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Worst Dollar Decline Since
2004!
Money and Markets Martin Weiss July 3, 2006 The U.S. dollar has just suffered its worst weekly decline since April and the worst quarterly plunge since 2004. It's plunging against the euro, the yen, the pound, the Swiss franc, the Canadian dollar, the Australian dollar and even third-world currencies. It's falling in terms of how much it can buy in oil, gasoline and propane ... meats, orange juice and sugar ... silver, gold, platinum, copper, and almost every metal on the planet. If this continues, it will affect every American alive today, driving up the cost of living, driving down the value of their savings, and potentially gutting many investment portfolios. Yet, most people don't know what's happening, and even among those that do, few seem to understand what's really behind it: America's Worst Reliance on Over a year before the Declaration of Independence, in May of 1775, the Second Continental Congress debated precisely how to pay for the anticipated war with England. A minority of delegates argued that, to avoid inflation, they must levy taxes, pay mostly in hard currency, and encourage free enterprise to supply the army, the navy, and the militias. But they were ignored, even ridiculed. Instead, the Congress issued orders to crank up the printing presses at full speed, and within months, the states did the same. In the ensuing five years, paper money flooded the economy — $241 million in Continental dollars ... $209 million in state notes ... plus countless millions in currency counterfeited by individuals, enterprises, and even the British. Wholesale prices surged from an index of 108 in 1776 to 10,554 by 1780 — over 10,000 percent inflation in just four years. Food shortages were endemic. U.S. soldiers were poorly armed, ill-clothed and ill-fed. The citizenry was panicked, plundered, or both. The Massachusetts Provincial Congress declared that anyone who refused to accept state notes or demanded a premium for them was an enemy of the country. Other states follow suit, punishing violators with public humiliation, fines, imprisonment, and the forfeiture of their property. New England and Middle Atlantic states imposed wage-and-price ceilings in a desperate attempt to hold down the cost of military recruitment. Farmers and entrepreneurs balked, hoarding large stocks of goods, refusing to sell them at official prices. In response, the states passed laws forbidding these practices — crimes called "forestalling" and "engrossing." Farmers were forced to hand over their harvests for a pittance. Many were wiped out. Others just quit planting. Supplies dried up. Prices surged even higher. And it was in the early stage of this financial crisis that Benjamin Franklin departed from Philadelphia for Paris to beg the French for desperately needed funds. Total foreign debts to finance the Revolutionary War: $11 million. Today, We Effectively Fortunately, the Revolutionary War was won — a testament to the sheer bravery and zeal of Americans, despite the financial blunders of their young government. But unfortunately, today, despite 230 years of progress, we are more reliant on foreign capital than at any time since that great victory. Foreign central banks and foreign investors own close to $2.5 trillion in U.S. bonds and countless more in other U.S. assets. Close to two thirds of our government's budget deficit is financed by foreigners. Even the giant General Motors may not survive without a heavy infusion of foreign capital, according to proposals floated last week by billionaire shareholder Kirk Kerkorian. But rather than fixing its problems, the U.S. government, much like the Second Continental Congress of 1775, seems intent on doing everything in its power to make it worse. Last year, the U.S. trade deficit was $716.7 billion, by far the biggest in history. And in the first four months of this year, it's running nearly 13 percent above the same period a year go, putting the country on course toward a trade deficit of $810 billion. At that rate, the United States needs a net capital infusion of $2.2 billion per day — 200 times the total amount Benjamin Franklin borrowed from France and other foreign nations to finance the entire Revolutionary War. Recently, his namesake, Rep. Benjamin Cardin of Maryland of the Ways and Means trade subcommittee, said "these figures are a jarring reminder that our nation needs a new approach to its trade policy," while Sen. Byron Dorgan or North Dakota said that the new deficit figure highlighted the "total failure of U.S. trade policy." I agree. Consider just a few of the consequences ... Consequence #1 If you pull up to a gas station along the U.S. border with Canada, and you want to pay with the cheaper Canadian dollars, you're naturally going to have to fork up more dollars for the same tank of gas. Similarly, if the U.S. dollar falls in value, it's going to take many more of them to pay for each barrel of imported oil. As the dollar falls, the price of oil will soar. Period. And we can already see that happening right now. Just last week ...
This is not a one-time event. It's the same trend we've been seeing for over three years. And, it's the same trend you're likely to see in the months ahead. No change in policy; no change in surging energy costs. Consequence #2 On Friday, gold jumped a whopping 4.9 percent to $617.90 per ounce. The last time gold surged that much in one day was nearly five years ago — on the first day of trading after the September 11 terrorist attacks. But this time, there was no attack. Nor was there any threat of an imminent strike. Instead, what triggered gold's surge was merely the Fed's announcement on Thursday that it would be a tamer than expected in raising U.S. interest rates, and less likely to help bid for foreign capital. That subtle change in the Fed's use of words sent shock waves into the marketplace. Suddenly, international investors woke up to the discovery that it was time to run from the U.S. dollar and rush into gold. End result: Gold is up 18 percent just this year alone, while the dollar is down 7.2% against the euro, also since the start of the year. Consequence #3 The more borrowers truly need money, the less willing lenders are to provide that money ... and the more they'll charge in interest to cover their risk. This fundamental principal was true in 1776, and it's still true in 2006. It applies to individuals, corporations, local governments and the United States as a nation. It's why "non-prime" borrowers pay higher rates for their mortgages, and why low-rated companies pay higher yields on their bonds. It's also why today's situation is so unique:
Has this every happened before? In poorer nations with big trade deficits, absolutely. In the United States, no. But it will. Indeed ...
I know. I personally lived through it in Brazil, and I saw it Uruguay, Argentina and Peru: A sinking currency, a sinking economy and soaring interest rates all at the same time. The historical record is chock full of examples; the statistical evidence, overwhelming. So brace yourself. Regardless of what happens in the stock market or the economy, and regardless of what the Fed may say about its interest-rate intentions, I think rates are headed up. Consequence #4 When the United States loses control over the dollar, trade and energy ... when it exhausts every powerful lever in its economic arsenal ... when it finds itself beholden to foreign central banks, foreign investors and foreign oil producers ... it's only natural that its foreign policy will also fall into a state of disarray. Today, on the eve of our 230th anniversary as a nation, I'm deeply pained to see that's exactly what's happening right now. Iraq, expected to help the U.S. gain a lock on the second largest oil reserves on Earth, is now plunging into chaos. Just this weekend, any hope for a grand "reconciliation" among warring parties was dashed by the bloodiest bomb attack in Baghdad since the new government was formed, followed by still another in Mosul this morning. And for the first time, American troops are being dragged into battles between Shiites and Sunnis, a dangerous new turn of events. The Palestinian Authority, once viewed as a government that could be a negotiating partner with Israel's leaders, is now being pounded by Israel's missiles. This morning, Israeli forces entered Northern Gaza. This weekend, the Israeli Air Force struck the office of the Palestinian Premier, setting it ablaze. And earlier, the army smashed the Palestinian Parliament ... arrested nearly three dozen Parliamentarians and cabinet ministers ... and destroyed a Gaza power plant. Iran, the world's most influential rogue state, is leveraging the America's foreign policy failures to the hilt ... gaining more and more influence over terrorist militias in the Middle East ... forging alliances with formerly hostile Arab governments ... and gaining influence precisely where the U.S. had hoped to do so when it established a democratic beachhead in Iraq. The U.S. war on terror, once boasting unanimous worldwide support, is falling from grace almost everywhere: In Europe, Asia, the Middle East ... in Africa and Latin America ... even in the United States Supreme Court. This is a tragedy on top of a tragedy. And I connect the dots straight back to the day when America's leaders turned us on a path of dependence — on foreign energy and foreign capital. So if you haven't done so already, think seriously about seeking protection from the fall-out. You can do that by keeping a big chunk of your money safely tucked away in short-term Treasury bills or equivalent. (Bought directly from the U.S. Treasury Department or via a money-market fund specialized in short-term Treasuries.) Plus, you can hedge with investments that are designed to go up as the dollar falls, using exchange-traded funds like StreetTRACKS Gold Shares (GLD) or Oil Service HOLDRs (OIH). For more dollar-hedge investment ideas, also be sure you don't miss Larry's report, "Protection from the Next Dollar Plunge," and Sean's, "Lessons from Boomtown." Tomorrow Despite everything, we still have a lot to be thankful for. We are still proud to be Americans. And we will still celebrate Fourth of July with our families and friends. I hope you do too. So we will not publish Money and Markets tomorrow. Tony Sagami, who writes our Tuesday column, is the lucky one. He gets a day off, while the rest of us keep our nose to the grindstone, with Sean picking up on Wednesday. Good luck and God bless! Martin For more information and archived issues, visit http://www.moneyandmarkets.com About MONEY AND MARKETS MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Colleen Collins, Amber Dakar, Ekaterina Evseeva, Monica Lewman-Garcia, Wendy Montes de Oca, Jennifer Moran, Red Morgan, and Julie Trudeau. Attention editors and publishers! 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