Part 2..(it was a large file)>
Second, the US was running a huge current account deficit as US consumers
spent far more on foreign goods than the US was able to export. Someone had
to finance that deficit and maintain balanced capital flows, so foreign
investment capital flowing into the US would allow the gargantuan trade
deficit to be sustained in the short to medium term.
Third, foreign inflows of capital helped ensure that domestic inflation in
the United States remained manageable. As the US Federal Reserve ran its
printing presses and computers 24 hours a day creating new inherently
worthless fiat paper currency out of thin air, an outlet for that currency
was needed so it would not slosh around in the domestic US economy and bid up
consumer and producer prices. As long as foreign investors were willing to
buy vast amounts of surplus dollars with their own currencies to invest in
the US financial markets, a pressure-valve type outlet existed for the Fed in
its relentlessly inflationary tendencies. Foreign demand for dollars bled off
potential consumer inflation and pushed the huge gluts of excess money into
the inflating equity markets, which made virtually everyone happy.
Finally, and perhaps most importantly to the simple political mind, a rising
stock market creates the illusion of prosperity for all, regardless of
whether or not this notion is true. A strong dollar seducing foreign capital
into the US equity markets was certainly highly valuable politically,
especially as Bill Clinton prepared for a second shot at the presidency in
1996.
The stakes for a strong dollar were incredibly high, and the dollar's
strength was highly sought after by the Washington elite as it helped
camouflage a variety of structural problems in the US economy, markets, and
money supply.
Under Clinton and Rubin, the US government began to make many comments about
the strong US dollar and how the official US dollar policy was aggressively
for a strong dollar. Amazingly, no one questioned this policy. After all, if
the dollar price is determined by free market dynamics, how on earth can
there be any dollar "policy"? The words "policy" and "free market" are
mutually exclusive. Either the global markets determine the dollar's value
through Adam Smith's invisible hand, or the US government gets involved in a
policy of active management and prodding to goad the dollar into a certain
range.
As early foreign capital was enticed into the dollar by Clinton
Administration proclamations of a strong dollar policy in the mid-1990s, both
the US dollar and US equity markets began to rise. Foreign investors sold
their own currencies to buy US dollars, driving the dollar up and other
currencies down. Many of these foreigners plowed their purchased dollars
right into the US equity markets or debt markets, bidding up prices on key US
financial instruments and initiating spectacular rallies.
A mountain of evidence is accumulating strongly suggesting that part of the
US strong dollar policy in the mid- to late-1990s was a concerted US Treasury
led effort to place a de facto cap on the price of gold.
Gold is the ultimate currency. For six millennia it has been the king of
commerce, the ultimate asset. This is because gold has internationally
recognized intrinsic value in and of itself. Gold is valuable because it is
gold. It does not represent someone else's promise to pay like fiat
currencies and its value depends on no government to maintain. Gold has been
sought after aggressively by virtually every nation and empire in world
history, including our seafaring friends the Phoenicians of Tyre.
Gold is the timeless arch-nemesis of fiat currencies like the US dollar. Gold
is the barometer by which all fiat currencies in world history have been
measured. When a paper currency begins to lose value relative to gold, the
gold price in terms of that fiat currency rises. If a government prints too
much paper money, the value of each paper monetary unit in circulation begins
to decline as relatively more money chases after relatively fewer goods,
classical inflation. As this inflation from government printing of money
becomes manifest, the gold price in terms of that fiat money begins to rise.
Usually a short-time later if the government has attempted to peg its fiat
currency to gold it has to abandon that policy, which is known as a
"devaluation", as it declares gold will now be worth more fiat currency units
per ounce. In reality, however, the fiat currency is simply worth less as
gold's real value is remarkably constant through millennia of history.
Gold, throughout all financial history, has always been the executioner of
fiat currencies. If fiat currencies are expanded too aggressively, the gold
price rises and ultimately vetoes that fiat currency built on nothing but
confidence and promises.
Perhaps the Rubin strong dollar policy was partially or substantially built
on the fraudulent premise that aggressive dollar money supply growth could be
masked by capping gold. If gold did not rise, global investors would lose
their traditional warning sign of impending fiat currency problems. If gold
did not signal a weakening US dollar through inflation, perhaps foreign
investors would keep buying dollars and keep plowing them back into the US
markets, the best of all worlds for the Clinton Administration politically.
Thus, the "strong dollar" policy was born and nurtured. Through incessant
political rhetoric, strategic currency interventions, and most probably
official gold price suppression, the US dollar launched on a mega rally which
has yet to be significantly broken, even with recent weakness in early August.
Unfortunately for the United States, US investors, foreign investors, and
countries and companies that do business with the US, the dollar is
enormously overvalued and will fall. A dollar bear market or possibly even a
dollar crash is coming. But when?.
Rarely in history has a fiat currency grown stronger when its sponsoring
government's economy was in such bad shape. The US current account deficit
remains mammoth, the most speculative portion of the US equity markets, the
NASDAQ casino, has crashed, and the Federal Reserve has embarked on its most
aggressive easing cycle in its entire 88 year history in a last-ditch
desperate attempt to stave off the inevitable.
In economic theory, when a country faces economic problems as great as the
United States and official interest rates are slashed, a currency should be
sold off. Lower interest rates mean foreign investors owning domestic debt
securities will receive lower rates of return and a currency will become much
less competitive internationally. Contrary to expectations, however, the US
dollar has actually rallied significantly in 2001, growing stronger as
interest rates were cut, not weaker as anticipated.
Like the mighty NASDAQ bubble of 2000, today most expect the dollar to remain
strong, but the prospects for this wishful notion are virtually zero when
viewed in light of the current US economic situation. Sooner or later, the
fact that the US Federal Reserve has imprudently grown fiat currency supplies
at rates far exceeding US economic growth for years and years will catch up
with the dollar. The challenge is in trying to discern the timing.
When the dollar finally faces fundamental reality, it will be sold off. The
critical foreign capital that has bolstered the US dollar by flowing into the
dollar and US markets will reverse at some point. Foreign investors, slowly
at first and then with increasing speed, will recognize the incredible
systemic post-bubble stresses still inherent in the US economy, the terrible
US slowdown which will most likely soon be a full-blown recession, and the
imploding US equity prices. When these foreign capital inflows, which were
approaching record levels early this year, reverse, foreigners will first
sell US stocks and bonds, putting heavy downward pressure on Wall Street.
Then the dollars earned from selling foreign-held US investments will be sold
for the home currency of each foreign investor, driving down the price of the
dollar.
The exact timing of any stampede out of the dollar is impossible to predict.
Right now in the financial markets there is absolutely monumental faith in
Alan Greenspan and his Federal Reserve. US and foreign investors alike
continue to point to the Fed's rate cuts and convince themselves that all
will be well because the Fed is on the case.
Unfortunately for the perpetually bullish, we have been hearing that same
statement for over seven months now, to no avail. It only took Alexander
seven months to capture Tyre! One would think that if interest rates cuts
were going to help we would have at least seen initial positive signs by now.
This post-bubble environment is nothing like anytime of the last 50 years,
and that conventional market "wisdom" can prove lethal in this surreal
post-bubble era, the probability of a mass foreign exodus from US markets and
the US dollar is growing every day. Without international faith in the US
dollar and its Federal Reserve custodians, there is no reason for foreigners
to stay heavily invested in the dollar. In addition, there is a strong
incentive to sell dollars early before the crowd, as if all foreign dollar
holders try to exit at once the dollar price would crash. When they reverse
their capital flows en masse, the dollar bear will roar to life.
Another reason we believe the dollar pivot point and turn south is rapidly
approaching is the growing chords of discontent echoing among the power elite
in the United States. More than any time in recent memory, there is a huge
disagreement and rift between opinions on the US dollar in the halls of
power. President Bush says the free market should determine the dollar's
value, while his new Treasury Secretary Paul O'Neill publicly corrects his
boss and contradictorily says that only he speaks for dollar policy and that
the US still aggressively advocates a strong dollar. (On a sidenote, it is a
revealing commentary on politics and compromising principles that O'Neil was
once an outspoken CRITIC of the strong US dollar when he was running Dow 30
companies in the 1980s!)
There is not a single important fundamental perspective that does not show
the US dollar woefully overvalued (although the Swiss franc comes close at
McDonald's), by virtually all historical standards. In any market, any
country, any era, anywhere, investments that become fundamentally overvalued
to extremes ultimately regress to their mean valuations, which are much
lower. There has never been an asset or investment in history that has
remained overvalued indefinitely.
NOTHING built by human hands is impregnable, whether it is the magnificent
island fortress of Phoenician Tyre or the mighty bastion of currency strength
in the current US dollar. Just as the ancient Tyrians believed that because
they had not been conquered in the past there was no reason to fear young
Alexander and his army, most global investors today think the US dollar will
stay strong indefinitely.
Linear assumptions in a non-linear world are highly dangerous. Today the
zealous international US dollar faith sits upon a kind of fragile conceptual
altar like the widespread Tyrian belief that it could never be subjugated.
Like the once mighty city of Tyre, however, the US dollar strength is not
immortal. The US dollar is poised for a devastating fall. The Tyrians of the
international investment world are still partying within the huge stone walls
of the "safe and secure" US equity market casino. But somewhere, just over
the horizon, a young Alexander rides his mighty war-steed Bucephalus, some
yet unforeseen event that will attack the US dollar with as much fury as
Alexander the Great focused on Tyre.
As the dollar is valued in terms of gold, the primary beneficiaries of a
dollar bear market will be physical gold and quality unhedged gold stocks.
Before Alexander's army reaches the US market gates, there is still time to
jump on a fast golden trireme and move capital to safety. With every passing
day, however, the day of reckoning for the US dollar draws closer and more
stones are thrown into the water paving the path to the dollar's date with
fundamental reality and destiny.
James Miller August 13, 2001 paraphrhased from ZELOTES essay |
