Since coming off the gold standard back in the 1970s the US Dollar has lost around 97% of its purchasing power. This latest bail out, which is a magical trick of creating money out of thin air adds nothing to the economy and only serves to reduce the wealth of those holding dollars. Our sympathy goes out to the American citizens who will carry this load for years to come and to the many foreign suppliers of goods and services that have received a hollow unsustainable paper promise for their efforts.
It is interesting to note the stock markets reaction on Friday 3rd October 2008 as the news of the bail out filtered through. The DOW was standing at 10782 at 1.00pm and by the close it had dropped 457 points or 4.2% to close at 10325, not the most enthusiastic reception for this historical piece of legislation.
The dollar was already on its knees due to the printing presses working 24/7 to produce dollars by the billion when the Federal Reserve hit the accelerator with their brain wave idea of a near trillion-dollar bail out. The pendulum for real estate prices had swung way past fair value and a correction was imminent, attempting to stall such market corrections is akin to trying to stop the tide from coming in. King Canute could not stop the tide from coming in and so got his feet wet. King Bernanke cannot prevent a recession and so the dollar will be decimated.
We are just four weeks out from a presidential election so the powers that be will do their utmost to make the picture look as rosy as possible for the electorate, therefore we can expect some support for the dollar in the near term. After the election the successful presidential candidate will be handed the poison chalice of a contracting economy, mega debts, a falling dollar and an angry nation looking for answers.
If we take a look at the rest of the world we can see that the picture there is not dissimilar to that of the United States. Japan, for instance has been pumping liquidity into the their financial system with much gusto. Over the pond in the United States of Europe they have just held a meeting in Paris to discuss the possibility of a unified approach to the current predicament. Well as the British, French, Germans, Italians, Spanish et al, have not managed to agree on much over the last two thousand years it comes as no surprise that they agreed to disagree. In other words each country will take whatever remedial action it thinks is necessary. This sounds fine in principle but in practice the Irish have already stated that they will guarantee deposits in their banks. This action has annoyed the British Prime Minister, Gordon Brown, as money is now moving out of English banks into Irish Banks. The Italians have also stated that they will guarantee the deposits in their banks, which in turn will attract more capital putting a strain on those who do not offer the very same assurances. This is like being on a raft that has entered choppy waters in that some people have moved to the Irish part of the raft causing the raft to wobble slightly. When a perceived better offer appears so a larger crowd moves to the other side of the raft causing a bigger wobble. It won’t take much for the heard to head for the same space seeking shelter from the financial uncertainty that abounds, for the wobble to gain momentum and tip the raft over completely.
The US Dollar is as good as dead and the other so called top flight currencies are walking corpses looking for a grave.
We can only conclude that gold, which is unprintable, is the only safe haven left and we expect to see it trade above $1000/oz shortly.
What all people, not just investors, need to understand is that paper money is worthless. Gold and precious metals are the real money, the real wealth that cannot be created or diluted by our political masters.