The U.S. dollar, the asset that is the measure of all other assets, is simply the 'stock' (i.e. liability) of the U.S. government. Think about that for a moment: What kind of a balance sheet does this entity have? Is it a wise investment? If the U.S. government were a publicly traded company, would you buy its stock as a long term investment?
Pop Goes the Bubble - Part III
Sell Dollars, Buy Gold Now!
22 January 2003 * M.A. Nystrom
If there is one single idea that I have attempted to convey in this series of articles, it is that the popping of the financial bubble in America and the world is a process, not a single event. This process will take years to complete, and it is far from over. Before the true rebuilding process can begin, much of what remains of the false paper wealth that has been created in this country will be destroyed. As the effects of the falling financial dominoes reverberate throughout the nation and the world, it is clear that this crisis will shake the foundations of the current financial system to its very core.
In Part I of this series, I advised that even after three years of steady declines, the stock market remains massively overvalued and I suggested that if you have not done so already, to sell your stocks now. In Part II, I observed that while the housing market is often referred to as the "only bright spot" of the current recession, and "the bedrock of the new recovery," in reality it is simply another investment bubble with valuations inflated by financial smoke, mirrors and debt. Take your profits here too, as this market will soon begin to deflate.
The reader who took this advice and liquidated these assets would now be sitting on a large pile of "money," most likely U.S. dollars. But it is not time to relax just yet, for even the dollar is not safe from devaluation. In this Part III, the final installment of the series, we examine the last great bubble, the granddaddy of them all, the one within which and upon which all other bubbles reside - the mighty United States dollar.
The Greater Fool
The dollar is fundamentally no different from the other assets that periodically inflate and deflate over time. Bubbles occur when market psychology - hype - cause asset prices to lose touch with reality. This hype feeds on itself as others rush to provide more of that asset in order to cash in on the easy money. We saw this with the dot-com IPOs that never made a profit. We're seeing it again with the rush to build cheap condo/retail complexes to cash in on the hot real estate market. And though you may not realize it, we're seeing it right now with the U.S. dollar. It is the hope of this essay to help clarify the bubble mentality that is currently inflating the value of the U.S. dollar.
Bubbles are driven by the very human desire for easy money. After all, who wants to work for their money in this modern age? A bubble is a scheme that relies on the Greater Fool theory - that prices begin rising for no other reason than the belief that they will continue to rise. You may be a fool to buy into the scheme, but it only takes one fool later and greater than yourself to ensure your profit. The question with the dollar is who will be the greatest fool? Who will be the ones left holding the bag as the value of the dollar - slowly or quickly - erodes to zero?
Seeing the Bubble
In the years of the stock market bubble, Fed Chairman Greenspan stated many times that it is only in retrospect that we can determine whether a bubble in fact existed or not. At its height, he denied the existence of a bubble. Today he openly admits that it was a bubble, but claims that even had he perceived it at the time, there was nothing he could have done to stop it. The Fed's best bet, he asserts, is to attempt to mitigate the fallout of a bubble when it occurs.
While this is not comforting, it is important. Because if Chairman Greenspan does not believe that bubbles can be spotted in advance, you cannot expect him to point them out to you before they pop! You'll have to think for yourself on that issue. He missed the stock bubble, he's missing the housing bubble and he'll certainly never publicly entertain the idea that the dollar could possibly be a bubble. His position as head of the Federal Reserve prohibits him from speaking bluntly about certain issues, namely the economy. His job is to soothe and reassure the public that everything is fine. And if it is not fine, he'll deal with the after-effects when they occur. (If he's still around; his term expires next year.)
The thinking investor realizes that the truth is hidden somewhere between the lines and listens to the news accordingly, all the while thinking for himself. Hints are given, directions indicated, hands tipped and signposts revealed. But the truth remains cloaked beneath the veil of the static of the daily news and popular prognosticators who would have you believe that the future is just a linear projection of the recent past. The bottom line is not to look at Greenspan nor anyone in power for guidance of your affairs, financial or otherwise. Their interests are not necessarily your interests. It is vital that you think for yourself. Their mantra is, and will ever be "Don't worry, everything is fine."
Everything is Not Fine
Make no mistake: The dollar is a bubble in the same way that the Nasdaq was, and the same fate awaits it. Like with any bubble, there is a rush to create more of the asset in order to cash in on the easy money. Our government is already $6.4 trillion in debt - this figure grew 8% last year, well over twice the rate of the economy. The Fed believes there is no limit to the amount of money that can be created. Yes, there is a legal 'debt-ceiling' but Congress moves it at will, like children changing the rules of a game in mid-play. The debt ceiling went from $6 trillion to $6.4 trillion last year, and it will have to be moved up again this year to over $7 trillion. Before long something will have to give.
But the Feds aren't the only ones creating money. Like every good bubble, many players are moving to cash in on the easy money. There is the mortgage refinancing game, discussed in Part II. There are the car companies and others with zero percent financing. And then there are the credit card banks.
Each month I receive several blank "convenience" checks in the mail from my credit card companies. MBNA, Fleet, Chase, Citibank, Discover - they're all running the same racket. "Spend now! Pay off higher rate cards, or take a vacation - use the money however you want!" they implore. With a few strokes of the pen, from thin air I could fatten my bank account literally by tens of thousands of dollars this afternoon, courtesy of the big banks of America.
Why do the banks do it? Where does the money come from? Where does it go?
The banks are simply participating in the bubble. They get their money cheap from the Fed - say at around 1.25%, then loan it to the "convenience" check writer at 3.9% for a while, then jack it up to around 16% after a few months. Such is the price of convenience. The bank pockets the difference with little risk. Easy Money. It is the hallmark of the bubble - money so easy that it cannot be resisted. The Fed, of course, encourages it by keeping rates low. They don't care how banks use the money, in fact they need the banks to inject it into the economy.
Like with all bubbles, the money is created from thin air. The banks are authorized to do it. The money is first created, then borrowed from the future based on the borrowers ability to pay it back. It is a classic money-for-nothing scheme. And like all free money, one can be certain that it is not going into anything useful. Say a consumer takes the credit card companies' suggestion and goes on vacation, buys some new toys and goes out to dinner every night of the week for the next three months. He has spent the money and greased the wheels of the economy for a period of time, but in the end has added nothing of lasting value.
In the final analysis, the 'convenience check' becomes rather inconvenient to both the consumer and the economy at large. The money is spent, but the debt remains and the price is high. No productive capacity was created with which to pay it off. It will likely be paid off with another "convenience check" at a lower rate, which is what the average consumer, and the nation itself, is doing. The debt never goes away, and in fact continues to creep up. Some banks even set minimum payments so low that they don't even cover the interest and fees for one month, so the balances continue to rise even when regular payments are made!
At some point these debts get so large that it becomes clear that they will never be paid off. The consumer falters and he is no longer a good credit risk. At this point the jig is up, and he'll have to either: 1) Pay off the debt in full (but with what money! Everything he has is borrowed!) or 2) Walk away. Kaput. Leave and leave the bank holding the bag, and go on his merry, or not-so-merry, way.
The same is true for the country itself. The U.S. government continues to borrow, because the easy money cannot be resisted. Why raise taxes, why cut spending, why be fiscally responsible when the money can simply be borrowed? And the world wants to loan the United States money! This is a signature of the bubble! Unfortunately, like the convenience check user, the government makes few useful investments. The borrowings go to pay for interest on the existing debt, more tax cuts, a war, and other such non-productive special interests.
So what happens when the jig is up for the country? The government will have but three choices:
1) To pay back the money honestly
2) To walk away from the debts
3) To print more money and pay off the debts with inflated currency
The first choice is a political impossibility. There is simply too much to be repaid at too high a cost. It will never happen. Likewise for the second. A default by the U.S. Government would be a last resort, worst case scenario that will be avoided at all costs. This leaves us with the third option, which means inflation. As the dollar is inflated, its buying power will gradually erode to a fraction of its current worth. At that time in the distant - or not too distant? - future, all savings and investments denominated in the currency - whether bank accounts or stock portfolios or mutual funds - will be equally devalued
How Much Will Your Dollars Be Worth?
While it is impossible to tell how much a dollar will buy in the future, we do know that the dollar has been losing value steadily since its decoupling from the gold standard in 1933, and this situation is unlikely to change. As Greenspan began a recent speech, "Although the gold standard could hardly be portrayed as having produced a period of price tranquility, it was the case that the price level in 1929 was not much different, on net, from what it had been in 1800. But in the two decades following the abandonment of the gold standard in1933, the consumer price index in the U.S. nearly doubled. And in the four decades after that, prices quintupled."
Translation: When the dollar was backed by gold, its value remained constant from the time of Washington and Jefferson until the roaring 1920s. Since the gold standard was removed 70 years ago, the dollar has proceeded to lose over 95% of its value! So the process of devaluing the dollar is already well underway. In time, like the German Reichsmark, 100% of its value will disappear.
The problem with the dollar is that political forces control its issuance and therefore its value. The Fed is ostensibly independent, but in truth it bends to the political realities of the times. That paper currencies are ultimately destroyed is a property inherent to them. Like everything in our current society, even our money is ultimately disposable. Once the dollar has come to the end of its useful life, it will be cast aside without concern or care for your life savings, your well being, or the well being of any of your investments. This is a cycle that repeats itself over and over with governments and fiat currencies.
Remember, all paper assets today are simply the flip side of someone else's liability. The money in your bank account is loaned out to God knows where and is the bank's liability to you. The money in your money market fund is short-term debt that is loaned out to a number of corporations and governments throughout the world and is their liability to the fund. A stock certificate is the liability of the issuing company, and is only as good as that company. The creditor list for the United Airlines bankruptcy alone ran to 32,644 pages. Each bankruptcy spawns a whole new mountain of bad debts and drives more people and businesses into bankruptcy. More are on the way, which means more assets are at risk.
If the last few years have shown us anything, it is that without knowledge of the system and eternal vigilance, your assets are never safe. The U.S. dollar, the asset that is the measure of all other assets, is simply the liability of the U.S. government. Think about that for a moment: What kind of a balance sheet does this entity have? Is it a wise investment? If the U.S. government were a publicly traded company, would you invest in it?
It is a fiscally irresponsible entity that hasn't managed to balance its budget in years. Congressman Ron Paul, member of the House Banking Committee, has compared the U.S. Financial system to Enron. The U.S. government, like many companies, is an entity facing declining revenues and rising costs. And instead of addressing these issues, it is lowering taxes and increasing spending while busying itself making war half way around the globe. The control structure of this entity is becoming increasingly dominated by nepotism and special interests. As the Fed indicated last, this is an entity with a printing press, willing and able to issue more stock (i.e. dollars) at will and without shareholder consent.
The first piece of advice that any financial advisor will give you is to diversify your investments. So why is it that most people invest in assets that are denominated 100% in a single asset: the U.S. dollar?
The Golden Alternative
While everyone in the world has been scrambling over one another to buy and hold U.S. dollars in the last several years, there is a better alternative: Gold.
Gold is very different from paper money. Over the centuries and millennia, we have seen that gold holds its value. It is a storage place for value, unlike paper monies that come and go with the tides of history. This is because gold cannot be created from nothing. It is both liquid like a currency, and real like property and is one of the few remaining assets in the world that is not someone else's liability. Your dollars are and will ever be the liability of the U.S. government.
Gold's recent rise in price as world tensions have increased demonstrate that it remains the premier financial safe haven in times of instability. The barbaric metal increases in value as men behave more and more like barbarians.
Timing is not Everything
The dollar is in the midst of a devaluation that has been occurring for the past 70 years. Few people see it. My father talks of buying a hamburger, fries and coke for a quarter after seeing a double feature for a dime. In 1930 he spent 35 cents on what would cost twenty dollars today. The dollar will continue to lose value on its inevitable march towards final destruction. When this will occur is an entirely different matter. The debate is alive and well as to whether we will see deflation before the ultimate hyperinflation. It is my opinion that this is a moot point, because my purpose for purchasing gold is not as an easy-money, get rich quick scheme. It is about the preservation of existing wealth.
If you want a get-rich-quick scheme, try investing in an S&P 500 index fund. Put your money in the Dow and wait for Dow 36,000 and see how quickly you get rich. Gold is about preserving the value of what you have worked for and protecting it from the political whims of the powers that control the value of the dollar. Gold is a safe haven in the increasing tempest of financial instability created by the current international fiat currency regime. If you haven't done so already, start buying gold now.
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