BEST OF RICHARD RUSSELL

March 25, 2008

The US has put itself in the incredible position of fighting an expensive war with borrowed money. Even without the war, the US is living on borrowed money. Our national debt is in the process of surging well past the $9 trillion mark. The wonder is that the dollar is viable at all.

I note that none of the presidential candidates are even talking about the debt -- or the $53 trillion in unfunded liabilities that we are facing. In fact, I believe we have gone so far in our debt and deficit situation that I just don't see how we're going to navigate out of it. The dollar, it seems to me, is ultimately doomed. The only question is timing, and here we're talking the impossible. It brings to mind Keynes' thesis -- "The market can stay irrational longer than you can stay solvent." In other words, even though the US dollar appears doomed, if you short the dollar, you can very easily go broke before the dollar finally succumbs (in fact, the oversold dollar may be in the process of advancing now).

So what do we do? I've been thinking about this for a long time, and I realize that there is no perfect answer, no ideal defense. You see, for the first time in modern history there are grave doubts about the very viability of our money. Even during the Great Depression, nobody doubted the value of a dollar. The dollar was "as good as gold." The only problem was -- nobody had dollars. Everybody was broke. Deflation swept the land, and money was scarce. I could give you a list a yard long of things I could buy in those days for a nickel. Talk about nickels, I would use nickels to take the subway to school, and I would use seven nickels to buy lunch. A movie cost three nickels. Nickels were useful, dimes were scarce and dollars were treasures.

Today it's a different story. Today there are too many dollars around -- but the world is questioning the viability of the US dollar. I understand there are places (China, for instance) where people do not want dollars. If they do receive dollars, they exchange them for another currency as quickly as possible.

The US has two sources of power besides our exports. One is our huge military. And the second is the reserve status of our dollar. If the dollar begins to lose its reserve status, we're in trouble. It would mean that we couldn't borrow, or if we could continue to borrow, we'd have to pay much higher interest rates. At some point, even higher interest rates wouldn't do it. Once our creditors were afraid of taking in dollars, no level of interest rates would convince them to lend to the US.

OK, that's the longer term story. The question I ask is -- what do you and I do about it? Here's what I suggest. Divide your assets into three sectors. One third of the total can be in a home preferably owned for cash, no mortgage. That means that you really OWN your home. Another third of your assets can be in gold. The final third should be in cash, and it can be in dollars or even partly in a foreign currency. But frankly, over the longer-term I'm tempted to lump all fiat currencies together, treat them all as a kind of junk. Because there's nothing behind any fiat currency but the full faith and credit of the respective nation. The viability of all fiat currencies is suspect.

Nations will lie about the worth of their money as long as they can get away with it. The US repeats its "strong dollar" policy even while allowing the dollar to go down the drain. My guess is that the trouble will start when the oil-producing nations start quietly unloading their dollars. China will likely do the same. Gradually, the word will emerge -- "the dollar is a doomed currency." Diversify as far as you can, and get out of dollars as quietly as you can.

In the meantime, I'm watching the stock market carefully. So far, following the initial rally from the January lows, the Transports have acted well, and the rest of the markets and averages have either been sinking or just "hanging on." Few investors have made any money since the January lows. The best you could have done was to minimize losses. It will be fascinating to see how the markets act over the coming weeks. Personally, I'm out of the stock market, so my main interest is academic. Well, that and I watch the markets for hints of things to come.

I'll breathe easier as long as one or both D-J Averages (Industrials or Transports) hold above those blessed January lows. But if both the Industrials and the Transports violate their January lows, I'll prepare for the worst -- and by the "worst" I mean hard times.

A house is a place for you and your family to live in. Gold is eternal wealth. Dollars are units of exchange. With a few of those lowly dollars, you can buy a loaf of bread. I like to keep it simple. A house, gold, cash -- what could be simpler?

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