The Dollar, Detroit, and Da State of our Economy!

Peachtree City…is it just me or does it seem like the ground is giving way beneath our feet.  But we are resilient right?  We stand our ground and for God’s sake don’t let them see ya sweat!  We’re all doing the right things?  Hmmm, Let’s see!  We go to work - but find we have no jobs.  Checked out your retirement account?  With just one eye open you say.  Guys, we all wisely invested in diversified portfolio…. only to find that it has lost half its value!   ….And to boot, our houses have lost 20% of their value.   

The ground is giving away…and somehow we find ourselves staring into an abyss. 

But what must happen, will inevitably happen.  Fish gotta swim.  Birds gotta fly.  And bubbles gotta pop. The bubble in private debt has popped already. And now, the bubble in public debt is awaiting its turn.  But wait…that would mean the dollar’s got to go down too. Yep, just like an opponent on the wrong end of a Mike Tyson punch.  (Well..the old Mike.)  Anyway, that’s when the ground will really give way… For many folks, the collapse of the dollar will literally wipe out what is left of their assets.  Pension funds and insurance companies will be devastated.  Savers will be unsaved.

What were we thinking?  Investors have rushed from risky investments of all sorts - emerging markets, mature markets, real estate, and commodities.  Oh yeah we have been enticed by Uncle Sam into the strong comforting arms of the U.S. Treasury market.  Just give me your tired, your poor huddled masses of dollars yearning for protection from capitalism.  In return, I’ll give you 2.58% return over 10 years. 

Was this a good deal folks?  Well, it depends on how solid the ground is under the U.S. Treasury market.  So far, as the ground gives way under other asset classes, the Treasury market has held solid. But here is why the word “must” was invented. When something’s gotta happen, it’s gotta happen. The U.S. federal government already has an official national debt over $10 trillion. The deficit for next year will likely exceed $1 trillion and could reach up to $2 trillion by 2010.  That’s more than 4 times the biggest deficit the
country has ever run…and more than the entire U.S. budget only seven years ago.  At this rate, in a couple of years, U.S. debt will exceed US GDP!

Is it likely that the feds can so greatly increase the quantity of U.S. debt without reducing the quality of it?  Is it likely that the last IOU issued by the federal government will be as valuable as the first?  No, it’s not likely.  Like I said….Something’s gotta give.  And boy are we talking about some really big money baby!  A business or a small government can sometimes borrow more than its annual revenues.  It’s borrowing can be funded by a small percentage of the world’s reckless savers. However, lending to U.S. government on such a scale is another matter.  It takes up a large percentage of the world’s total savings, effectively blocking other
borrowers, and actually reducing the world’s capacity for economic growth.

Folks, Everybody, well….except bankers, knows that lending large amounts to a small country is extremely speculative.  But lending to the United States for ten years at 2.58% has a nasty stink of certainty about it. You can’t borrow that kind of money without some consequences..and the consequences of that much debt are bound to be ugly.

To us, it seems almost inevitable that it will turn out to be a bad place to put your money.  How so?  Ben Bernanke has already told us.  When the borrowing gets tough, the Fed will turn to other forms of liquidity - buying U.S. Treasury bonds itself.  In other words, instead of borrowing from savers thus leaving the net money supply unchanged, the Treasury will borrow from the Fed. Where will the Fed get trillions of extra dollars? Of course, it will create them.  That’s why the dollar has turned down.  The dollar is Hellbound, folks.  For example, I met with a client yesterday who is in the military stationed in Korea.  She told me that when she gets paid she goes to the exchange and changes her dollars into won.  Why, because the won goes much further than the dollar there.  Oh yeah, the euro is also up to $1.33 and gold keeps edging up.  It was $820 per ounce last week.  Gold coins sure make a great Christmas present that really lasts…. 

….And speaking of Hellbound, you won’t pick up the paper and find that a crook like the grinch or Bernard Madoff has stolen away the value of your gold coins. The latest Wall Street desperado took investors for some $50 billion. The press has labeled it a “ponzi scheme.” But Charles Ponzi took in only $10 million. A mere pittance compared to Madoff’s scheme. 

Also Ponzi took money from ordinary investors, but Madoff went for bigger game - hedge funds, banks, and professionals. Today’s news tells us that the world’s largest bank, HSBC was a victim.  Banks in Geneva said they were out $4 billion. The Fairfield Greenwich Group said it had invested $7.5 billion with Madoff.  Even Stephen Spielberg was out some major cash…who would have thunk it!  Of course, nobody likes to see ordinary folks get scammed…but hedge funds?  Banks?  Spielberg?  Shear madness and greed is running rampid.  But who can honestly say that they don’t enjoy seeing these mighty moneymen tripping over their own greedy delusions?  Whoo Hooo! 

So what do you do so you won’t have to wonder if the balance sheet is made up…or if the trades were fictitious…or why the SEC was asleep at the switch. Think about it carefully folks! 

..And if you are wondering about the Big 3, word from the Washington Post is that autoworkers are “angry.” Why should they be angry? They’ve been paid far too much (compared to autoworkers in, say, India) for far too long.  My son even knows that now after analyzing their pay structures for his class at Georgia Southern.  Now their gravy train seems to be stalled and they want the government to do something to get it going again.  It isn’t fair for the feds to bail out Wall Street but not Detroit, they say.  May be some merit to that… “Blank check for banks, pink slips for Detroit,” is how Gretchen Morgenson explains it in the New York Times. 

The UAW has a point, of course. But let’s face it neither industry should be bailed out.  But if you’re going
to throw money around in Manhattan, why not toss some to Detroit? My guess is that Detroit will get its bailout too.  Just  you wait and see.