WHISTLING PAST THE GRAVEYARD
The runaway spending of our government puts the dollar at grave risk. Despite this fact it’s highly unlikely that this excessive spending will be voluntarily curbed. Our government will stop spending when the markets of the world force it to quit. Nothing could be more unpleasant for America. It will start with dollar weakness. Make no mistake, the dollar could ultimately become worthless.
The worst thing about our government’s reckless spending is that it threatens the dollar’s role as the world’s reserve currency. As it stands now the dollar is in great demand in many parts of the world. In some countries it rivals or substitutes for the national currency. However, the constant printing and monetary expansion of the dollar to fund trade deficits and budget deficits is taking a toll. The Chinese news agency Kinhua reported, “The U.S. has long been facing the same problem: living beyond its means. At present, the country has debts as high as 55 trillion U.S. dollars, including more than 14 trillion U.S. dollars of treasury bonds.”
Chinese concerns may be the principal reason the Federal Reserve has been reluctant to launch QE3. The Chinese have the financial power to bring us to our knees simply by selling the treasury bonds they own. It’s amazing how oblivious Wall Street is to our indebtedness. Stock buyers refuse to see what they don’t want to have happen. Kinhua noted, “Economists agree that the United States’ largest foreign creditor, China should contemplate ways to pull itself out of the ‘dollar trap,’ as the U.S. economy is faltering with its debt piling up and its currency on the brink to depreciate.”
I was in Canada in early July. Several friends invited my wife and I to have dinner with them at the race track. After the races started I pulled out a U.S. twenty dollar bill because I didn’t have much Canadian money. Can I use this I asked? All three couples gave me the horse laugh. Their money which was always at a deep discount to ours is now worth a little more than ours. It was disconcerting to have them show less respect for the dollar.
Currently the demand for the dollar is strong because of the European crisis. If Europe suffers a contagion that spreads a distrust of fiat money it could eventually come here. A panic out of dollars could ensue. Another possible outcome would be dollar weakness after Europe calms down. This would find China and other Asian countries along with mid-eastern and South American nations using other currencies. Any lessening of demand for dollars means less bond buying. That would require the U.S. to raise interest rates. Such an increase would be a dagger in the heart of the economy.
Wall Street and Washington put all their trust in a few people to run our economic and monetary affairs. Chief among them is Mr. Bernanke who said in January 2008, “The Federal Reserve is not currently forecasting a recession.” In 2006 he said, “Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.” And in 2007 said, “We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”
In 2006 then Secretary of the Treasury, Henry Paulson said, “The U.S. economy is very healthy and robust.” Richard Fisher president of the Dallas Federal Reserve bank claimed, “A recession is not visible on the horizon.” In 2005 Alan Greenspan said, “There is a chance that housing prices could fall but its effect on the economy will be limited.” And that guru of Keynesian economics who does the thinking for the left, Paul Krugman suggested in 2002, “Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”
These are the people to whom Wall Street listens. Their prescription for our economy is to print up a bunch of money and pass it out. That’s it: create more dollars out of thin air. These are the leaders of America and the world. They believe all will be well if we debase the dollar and damage its purchasing power. They could just as well believe in witchcraft and voodoo. This is the inflationary philosophy of Zimbabwe dressed up in Keynesian double talk.
The question is, are you going to rely on Wall Street and Washington for your financial security? Isn’t it more reasonable to follow the advice of the people who have been right about the economic events of the past two decades? In 1977 just prior to the big inflation of 1980 we wrote, “We are guaranteed an inflationary epidemic that saps the vitality of the country and its economy.” In January 2000 just weeks before the Nasdaq bubble burst we wrote, “For those who think the stock market will never crash, here’s 20 powerful reasons.” In 2002 we wrote about the housing boom, “Years of inflationary money and credit creation have fostered unmanageable levels of debt and spending. Now the debt is beginning to strangle us. An agonizing liquidation will sweep homeowners and mortgage lenders away on a tidal wave of foreclosures.”
Frequently we quoted our dear friend and mentor, the late economist Kurt Richebacher. In 2005 he predicted, “Given the preposterous leverage underlying all U.S. asset markets, the Fed is running an immense risk of bursting the asset and credit bubbles with a bang. The second major risk we see is that an unexpected sharp slowing of the U.S. economy will shake the prevailing complacency, with dire consequences for the economy and its financial system.”
We’ve been right. For the most part our clients have made a lot of money over the past dozen years. We believe big gains are still ahead. We expect that America will see economic ruin. There’s so much financial excess, cultural rot and failed socialism to be purged. Conventional investments may prove to be a trap. Follow our advice to get through what we think will be the worst of all worlds for our country.