The Disappearing Dollar

A lone, sane voice in Washington … on Alan Greenspan and empty political slogans.

Those who follow financial markets may be familiar with the term "strong-dollar policy," which is used by Bush administration officials and Federal Reserve Chairman Alan Greenspan himself. One might assume that such a policy entailed a course of action designed to strengthen the value of the U.S. dollar. However, if we judge Fed policy by Mr. Greenspan’s actions rather than his words, it appears we have a weak-dollar policy, a policy that erodes the value of your personal savings.

The "strong-dollar policy" is nothing more than an empty political slogan.

Strong-Dollar Policy: Not Indicative of Strength

The inescapable truth is that the value of the U.S. dollar has fallen over 30% in the past year, which to most people would not seem indicative of strength. There are several reasons for this decline, but the single biggest factor has been Mr. Greenspan’s relentless increase of the money supply. There are roughly sixteen trillion dollars in worldwide use today, five trillion more than when Greenspan became Fed chair. The law of supply is immutable: When dollars are abundant they are also cheap.

For much of our history a gold standard imposed discipline on U.S. dollar policy, since every dollar printed theoretically was redeemable in gold. Since the last links between the dollar and gold were severed in 1971, the dollar essentially has operated as an article of faith. Christopher Mayer, writing for the Ludwig von Mises Institute, states: "Faith that paper money itself was of any lasting value would have struck our forebears as patently absurd."

The problem is that faith can be shaken, and the precipitous drop in the dollar shows how investors around the globe are very concerned about American deficits and debt. When government policies in a fiat system are the sole measure of a currency’s worth, the currency markets act as a reliable barometer of how those policies are viewed around the world.

Politicians often manage to fool voters and the media, but they rarely fool the financial markets over time.

Strong-Dollar Policy: No Faith in US Economic Policy

When investors lack faith in the U.S. dollar, they really lack faith in the economic policies of the U.S. government. The Medicare prescription drug bill passed two weeks ago provides an example of this phenomenon – the day after the bill passed, the dollar dropped once again. Investors understand that the new entitlement will cost trillions over coming decades, trillions that will come from Treasury printing presses and further devalue existing dollars.

Ultra-cautious investor Warren Buffett is trading heavily in foreign currencies for the first time, demonstrating his lack of faith in the dollar. His predicament is simple: He holds billions of dollars, and cannot afford to sit by and watch the value of those dollars drop another 30%. By taking a position against the U.S. dollar, his actions speak volumes.

Unlike Warren Buffett, most Americans are stuck with their U.S. dollars. Average people, particularly those who depend on savings or fixed incomes to fund their retirement years, cannot abide the continued devaluation of our currency. A true strong-dollar policy would require constriction of the money supply and higher interest rates, both of which would cause some short-term pain for the American economy.

In the long run, however, such a correction is the only alternative to the continued erosion of our dollars.


Ron Paul
for The Daily Reckoning
January 6, 2004

Editor’s note: Dr. Ron Paul is a Republican member of Congress from Texas and perhaps the only voice in Washington still advocating "limited" government in the Jeffersonian tradition. He has delivered several stunning addresses before Congress in the year 2003, including the following:

"Sorry, Mr. Franklin, We Are All Democrats Now"

A version of The Disappearing Dollar appeared on Lew Rockwell’s site in early December.

What’s ahead in 2004?

We do not know; but we can guess as well as anyone.

You pay nothing for these guesses, dear reader; we hope they are at least worth the price.

But who knows?

"I think we have to face it," writes a DR reader. "You guys missed a huge market move over the past year. Yes we know all about the debt, dollar, etc etc etc. But the lost opportunity has been massive. Unfortunately, those of us who analyzed everything to death lost out huge.

"The gold move you gloat about was peanuts next to small caps that increased 5 – 10 -20 times their price a year ago.

"You fought the Fed and that was the biggest mistake."

So this is the thanks we get? We were right about the major trends — the dollar fell, gold and the euro rose, just as we said they would. Investors who followed our advice for the Trade of the Decade switched out of stocks in early 2000…and bought gold. They missed the entire downdraft of the stock market and are up nearly 50% on their gold.

Some readers are still not satisfied. They regret having missed out on the techs in The Great Moronic Rally of 2003. It was, after all, a year when the most benighted investors made the most money. While Buffett, Soros, Templeton, Rogers — not to mention the Daily Reckoning — were running for cover, investors who were dumb enough to buy biotechs without visible means of support made more than 6 times their money.

Making money without tech stocks, on the other hand, is a little like taking a nap without lying down on a nest of fire ants — it is not as exciting, but much more agreeable.

Besides, dear reader, the point of our advice here in the Daily Reckoning is not to make you rich. Wealth…without wisdom… is a burden and a trap. No, our aim is to not to make you money, but to merely to help you deserve it.

"We cannot guarantee success," said George Washington, "but we can deserve it."

And here we pause a moment — aghast at our own immodesty. As soon as we think we know something — we make fools of ourselves. And in the last few paragraphs we have admitted that we think we know not only the major trend… but the mind of God! The Trade of the Decade implies falling stock prices and rising gold prices for years to come. And how do we know when or how or who merits wealth? Isn’t that a matter for higher authorities to decide? Don’t the gods punish those who crash their parties and dare to trod on their turf?

Maybe. So we rush from the fear of arrogance to the cozy comfort of our own incompetence. Gold soared $8.70 yesterday. We still own the metal…and plan to buy more. But we wonder how we could have been so stupid as not to buy it the day before yesterday.

"Will gold continue to advance in 2004? Will the dollar continue to fall?" The questions were posed in a telephone interview yesterday.

"We don’t know," was our stock reply. "But we think we are facing a major crisis. While we can’t know exactly what will happen… or when, or how… the most likely outcome will be the collapse of the dollar — against gold. Gold is nature’s competition to paper money. Gold is what you want to own when paper money is in crisis."

"Noboby seriously doubts that the global cycle has turned and something of a boom lies ahead," writes Anatole Kaletsky in The Times of London. Mr. Kaletsky never spoke to us. Because we seriously doubt that a boom lies ahead. Our guess is that a bust lies ahead. A big bust.

Hardly anyone doubts that the dollar will continue to fall… and almost all expect the dollar decline to contribute to the world economic boom. Our guess is that the dollar will surprise everyone. It will rise, in response to the illusion of boom-like conditions. Then, it will begin to fall again. Faced with another 20% loss on their investment positions, foreign holders will panic.

Stick with the major trends, we urge readers. Avoid distractions and temptations. You may not make profits, but at least you will deserve them.

Over to Eric Fry, our man-on-the-scene in New York. [If you’d like to see Eric in action, he will be appearing on CNNfn’s "Market Call" from 9:00 AM to 10:00 AM this week on Thursday, January 8th and Friday, January 9th]…


Eric Fry in Manhattan…

– "No crisis!" says Ben Bernanke… and millions of American investors seem to agree. The outspoken — and somewhat wacky — Fed governor says that the dollar’s serial collapse is no problem at all… and certainly not a "crisis." During a panel discussion at the American Economics Association meeting over the weekend, Bernanke opined: "The depth of international financial markets and the integration of global financial markets means that the risk of a dollar crisis is quite low –  not zero – but quite low."

– The international financial markets are deep indeed…deep enough for the dollar to drown in. If the dollar’s 40% drop over the last two years is not at least crisis-like, what, we wonder, would qualify? A 60% drop? 80%? 99%?…One day, perhaps, Bernanke may find his poor, abused dollar at the bottom a monetary Marianas Trench – hopelessly submerged under an ocean of debt, trade deficits and fiscal mismanagement.

– But that unhappy fate — we are delighted to report — is a problem for another day. Today, Mr. Bernanke assures us, there is no dollar crisis. On Monday, the healthy-as-can-be dollar fell for the 15th time in the last 18 trading sessions. The dollar dropped 100 "ticks" to $1.2684 per euro from $1.2584 on Friday. The dollar also hit a fresh 11-year low against the British pound…Our American colleagues in the London office can scarcely afford a steak and kidney pie.

– But the dollar’s woes did not trouble stock market investors one bit. Buy orders flooded in from morning until evening, and by the closing bell, the Dow had jumped 134 points to 10,544, while the tech-powered Nasdaq had rocketed 2% to 2,047 – a new two-year high.

– Investors also tossed a few buy orders into the gold trading pits, as the ever-more-precious metal rocketed $8.70 to $424.80 an ounce – its highest price in 14 years! The gold buyers seem to differ with Mr. Bernanke about the severity of the dollar’s collapse. The yellow metal’s 50% rally over the last two years may not say "dollar crisis," but neither does it say "dollar confidence."

– The Bernanke Dollar is dropping against almost every commodity these days. Silver soared 28 cents yesterday to $6.25 an ounce – a new five-year high; copper jumped four cents to $1.083 a pound – a new six-year high; while palladium soared $31.20 to $842.50 –  a new 23-year high!

– Meanwhile, energy futures also jumped yesterday, thanks to forecasts of an artic chill descending upon the northeastern United States. The weather forecast calls for temperatures in Chicago to drop to 4 degrees Fahrenheit today, and to fall to zero by Thursday. Crude oil jumped $1.26 to a nine-month high of $33.78 a barrel, while natural gas surged 10% to $6.83 per million Btu.

– At the current quote, natural gas costs about 40% more than it did at this time last year. That’s not a crisis, perhaps…but neither is it painless. Several of your New York editor’s friends report that their monthly heating bills have become even larger than their wives monthly credit card bills.

– Trips to the gas station have also become quite unpleasant. Filling up the gas tank of an SUV now costs more than a sushi dinner for two. But these rising costs are little more than an annoyance…as long as the stock market is rising. In the Bernanke Economy, the S&P 500 is the coin of the realm. The dollar may crumble and commodity prices may skyrocket, but as long as share prices are rising (and homes values are trending higher), the lumps will continue spending money they don’t have on things they don’t need…and America’s GDP will continue to charge ahead.

– Furthermore, even if GDP should pause for an instant, Bernanke and the other Fed governors stand at the ready to continue debasing the dollar, if need be, to spur economic activity.

Translation: The gold bull market is not over.


Bill Bonner, back in London…

*** "Consumer Debt More than Doubles in Decade," reports the Associated Press.

*** Another news item tells us that capitalists are finally catching on. A study by U.S. Trust found that 79% of the rich — people who either earn more than $325,000 per year…or who have a net worth of more than $5.9 million — have come to distrust corporate America. Wall Street and the Feds make patsies out of the lumpeninvestoriat — and the rich too. The lumps are lured into debt and hopeless stocks. There is no way out. They can sell their stocks to a greater fool…but who is a greater fool than they are? And their debts? They count on the Feds to devalue the dollar to bail them out. But there is no guarantee that the Feds can control the value of the currency…or that lenders will take the loss.

In Marxist theory, corporations are expected to exploit their workers for the benefit of the capitalists — the rich owners. But in late, degenerate American capitalism, the workers get nearly all the money. Dividends are currently less than 2% — or considerably less than the current rate of inflation. Corporate managers set up stock option plans, bonuses, retirement programs, health insurance — all for the benefit of employees. In the end, the shareholder’s only chance of making money is the forlorn hope of selling the shares to someone who is even dumber than he is.

Eventually, stock prices fall to the point where an investor can get a decent dividend from his stocks. But by then, the public’s attitude has changed. They want nothing more to do with them. And the rich man’s trust fund manager tells him that stocks are history.

*** Another DR reader…another kvetch:

"You say there is nothing George Bush or Alan Greenspan can do to save our nation. This is not clever, it is not funny, it is not constructive, and it is totally inconsistent to say that there are many things the followers can do to better themselves, but nothing the leaders can do. What you advocate is individual initiative, but collective anarchy. It is ridiculous, and though you certainly stand out with your stance, it benefits no one. For shame. If there is nothing Greenspan or Bush can do, we do not need them, or any other leaders for that matter. "Of course there are things that can be done. Curtail corporate crime. Restore the justice of a truly progressive income tax system. Institute the fiscal sanity of an approach to balanced budgeting. Stop getting into phony, exploitive wars of imperialistic expansion. Respect our one-time allies instead of treating them like idiots or second class citizens. Pursue a middle east peace strategy that can be made to work instead of the current one which can never work. Encourage basic research into worthwhile endeavors like non-polluting energy (there are revolutionary technologies being suppressed by the energy cartel). Develop new products that benefit mankind, not just weapons, and sell them around the world. Show the world how to control its population and why it makes sense to do so. Stop excessive immigration into the U S in its tracks. Stop pitting people against each other in the name of religion, but in the cause of financial exploitation. Teach every school child about saving, finance, investment. Clean up our polluted environment and sell other nations the know-how and technology to do the same. Develop and produce low cost, life-saving drugs, and sell them around the world to benefit the living. Encourage creativity in developing new products and services, not just using financial subterfuges to create wealth. "Show some creativity. Stand for something. It is interesting and flip to talk about what is wrong with our society, and there is plenty, but, if you want to really be someone, and do something, tell us what George Bush and Alan Greenspan, and all the rest, can do to make this a better world. Don’t tell me there isn’t anything. To do so is just plain stupid, and from reading your incisive, clever letters, I know that you and those you quote are anything but stupid. Be your real selves for a change. You might actually enjoy the difference. Best wishes for 2004 (God knows we will need all the luck we can get)."

*** Of course, we reply, there are many things our leaders can do to make a better world, most of which involve undoing the efforts of previous leaders. But there is nothing they can do prevent what Nature has decreed. A super-boom must be followed by a super-bust. A rush into debt must be followed by a rush out of debt. You cannot have a spring without a winter…nor a Resurrection without a Crucifixion.

Here at the Daily Reckoning, we stand firmly with Fate…wherever that is. Que sera sera. And we recognize that sometimes things happen that no one wants to happen…and that are in no one’s interest.

*** And here’s a little something we picked up from Richard Russel’s always-delightful Dow Theory Letters site:

The interviewer is FORTUNE editor-at-large Brent Schlender. The title of the piece is "GURUS: Peter Drucker Sets Us Straight" To a question: Does the U.S. still set the tone for the world economy?

Peter Drucker answers as follows:

The dominance of the U.S. is already over. What is emerging is a world economy of blocs represented by NAFTA, the European Union, ASEAN. There’s no one center in this world economy. India is becoming a powerhouse very fast. The medical school in New Delhi is now perhaps the best in the world. And the technical graduates of the Institute of Technology in Bangalore are as good as any in the world. Also, India has 150 million people for whom English is their main language. So India is indeed becoming a knowledge center.

In contrast, the greatest weakness of China is its incredibly small proportion of educated people. China has only 1.5 million college students, out of a total population of over 1.3 billion. If they had the American proportion, they’d have 12 million or more in college. Those who are educated are well trained, but there are so few of them. And then there is the enormous undeveloped hinterland with excess rural population. Yes, that means there is enormous manufacturing potential. In China, however, the likelihood of the absorption of rural workers into the cities without upheaval seems very dubious. You don’t have that problem in India because they have already done an amazing job of absorbing excess rural population into the cities – its rural population has gone from 90% to 54% without any upheaval.

Everybody says China has 8% growth and India only 3%, but that is a total misconception. We don’t really know. I think India’s progress is far more impressive than China’s.