Inflation and the Fall of the Dollar
Like John, I'm sure we'll find a way to muddle through. In the end - even if there's more deflation in the short term - our government will end up monetizing its debts. Greenspan and others at the Fed have already mentioned they're prepared to buy large amounts of long-dated Treasury bonds. Retiring Treasury obligations with dollars the Fed prints will cause a weaker dollar. That means, sooner or later,
inflation will be back -- and in a big way.
This is the real endgame, as I see it. Let me explain.
One of the smartest and best investors I've ever met, Chris Weber, says we're entering the third dollar bear market. And if there's anyone worth listening to when it comes to the currency, it's Chris Weber. Starting with the money he made on a Phoenix, Arizona paper route in the early 1970s, Chris built a $10 million fortune, primarily through currency investing. He has never had any other job. When I met
him seven years ago he was living on Palm Beach. Now he resides in Monaco. I saw him two weeks ago in Amelia Island, Florida.
According to Chris, the first dollar bear market began in 1971. It ended when gold peaked out at $850 an ounce in 1980. This inflation helped ease the debts the U.S. incurred fighting the Vietnam War while wasting billions on the "war on poverty."
The second dollar bear market began after the Plaza Accord in 1985. This inflation helped pay for Reagan's tax cuts and the final build-up of the Cold War. (You should remember the impact the falling dollar had on stocks. They collapsed in 1987 on a Monday following comments over the weekend by Treasury Secretary Baker who said the dollar could continue to weaken.)
And Chris thinks this - the third dollar bear market - will be much worse than the last two. This time the falling dollar might lead to the end of the dollar as the world's only reserve currency. He's not the only one who thinks so. Doug Casey sees this happening too. And I believe it's not an unlikely outcome.
Why? Because the imbalances inside the U.S. economy have never been this large, nor has our current account deficit ever been this big and never before has the United States been more dependent on foreigners for oil.
This possible move away from the dollar as the primary reserve currency for the world is high-lighted by a recent comment from Dennis Gartman (The Gartman Letter):
"At what has been promoted as "The Executives' Meeting of East Asia-Pacific Central Banks" (The EMEAP), those attending took the preliminary steps toward creating an Asian bond market fund to be managed by the central bank's central banker, the Bank for International Settlements (The BIS). According to the Nihon Keizai and The Japan Daily Digest, the EMEAP is a co-operative of eleven regional
central banks and it intends to create a fund with contributions from its member banks and to use the money to invest in dollar denominated government debt... initially. Then from our perspective, the fun begins. Given that the idea works in practice, the fund will proceed to increase its size and to start buying debt denominated in local
currencies, moving away from the US dollar. The idea according to the Nikkei is to give the Asian central banks a place to invest the dollars their economies generate in something other than U.S. Treasuries. The intention is ultimately to keep the foreign currencies that these economies generate available in the region for investment.
They are apparently weary of washing these earnings back into the US dollar, and that weariness has become all the more emphatic in light of Mr. Snow's ill-advised comments over several weeks ago. President Bush's comments over the weekend might have assuaged those concerns somewhat, but they are still looking above for other avenues of investment. Were we in their shoes, certainly we'd be doing the same. The EMEAP's member central banks include Australia, China, Hong Kong, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore and Thailand. Other's may join, making the effect even more
material. Snow's comments created a veritable blizzard effect."
If this happen, it will accelerate the drop of the dollar predicted by both John and myself for some time.
For investors, while we muddle through this mess, it will pay to remember: America is bankrupt. Another big inflation is coming. And that's bad for equity investors. From 1968 through 1981 the Dow lost 75% of its value, in real terms.
Porter Stansberry
Editor's note: Porter Stansberry is the founder of Pirate Investor (www.pirateinvestor.com), a publisher of independent financial newsletters. Pirate Investor titles include: Porter Stansberry's Investment Advisory, Steve Sjuggerud's True Wealth, Extreme Value and Diligence, a small cap research service for high net worth investors. |
