A Curious Divergence

This could be important: the dollar has NOT gained from the unrest in the Arab nations. People no longer seem to see the dollar as a haven of safety. Instead, they turn to gold…

Watch this space. Because now, both good news and bad news send gold higher.

Smart central banks are buying gold. Smart investors are buying gold. Smart businesses and hedge fund managers are buying gold.

The smart money is buying gold. But the dumb money – which is most of it – is still against gold. It doesn’t understand that monetary systems are temporary…that they ALL fall apart eventually…and that, when they do, people turn back to real money – gold.

Sooner or later, the dumb money will catch on too. We are probably still years away. (Though it is impossible to know for sure…)

Dollar vs. Gold after QE2

One thing we know already is that the dollar and gold parted ways last summer, right about the time Ben Bernanke stood before the Grand Tetons at Jackson Hole and announced his grand design to continue debasing the dollar until something good happened.

William McChesney Martin, Fed chief during the Eisenhower years, used to say that the Fed’s job was to “take away the punchbowl” when the party started to get out of hand.

Times have changed. Now, the Fed has no intention of taking away the punchbowl. It’s just running out to the liquor store to buy more gin!

What’s changed?

Well, a lot of things. But one of them is simple. The economy of the Eisenhower years was a healthy economy. The party could get out of hand then. Because it was a real party. There was something to celebrate. The US made things and sold them at a profit. Wages rose. With rising incomes came increasing purchasing power…which gave US industry more customers…with more money to spend.

Now, we’ve entered a new phase. The party’s a flop. It’s a fraud. A bunch of stuffed-shirt zombies are standing around with drinks in their hands. Listening to awful music. Talking a line of guff. And no one is listening.

The largest group of consumers – the boomers – were born in the Eisenhower years. Now they’re retiring. They’ll no longer be contributing to the nation’s wealth. They’ll be subtracting from it…spending their savings…and looking to the next generation to provide healthcare and Social Security payments.

And what has become of US industry? It is getting better, say the papers. But it is only a shell of its former self…only able to compete in certain narrow areas. The Chinese make more cars. The Germans make better cars. And the Indians make cheaper cars. What’s left to make? Cars “Made in America.”

General Motors, the world’s best, biggest, and more admired corporation when Ike and Dick were still clicking, went heavily into the finance business during the Clinton administration. Then it went broke…and got nationalized.

And America’s top graduates too…shifted from industry in the ’50s, to marketing in the ’60s…to advertising in the ’70s…to tax accounting in the ’80s…to investing in the ’90s and financing in the ’00s.

And now the biggest group of them is getting ready to knock off…to retire…to enjoy the good life…

But wait. How can they enjoy the good life? They don’t have any money?

Remember those numbers we cited last week? Only one in 10 – or something like that – has enough money in his 401k to permit him to retire in the style to which he’s become accustomed.

So what’s he going to do?

Let us be the first to tell you: his standard of living is going to go down. And not just retirees…but working Americans too…

Why? That’s what happens when you borrow too much. You have to pay it back somehow.

Most likely Americans will see their incomes and accumulated wealth fall along with the dollar. Yesterday, we reported a Wall Street Journal opinion that the dollar would fall 20% as it ceased being the world’s only reserve currency.

That alone would wipe out a fifth of Americans’ global purchasing power.

But it could be much more. Just wait. The trap only chaffs now. Wait until it digs into the flesh…and then the bone. The more the feds struggle against it, the tighter the trap becomes. They run budget deficits. They print money. They bailout…and lend money below the rate of consumer price inflation

Of course, it’s not just Americans. The US, Britain, Ireland…and much of the rest of the world…are all in a Great Correction. Their standards of living are going to be corrected…

…lowered, that is.


Bill Bonner
for The Daily Reckoning

The Daily Reckoning