About 75% of the worlds monetary reserves are
held in US dollars, making the US dollar critically important to the financial
well being of every single citizen of the world. Did I overstate that? Perhaps
yes, and perhaps no.
Once the USA continues to be pressured by the
gathering forces of deflation the FED will continue to pump up the money supply
while holding interest rates down. Currently Mr. Greenspan is considering
whether or not to lower rates yet another time, to fight the forces of
The problem is that the Federal Government is
running up a budget deficit of about one half of a trillion dollars in addition
to a current account deficit of another one half of a trillion dollars. These
two items are undermining the value of the dollar.
The Europeans are lowering interest rates in an
effort to stop the appreciation of the Euro against the dollar. It is unlikely
that they have the room to maneuver to the extent necessary, over a sustained
period of time, to stop the Euro from becoming the reserve currency of choice.
Put differently, once worldwide confidence in the dollar diminishes, the Euro
will take it's place. The consequences are just about impossible to imagine with
any degree of accuracy.
The FED has deflation on it's mind, and the
politicians have re-election on their minds. Therefore debate no more - there
will be lower interest rates, tax cuts, budget deficits, and current account
deficits, credit creation and mortgage refinancing, in an all out effort to beat deflation and the Democrats. The costs are
being distributed worldwide.
The insurance against consequences of currency
dilution, budget deficits, and current account deficits is gold.
Although gold sells for about $365 an ounce the
Federal Government values the gold in Fort Knox at $42.2 per ounce. The reason
for this is that the FED does not want to draw attention to gold in it's role as
a store of wealth, in competition with it's paper money.
To see the rate at which the US is accumulating
debt click here
I lived through a period when the Government of
my country, printed money on an unprecedented scale in an effort to
re-distribute wealth, and create 100 percent employment even if it meant paying
people to lean on a rake while pretending to cut grass and pick up leaves. At
first the consequences were masked somewhat by a fixed exchange rate.
There soon developed a steady flight of capital
and a thriving black market in foreign currencies. The response of the
Government was to create a financial intelligence unit to seek out and arrest
anyone suspected of exporting foreign exchange. When all of this started one
Jamaican dollar bought one dollar and twenty cents of US currency. The damage
done by that failed attempt to create an egalitarian society has never really
been reversed and today one Jamaican dollar buys about one and a half cents of
In 1981 I bought a one acre lot of land for
J$150,000, and today the annual tax on the unimproved value of the lot is
The point I hope to make is that there are
inescapable consequences attached to what the FED is doing in relation to credit
creation and the promise that in the event that it becomes necessary in their
opinion, they will not hesitate to turn on the printing press. The likely result
will be the same as happened in Jamaica. The principles do not change simply
because America will be printing what is currently the most widely held and
trusted fiat currency in the world. Dilution is dilution and in this case the
effects will be seen in the increasing amount of dollars it will take to buy an
ounce of gold. As soon as a critical mass of people understand what is happening
and begin to protect themselves and their assets the price of gold will rise
rapidly, even in the context of the high inflation and rising interest rates.
The stock market has had an explosive bear
market rally that looks and feels like the good old days of the bull market are
back. So convincing has the action been that many who shorted stocks have been
forced co cover their positions. This is, in my opinion, one more indication
that the bear market rally is coming to an end.
Ninety four of the stocks that I track ended
the week below where they were on September 21, 2001
The McClellan Oscillator ended the week at
+101.98 and the VIX closed at 23.43, having opened the week at 21.95. The trend
is moving away from complacency.
The primary trend of the market is still
negative. The secondary trend while still positive looks to be weakening.
June 06, 2003