Fears grow of a new stage of credit crisis," the FT went on.

Homeowners continue to get slapped around. From California, the latest report says the typical house is worth only about two-thirds as much as it was two years ago. Nationwide, houses are down for the first time since the Great Depression…with the go-go markets of Miami, Las Vegas and Washington, D.C. area, hit hardest.

With house prices falling so much, you’d think that fewer people would be left without roofs over their heads. Not so. USA Today tells us that the ranks of those with no roofs over their heads are swelling with "new faces" of those who hitherto had passed for normal, folks-next-door.

Among those most haunted by the spectre of the ’30s are the people who were always closest to that era – old people. They’re going broke faster than any other age group.

What is driving these fossils into the poor house? We can guess. They live on fixed incomes. While the ghost of the ’30s lowers the price of their main asset – their houses – the ghost of ’70s inflation is making their bare lives more and more expensive.

Everyone is driving less, as a consequence of higher fuel prices; but these graybeards didn’t drive very much anyway.

Everyone is cutting back on air travel; but even before the price increases, these antiques didn’t get into the air very often.

Everyone is trimming his budget, taking out the whimsical and witless spending; but old people often don’t have much left in their budgets but the necessities.

They’re in a classic ’70s trap – hard against the rock of fixed income, crushed by the boulder of rising prices.

Yesterday, the CRB commodity index rose to a new record high – at 595.

"Buffett says inflation is exploding," according to CNNMoney.

What can people do? A report in today’s news tells us that many are "delaying health care." Probably a good move for the oldsters. If they put it off long enough, they won’t need it at all.

You could hang George W. Bush for inflation too. It would be fine with us. He let government spending get out of control. "Deficits don’t matter," said his #2, Dick Cheney. More new federal spending and US financial commitments were added in the Bush years than under all the rest of America’s presidents put together; and more new money was created while George W. Bush was president than in all the years since the Declaration of Independence combined. Legally, we don’t know if that charge is enough to hang a man. Besides, it seems extreme. In the middle ages, if the keeper of the mint allowed monetary inflation, the king had him castrated. That seems like punishment enough.

Buffett says he is supporting Obama.

*** Bill Gates retired.

*** Now it’s the winemakers who are "on the rampage," says today’s paper. In Montpelier, France, they burned cars and smashed up supermarkets.

What’s their beef? Same as everybody’s; they say they can’t make any money. Their costs are rising faster than their incomes.

Well, at least they can’t blame us. Last night, for example, we went to dinner at a restaurant in the Palais Royale. We had a black risotto (made from the squid ink) washed down by two bottles of Bordeaux.

What a lovely evening.

"This is the sort of night you wait for all year round," said a colleague. "It’s almost 11 o’clock and it’s still fairly light out…the temperature is perfect…and here, in the Palais Royale, it’s as if we were in a painting."

We were dining outside, under the linden trees. The fading light reflected off the old stone walls of the Palais…children played in the park next to us…

…and we gave the wine industry our full support.