Good Questions - Tough Answers
VIEWS FROM THE FUSE: GOOD QUESTIONS – TOUGH ANSWERS
Your editor has recently packed up her belongings and headed to the ‘Left Coast’ to work on our still-untitled documentary. Since we have taken a breather from doing interviews right now, this is the perfect opportunity to flush out our ideas and themes and start piecing this film together.
A theme that keeps coming up when we talk about important points in the documentary is the U.S. dollar and its position in not only the everyday lives of Americans, but in the world. Obviously, our floundering currency will play an integral role in the movie – after all, it is the underlying thread that ties many other topics – debt, deficits, the American consumer – together.
And this past week, the dollar continued to prove itself as a major issue…not just in our documentary, but worldwide. The U.S. currency is at near record lows against the euro, the British pound, the Australian dollar and the Chinese yuan.
A number of factors have played into the reserve currency of the world taking this significant hit: weak U.S. economic growth, the concerns raised by the crumbling housing market and the possibility of an interest rate cut by the Fed later this year.
But the larger question remains: is the greenback’s status as reserve currency threatened – and what will the impact be on America? We recently posed this exact query to former U.S. Treasury Secretary Robert Rubin in an interview for the documentary – and here’s what he had to say:
“It’s a good question, I understand the question, but it’s a complicated question…and I’m supposed to be saying this in a way that people watching this documentary are going to understand? Good luck,” he began, settling into his chair in the conference room at the Citigroup building in New York.
“At the present time, the United States has significant fiscal deficits and they’ll fluctuate depending on short-term circumstances, but in the long-term sense, we have significant deficits, they get substantially worse over time because of entitlement, and at the same time, we have very large trade deficits.
“At some point, these become a deep threat to our economy and to the global economy – and at some point, our political system is going to have to address this predominantly through putting in place a sound, long-term fiscal regime. One of the risks, and there are many risks in this combination of imbalances, we also have a very low national savings rate…[and] at some point people can lose confidence in the dollar. And if the global community lost confidence in the dollar, it’s conceivable that we would no longer be a favored reserve currency.
“That’s a very technical matter, but it could have enormous significance for our country. I don’t believe that it will happen for a while host of reasons. I believe we’ll remain reserve currency and I believe at some point, our political system is simply going to have to address these long-term fiscal issues. But it’s going to be very difficult to do it and it’s enormously in the interest of the American people that our political system address these issues before they’re a substantial difficulty rather than a response to substantial difficulty, but our political system has a tendency to respond more in response to difficulty than in anticipation of difficulty.
“Let me just add one more thought: the United States has many great strengths which put us in the position to thrive over time economically, but in order to thrive we have to address these issues, and if we don’t, then I think we could have serious difficulties.”
Let’s just keep our fingers crossed that the presidential hopefuls are paying attention…
The Daily Reckoning – Weekend Edition
April 28-29, 2007
Los Angeles, California
by Kate “Short Fuse” Incontrera
P.S. We still haven’t settled on a title for the documentary. Any ideas? If so, send them to email@example.com
— The Daily Reckoning Book of the Week —
A Maniac Commodity Trader’s Guide to Making a Fortune
by Kevin Kerr
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THIS WEEK in THE DAILY RECKONING: Excess and the American obsession with it revealed itself as a theme in the past five days of The Daily Reckoning. Read all about it, below…
Those Irresistible Hearts of Darkness 04/27/07
by Bill Bonner
“The world is currently reveling in excess. From China to Las Vegas, the constant exchange of money is getting more and more outrageous. Bill Bonner explains why investors may be setting themselves up for failure by entering into the ever-darkening hearts of some very volatile markets. Read on…”
Overcoming the Fear Factor 04/26/07
by Kevin Kerr
“It’s human nature to avoid or dismiss things that you don’t understand – tasks that you find daunting or subjects that you just can’t wrap your head around. Options trading, for example, made even our Maniac Trader’s knees knock together at one time…read on to see how he wrestled that fear and has since made options the most profitable part of his trading strategy…”
The Modern 1930’s 04/25/07
by Tom Au
“It has become generally accepted that the bursting housing bubble will have its consequences – but do we fully understand the effect it will have on the average cash-strapped American consumer? Tom Au shows how the nation’s latest Ponzi scheme could bring about pullback in living standards not seen since the Great Depression. Read on…”
The Fine Art of Living 04/24/07
by Dr. Mark Skousen
“If you’re too busy in your work, you don’t have time to learn new ideas, to discover new truths, to enjoy life’s little pleasures, or perhaps to pick a winning stock! Beating the market requires you to look in untrodden paths, and you need the free time to do it. Mark Skousen explores…”
Fed in the Land of Excess 04/23/07
by The Mogambo Guru
“The Fed doesn’t know how to do anything small – and the Mogambo never lets them do it without giving them a piece of his mind. See why this week, he wants to drag them down to The Mogambo Secret Kangaroo Court Of Vengeance (TMSKCOV). Read on…”
FLOTSAM AND JETSAM: While former Treasury Secretary Robert Rubin feels that the dollar may be able to pull itself up by its bootstraps if the proper measures are taken, GoldMoney.com’s James Turk thinks that the greenback may be doomed to fail. Read on…
The Dollar in Freefall
by James Turk
It has been a bad couple of weeks for the dollar. From its recent high of 83.10 on April 9th, the US Dollar Index has fallen to 81.53, a 1.9% decline. That may not sound like much, but it works out to a 32.7% decline on an annualized basis. Given that one presently earns only about 5% per annum in interest income on their dollars, the loss in purchasing power is obvious.
What’s more, the US Dollar Index is now trading at a 2-year low. It is only 3.9% away from its all-time record low of 78.33, made on September 1st, 1992.
The dollar is in a precarious position. It is in a freefall, which in itself is not new. This time, though, there is a difference.
It is important to note that the US Dollar Index is rapidly approaching its all-time low. That fact suggests the length and severity of the present freefall decline could exceed all previous examples. One must therefore ask, has the long anticipated final collapse of the dollar begun?
A collapse of the fiat dollar is inevitable. It is the principal theme that John Rubino and I put forward in our book, The Coming Collapse of the Dollar. The dollar is being mismanaged, just like all other fiat currencies before it. These currencies inevitably collapsed, so why should the outcome for the dollar be any different?
In my view there is no logical reason to suggest that the fate of the dollar will be anything but a collapse. Whether it will be like the Argentine peso several years ago or the Reichsmark in Weimar Germany or the collapse of dozens of other fiat currencies, it’s just a matter of timing, which is the only uncertainty. In other words, no one can predict when the collapse will occur. It may yet be years away, but then again, it is possible that the final collapse of the fiat dollar has already begun.
Meanwhile, gold and silver have both fallen back into support. Both of the precious metals remain in uptrends. Most importantly, both look ready to break above their multi-decade high set one year ago. So in the coming weeks I expect to see gold and silver exceed their May 2006 high.
Editor’s Note: James Turk has specialized in international banking, finance and investments since graduating in 1969 from George Washington University with a B.A. degree in International Economics.
He is the author of two books and several monographs and articles on money and banking. He is the co-author of “The Coming Collapse of the Dollar” (Doubleday, December 2004).
In addition, James Turk is the Founder and Chairman of GoldMoney.com. Since 2001, thousands of individuals and companies have used GoldMoney® to buy gold to protect their wealth from today’s financial uncertainties. Many of them have also found GoldMoney’s patented process of digital gold currency payments to be an ideal payment solution for online commerce.