OnlineInvestorsNews
Volume M 9-15, December 1, 2004
The Fed's
Dangerous Game
Bill Ridley
www.jameswinston.com
December 2, 2004
Back in
April of 2001 when I called the bottom of the gold market, one
of our concurrent strategies was to look at Canadian listed mining
equities in order to get the double whammy benefit of rising
gold prices along with an appreciating Canuck buck.
Never in my
wildest imagination though did I foresee such an unabashed attempt
to purposefully devalue the greenback. It's one thing to have
the assortment of economic forces working against you as I have
written so often about on these pages but this is insanity!
One of the
old tricks global central banks tend to pull in order to beef
up exports and decreased imports is to purposefully devalue their
home currencies.
Recently, Federal
Reserve Chairman Alan Greenspan and Treasury Secretary John Snow
made it abundantly clear that in order to reduce the U.S. trade
deficit; they want to see the American dollar drop further.
And to make
the dollar keep dropping in value, the Federal Reserve only has
to keep printing money out of thin air like they have been doing.
The more dollars created and put into circulation, the less value
they hold.
This is a very
dangerous game which could lead to an unprecedented rise in long
term interest rates causing an economic slowdown, leading to
a potential global recession.
World Leaders
are Concerned
While the U.S.
dollar has dropped to an all time low against the euro, the Bush
administration indicated they would not take any action to prevent
the slide. Over the past two years the dollar has dropped 40%
against the euro which has Euroland policy makers sounding alarm
bells as the U.S. trade and budget deficits are expanding.
At stake here
is a rather fragile European export market which is likely to
get hammered as the dollar continues its decent. The
European Union's two biggest economies are France and Germany
whose growth has slumped to just 0.1% in the third quarter. "Everyone
is worried when they think about the euro/dollar rate and what
effect this has on exports," the German chancellor, Gerhard
Schröder, said.
European Central
Bank head Jean-Claude Trichet described the euro's soaring value
against the dollar as "brutal" and unwelcome after
a meeting of central bankers from the Group of 10 industrialized
powers.
French Finance
Minister Nicolas Sarkozy pressed the U.S. to cut its
trade deficit, reminding Washington it had signed a Group of
Seven statement in Florida in February saying excess exchange
rate volatility was undesirable. Sarkozy stated "The euro
has hit a record against the dollar and that shows that the markets
are concerned by the size of the U.S. balance of payments deficit."
There was no
talk of intervention by European countries to buy dollars and
try to prevent the U.S. currency falling any further, however.
With the Fed's apparent agenda to devalue the dollar further,
the Europeans are staying on the sidelines no doubt waiting for
some sign the U.S. is prepared to reverse the downfall.
So far, the
dollar's slide hasn't sparked an outright panic though some analysts
say a run on the dollar is possible. "There's a lot of speculation,"
says Michael Schubert, an economist at Commerzbank in Frankfurt.
He sees some signs that a potential "herd instinct"
could create a cavalcade of selling.
Federal Reserve
Chairman Alan Greenspan seems to be quite aware of this
reluctance from the European Union to take action and doesn't
seem concerned. Greenspan stated when he was in Germany recently
that foreign investors would eventually resist sending more money
to the US. He admitted this could lead to a further decline in
the dollar, and possibly higher interest rates in the US.
What this
means to you
The ability
of the Federal Reserve to create money out of thin air and then
charge interest on this fiat money is the bane of society and
is the root cause of our eroding wealth yet most Americans are
oblivious to the situation.
Trillions of
dollars are owed to the privately held Federal Reserve Bank which
the taxpayers are on the hook for. At some point there won't
be enough paper money in the world to pay the debt. What happens
then?
In October
the USA Today printed some facts and figures on the national
debt which they stated totaled $7.2 trillion. Personal debt representing
credit cards and mortgages was another $9.5 trillion. However
there are also other U.S. Government debt obligations which we
never hear about much. There's the little matter over social
security, medicare and government pensions which is owed now
and amounts to another $53 trillion.
As more paper
is printed to meet these debts, your labor is also devaluing.
As the fiat money you earn becomes worth less - it then buys
less. In other words you will have to work longer to earn the
same purchasing power.
The USA Today
reports that personal debt owed per household amounts
to $84,454 however with the $53 trillion for government obligations
factored in this adds another $473,456 of debt per household.
Then there's the mortgage and credit card debt.
This means
every household is in the hole by well over half a million dollars!
At some point this figure will be so obscenely large, it will
be more than obvious this debt will never be paid back
that is presuming you think it can be now.
Evidence from
world leaders and bankers would seem to suggest we are much closer
to that reality today and if the brakes aren't applied rather
quickly the demise of the dollar could have brutal repercussions
for everyone.
One is reminded
of the prophetic words of Thomas Jefferson who said "If
the American people ever allow the banks to control issuance
of their currency, first by inflation and then by deflation,
the banks and corporations that grow up around then will deprive
the people of all property until their children will wake up
homeless on the continent their fathers occupied."
For the savvy
investor who can read the writing on the wall this also means
that the asset based inflation we have seen with gold, copper,
oil, and other resources will continue to go up regardless of
upward pressure on interest rates or the slumping dollar. The
devaluation of the dollar will not make these commodities worth
less. The price of these commodities must go up in US dollar
terms to reflect their true value on a global basis.
Investment
exposure to gold and a basket of other commodities makes sense.
Those valued in Canadian dollar equities will continue to
provide a double whammy benefit.
Bill Ridley
Contact
Website: www.jameswinston.com/
321gold Inc
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