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US dollar: Prepare for a prolonged devaluation


Scott Boyd

A foreign currency broker in Tokyo drinks water under an electronic board displaying a graph of the Japanese yen’s exchange rate against the US dollar Oct. 25. The dollar fell to a 15-year low against the yen, drawing ever closer to its postwar record low of 79.75 yen set in 1995. The dollar looks set for a prolonged slide in value. Kim Kyung-Hoon/Reuters

US dollar won’t fall to peso level, but three’s a strong possibility the dollar’s slide will last well into next year.

Those nagging whispers warning that the United States is heading for an Argentina-like currency crisis are getting louder. The prospect of a prolonged devaluation of the US dollar is just one more challenge in what has already been a difficult period for savers and investors. Have we really reached the point where the greenback is in danger of becoming an “also ran” currency?

The likelihood that the dollar will suddenly lose most of its value is remote. The economy would have to deteriorate to unimaginable levels for the dollar to fall to the depths of the Argentinean peso in 1999. However, this does not mean that the dollar is a risk-free investment. Quite the opposite, really, as there is a strong possibility that the dollar is mired in what could be a prolonged devaluation extending well into next year.

The credit crisis that triggered the Great Recession exposed several flaws in the US economy. The list of shortcomings includes economic growth too dependent on asset bubbles of one form or another, a workforce struggling in the face of greater international competition, and a long-held tradition of relying on deficit financing to keep the party going. The result? An economy – and a currency – in dire need of a correction.

This correction has already started as millions of unemployed Americans can attest. The Federal Reserve has conceded that unemployment will remain elevated through 2011. When employment does pick up, it is expected to do so at a much slower pace than experienced following recessions of the past.

Next week, the Fed is expected to intervene directly. Its Federal Open Market Committee can’t adjust interest rates downward because they’re already zero-bound. This leaves the Fed with only one option; additional stimulus spending in an attempt to inject more cash into the system.

Alas, just as in physics, every economic action has an equal and opposite reaction. While carpet-bombing the economy with excess capital increases liquidity, there is also the unintended side effect of further devaluing the dollar. And it may not be unintended.

In January’s State of the Union address, President Obama stressed the need to reduce the trade deficit. The last time the US recorded a trade surplus was 1975 and the president set a target of doubling exports in five years “because the more products we make and sell to other countries, the more jobs we support right here in America.”

What was not included in the speech was the fact that the only way in the short term to sell more products to other countries is to actively pursue a low-dollar policy that makes American exports less costly to these markets. A weaker dollar also makes imported goods more costly for American consumers, thereby further reducing the trade deficit. Simply put, in order to meet the administration’s aggressive goal of reducing the trade deficit through a doubling of exports, a weaker US dollar is the new reality.

Naturally, the prospect of a devalued US dollar has China concerned. In 2009, the US Census Bureau placed the yearly value of China’s exports to the United States at $296.4 billion or 17.7 percent of China’s total exports. Of course, China is no stranger to currency controversy itself and both sides have routinely accused each other of unfair trade practices. But the rhetoric reached a new level when a trade bill was recently approved by the House of Representatives. If the bill is passed into law, US officials will be free to introduce tariffs on Chinese imports that will decrease the price advantage typically enjoyed by Chinese manufacturers.

While the US market remains an important export destination, China is hard at work cultivating new customers and many of these are to be found within her own borders. The increase in demand for consumer products within China is advancing at an unprecedented rate, and the domestic Chinese market – together with other emerging Asian nations – is universally recognized as the largest untapped pool of consumers on the planet.

China will not replace the American market overnight; indeed, it will likely never withdraw from the US entirely. Still, it is clear that a move is on to decouple China’s future from the US by reducing its dependence on the American consumer.

So what does this mean for America and more specifically, the US dollar? In the short-term, there is little doubt that the Federal Reserve will enter into a new round of quantitative easing to inject more cash into the economy. This action alone will devalue the dollar, and the continuation of record-low interest rates will further reduce demand for the buck.

This leaves holders of US assets in a bit of a quandary. If the falling dollar appears to be a short-term phenomenon, then it may be feasible to ride out the downturn and hope for a quick turnaround. If however, a weaker US dollar is destined to be with us for awhile, investors and savers may need to look beyond dollar-denominated assets in order to protect investments over the long term.

Who Wants to be a Millionaire?


Peter Souleles

The word “millionaire” first made its American print debut in an obituary for Pierre Lorillard II in 1843 when he died leaving behind a fortune of over $1,000,000. He wasn’t of course the wealthiest man of his time but then again a million dollars was a stratospheric figure for the average man. Since then, inflation has bestowed the title of millionaire on countless more individuals. In recent years most of them lived in Zimbabwe.

But what makes a millionaire?

In 1843 the average price of gold was $18.93 in US dollar terms. A person having a million dollars could therefore buy 52,826 oz of gold. Even in 1929, a million dollars could still buy 48,473 oz.

On Friday, the price of gold closed at $1,359.80. With a million dollars you could therefore buy only 735 oz or 1.5% of what you could buy in 1929. In other words the dollar has lost 98.5% of its value since 1929 in comparison to gold. I think this is why US currency has the words, “In God we Trust” printed on it because to trust in the printed dollar would be lunacy.

An alternative exercise would be to calculate who the real millionaires are in 2010. Taking the 1929 amount of 48,473 oz as the mark of a true millionaire, we find that only someone with at least $65,913,585 can be considered for the title.

Do you want to try your luck with silver? Well in 1929 the average price of silver was 48.8c. Therefore a million dollars would buy you 2,049,180oz. The closing price of silver on Friday was $24.75 which would require you to have $50,717,205 to be considered the equivalent of a 1929 silver millionaire. The dollar has lost therefore about 98% of its value since 1929 in silver terms.

Interestingly enough, James Turk announced the other day that silver would go to $30 within just a few weeks.

This would push up the amount to $61,475,400 for anybody wishing to be considered a true silver millionaire in 1929 terms. This would somewhat align the movements in silver and gold prices.

The reality is that the world of fiat currencies, combined with Fed induced inflation, has created countless millionaires who in reality are deluded both about their wealth and the system.

Pulitzer Prize-winning tax reporter David Cay Johnston recently reported that the number of Americans earning over $50 million a year fell to 74 in 2009. Interestingly enough these 74 individuals earned an average of $519 million per annum.

The frightening statistic is that these 74 people made as much as the 19 million lowest-paid people in America, who constitute one in every eight workers. To put that in simple terms, each of these millionaires made 256,756 times more than one of these workers.

Please note that I am not espousing the politics of envy or redistribution. In fact inequality is central to economic dynamism and development for all participants. If the system somehow was able to achieve equality it would also destroy itself as there would be no incentive to produce, save or innovate. Communist regimes are a stark reminder of this.

What we must realise however is that excesses well beyond the mean have been allowed to develop that have rendered the present system impotent and fragile in the face of disaster. Money printing and lending en masse is nothing more than “monetary Viagra” that does not increase the virility or potency of the system. As Brian Bloom wrote back in November 2009:

“Yes, the equity markets can continue to rise from here. But the manufacturers of Viagra caution against the use of their product by heart patients. The US economy has a weak heart. Too much monetary Viagra can cause it to drop down dead from heart failure.”

Currency wars, quantitative easing, stimulus checks, zero interest rates, lopsided free trade, etc are poor quality policies/strategies that are destined to not only fail but also to increase the size of the final explosion/implosion.
The year opened with an investor needing 9.29 oz of gold to buy the Dow. On Friday an investor needed only 8.17oz. Despite this, the doubt about gold still continues in spite of the run up over the last 11 years and its 5000 year pedigree.

The U.S. public pension schemes, its stock market, its banks, its residential and commercial property are all D Grade. By the way even the nation’s professional engineers have given US infrastructure a D Grade. The education system must also be D Grade given that total student loans account for more than the total amount of credit card debt. Education is supposed to set you free. In the USA it enslaves you. In the western world a man’s home is considered his castle. Now it is considered his dungeon. The USA’s factories have been sold overseas and its workers sold out. Now everything is for sale or lease, whether it be a highway or a parking meter.

The motto “Yes We Can” is not an Obama slogan. It has been the slogan of successive US governments who have pursued policies that could not be accommodated or sustained within a longer term economic context. “Yes We Can” is simply a shortened version of “Yes we can make our children pay for it all.” But will they? I somehow doubt it. The honeymoon for the US economy, its dollar and its taxpayer is over.

Professor Kotlikoff estimates that the US government has a $202 trillion fiscal gap. That my dear readers is not a gap….it’s a black hole from which no one can emerge. To that fiscal gap one might want to add the tremendous fiscal gap in personal finances both on the balance sheet and the income statement.

What is certain is that expectations of future government payments and services will not materialize in full given the unfunded nature of the system to date and for the foreseeable future. Is it any wonder that people seek wealth preservation in gold and silver?

The critics of gold always like to remind us that all of the gold ever mined is still in existence except for what may have been lost in ship wrecks. Well that’s true, but what is also indisputably true is that all of the paper money ever produced has or will bite the dust. The critics tell us that gold pays no interest yet this is what makes gold so attractive. A bank deposit makes interest which is subject to taxes and inflation year after year. Gold and silver retain “value” which is subject only to tax at a time of your choosing if you decide to sell.

Some call gold a “fear metal” and that to an extent is true. I say it’s a sure bet against guaranteed government insanity. Gold and silver will in the long run turn paper millionaires into paper billionaires. They will not however compound in real value (save over short periods of time of upheaval as in the last 10 years) for the simple reason that no asset class can in relative terms outstrip all other asset classes ad infinitum. If it were possible then we would have the ridiculous situation of one oz of gold being passed along for the last 2000 years now being worth a house or a farm or much more.

Gold will however continue to increase in relative value for quite some time as society flushes out excesses in the system. Remember, gold and silver is not only about what you might gain but more so about what you might avoid losing. In the current climate much has been lost and much more is to be lost. Gold and silver are the great fulcrums that silently watch a see-sawing society go from one extreme to another.

The economic, political and social pots of this world are simmering ominously. To the people who wish to avoid the cannibals’ pots in banking and government, I say “buy a little gold and silver and be patient.”
Yes, dear readers, there are many definitions of “millionaire” but remember that the only true millionaire is the person who is content with what he has.