by Adam Crum
In a statement to the World Economic Forum reported by the Associated Press just this past month, Microsoft’s Chairman reiterated what many of us have been saying for some time now. Bill Gates believes the dollar will continue to slide downwards.
Well-known investor Warren Buffet, in a CNBC television interview, said: I don’t know when it happens. I don’t have any idea whether it will be this month or this year or next year, but we are force-feeding dollars on to the rest of the world at the rate of close to a couple billion dollars a day, and that’s going to weigh on the dollar. According to Buffett, further declines against other major currencies are apparently inevitable and cannot be avoided.
It’s not just the two wealthiest individuals in the world who are saying it either.
How do you spell irony? e-u-r-o
The U.S. dollar was on the agenda of the policy makers of the Group of Seven leading industrial nations at a recent meeting. Leaders across Europe fear the declining dollar will hurt economic growth and competitiveness in that part of the world by keeping Americans away from Europe and making their imports into the United States too expensive.
German Economics Minister Wolfgang Clement, for example, has chastised the United States for its ever-increasing current account and budget deficits, which he and others link to the dollar’s decline.
Ironically, reforms will not come from the European Union (or the European Central Bank, for that matter) to assist the U.S. in reducing its deficit and the downward pressure on the dollar. And equally ironic is the fact that the euro, Europe’s signature currency, poses a very serious threat to the dollar as it becomes more widely accepted worldwide.
- The euro hit a record high of more than US$1.36 at the end of December. It was trading at US$1.30 as I write this, still up almost 9 percent in the past six months.
- Iraq became the first OPEC nation to sell its oil for euros in 2000, and reports indicate Iran has begun selling its oil to Europe for euros, as well as encouraging others like Indonesia and Malaysia to do the same. The euro could replace the dollar as the currency of choice for oil pricing.
- Nobel-prize winning economist Robert Mundell, who essentially created the euro and who favors a global currency, has predicted “the monetary collapse of the dollar is imminent within the next three to five years unless the United States gets its deficits under control.
- This all has serious implications for the United States if the other nations of the world decide to exercise financial leverage. But there’s even more bad news for the dollar as it competes with the euro.
Central banks are shifting reserves away from the U.S.
Based on a survey conducted by London-based Central Banking Publications during the final quarter of 2004, and released just last month, 70% of the world’s central banks have increased their exposure to the euro over the past two years. None intend to increase their proportion of reserves in the falling dollar. According to the report..
- The majority of Central Bank managers thought euro zone money and debt markets were as attractive as those in the United States.
- At the end of 2003, central banks held 70 per cent of their official reserves in dollar-denominated assets and central bank purchases of U.S. securities had financed more than 80 per cent of the U.S. current account deficit in 2003.
- Since the U.S. has become increasingly dependent on official flows of funds to finance its current account deficit, changes in central bank reserve portfolios have serious implications for this country.
Any reluctance to increase exposure to dollar assets further could cause the U.S. dollar to plunge on currency markets.
$27,221.90 per person man, woman and child
Put simply, U.S fiscal policy, as it presently exists, is unsustainable. William Gale, Chair, Federal Economic Policy, Brookings Institution, and Peter Orszag, Senior Fellow, Brookings Institution, report that the budget deficit is likely to reach approximately 3.5 per cent of GDP each year during the next ten years.
- The congressional analysts projected that this year’s deficit would hit $368 billion excluding war expenses and about $400 billion including them.
- Due mostly to tax cuts and hurricane relief enacted since their initial projections, the nonpartisan Congressional Budget Office has reported projected deficits for the decade ending in 2014 at $503 billion more than it calculated in September. Those projections excluded war costs.
- The analysts said deficits over the decade ending in 2015 would total $855 billion. Funding for the war, the costs of renewing expiring tax cuts and protecting more middle-income Americans from the effects of the alternative minimum tax were not included in that figure!
- The deficit will be severely affected as the baby boom generation’s health and retirement costs continue to kick in.
It is estimated that the nation’s fiscal gap could add up to about seven per cent of GDP over the next 75-year period. So, how much is the war costing?
A budget proposal to spend money that isn’t there
Since the terrorist attacks of September 11, 2001, according to the Congressional Research Service, the most recent budget proposal brings war spending to about $308 billion. This includes $25 billion to rebuild Iraq and Afghanistan.
- Officials report that $80 billion is slated for the Defense Department and would include personnel costs to add at least 17 combat brigades to the Army and replace worn-out equipment.
- The remainder mainly goes to the State Department to be doled out to U.S. allies and for other expenses. This includes financial assistance to new Palestinian leader Mahmoud Abbas for an embassy in Baghdad, estimated at $1.5 billion (as outrageous a figure as that sounds) and to aid victims of fighting in Sudan’s Darfur province. It is not known if the request includes aid for victims of the recent tsunami. [The United States has already committed $350 million to tsunami recovery efforts and is reportedly already spending $5 million daily.]
- The government budget office estimates these additional items would add more than $2.9 trillion in interest to projected deficits. That would keep projected deficits over the next 10 years above $330 billion each year and growing steadily in the latter half of the decade. These figures, by the way, do not include the Administration’s plan to revamp Social Security, which analysts have estimated could cost $1 to $2 trillion over the next ten years.
The Concord Coalition, a bipartisan group that favors balanced budgets, said regarding these figures, it is further confirmation that fiscal policy is on a dangerous path. They are correct, of course, since budget deficits reduce national savings, thus reducing future national income and the income of individual Americans. In the extreme, deficits can trigger fiscal crises of mammoth proportions.
No end in sight for U.S. involvement in the Middle East
Taking a closer look at the war on terrorism, some experts predict the war could easily extend into the next decade or longer. Others say it is now a permanent fact of life. Either prediction involves enormous financial implications.
- Lt. Gen. James J. Lovelace Jr. told reporters recently that the most probable case is little change in the military’s involvement in Iraq through 2006. The Army plans to continue rotating active-duty units and is looking for ways to further tap into reserve forces.
- While world leaders and the media praised Iraqi voters and that country’s first multi-party ballot in half a century, Iraq’s Muslim Clerics Association apparently didnt see it that way. Sunnis perceive Shiite control of the government a move towards Iran. While Iraqis flocked to the polls in the Shiite south and Kurdish north, the clerics contend that any government emerging from the election lacks legitimacy since many, as in the central Sunni Arab heartland where the American insurgency is strongest, had boycotted an election tainted by the United States-led occupation.
- Seymour Hersch, writing in The New Yorker, believes there will be surgical bombing of Iran’s nuclear facilities this summer that would include Syria as well as the target-rich, open-fire zone of the Middle East. Reiterating Hersch’s prediction, a recent edition of U.S. News & World Report states that: The Iraqi resistance is a monster with its head in Syria and its body in Iraq it is reasonable to assume that the reasons for the Iraqi action could easily be applied to Iran and Syria in terms of establishing democracy in the Middle East.
The enormous expenses generated by the war, the rebuilding of Iraq, for Homeland Security and continued operations and the rebuilding of Afghanistan represent an almost inconceivable financial load on our country. And, depending upon the type and location of terrorist attacks to come, any form of electronic wealth could be threatened, having a rippling effect throughout the U.S. stock market and the entire economy.
Monetary policy of accommodation
Federal Reserve monetary policy of accommodation is still seen by some as an invitation to inflation and a negative trade balance. But, while the dollar has experienced rallies in response to rate hikes in the past, historically these rallies have proven to be short-lived. [Increasing rates is one of the common characteristics of a bull market in gold.]
In fact, rising interest rates can have many negative effects.
- Mortgage rates almost automatically increase right along with rising interest rates.
- In the past, rising interest rates have gone hand-in-hand with stock market declines, some very brutal, as in the case of 1974 and 1987.
- Other countries have basically financed America’s massive debt. Sounds good, except rising interest rates decrease the value of their treasuries, making the dollar less attractive. [By the way, last November by Fed Chairman Alan Greenspan warned that there was a limit to the willingness of foreign governments to finance the U.S. current account deficit.]
In addition, as the federal debt increases, the FED is raising cash by printing money at an unprecedented rate. Estimates indicate that more money was issued from 2000 to 2003 than had been printed from the time of George Washington through 1980. You do the math!
Since money is really no different than any other commodity, most savvy investors know that large increases in the monetary supply stimulate inflation. That’s why the truly savvy also know that such monetary expansion has also been a major cause of bull markets for precious metals and numismatic quality gold coins.
The flight to hard assets such as gold and rare coins
With the breakdown of the Bretton Woods system in 1971, exchange rates “floated,” and investors searched for currencies that provided “safe haven.” Finding none, it is ironic that investors returned to gold and its many forms, such as rare gold coins, to hedge their overall investments. Numismatic rare gold coins, for example, have acquired long-term wealth preserving properties because they..
- Cannot be reproduced and, thus, debased by governmental authorities;
- Have become a standardized asset, easily traded in a market that is always open and gets hotter and hotter;
- Provide an ideal hedge against inflation and a long-term storage of wealth that has consistently outperformed other assets in times of economic turmoil…thriving in times of insecurity and rising interest rates; and
- Possess intrinsic, aesthetic and historic value being, quite literally, works of art and pieces of history.
Conventional wisdom says that to be truly diversified and safe, you must own gold in one of its various forms. Gold coins are a great value now (although quality coins will become more difficult to find). Now is an opportune time to trade up and add to a collection. Tens of thousands of new collectors and investors have emerged over the past seven years and many coins have been added to collections, which is good for the market since those coins will be off the market for years to come.
A few final words
At the moment, the dollar is in a technical short-covering rally, but confronting a deceleration of its appreciation with the fundamental reasons for its decline remaining unchanged. As is traditionally the case, gold is acting in the inverse to the dollar.
Similar scenarios played themselves out three times in the 70s. Today, investors who remain patient, resist the expectation of instant gratification, and look at the larger picture watching short-term moves while placing more emphasis on the long-term will reap significant rewards in the end.
I believe this could be the greatest rare coin buying opportunity…EVER! I encourage you to read my article entitled Wow What a FUN Show and get excited!