Destroying the Dollar

Bill Bonner - Fri 11 Sep, 2009

What Was America's Golden Age?

London , England

Friday, 11 September 2009

Edward Gibbon described the happiest age of mankind as the period of the “five good emperors” between AD98 and AD180, when Marcus Aurelius died.

What was America’s golden age?

It is much too soon to write the history of America’s decline and fall. Still, that doesn’t stop us from guessing.

We would name the period between the fall of the Berlin Wall and the fall of Lehman Bros – a period of only 19 years – as the peak of US power and wealth. Of course, Americans were dreaming during those years. The dreams were the usual imperial sort – that the US empire was such a benefit to the rest of the world that the foreigners would support it indefinitely. Rome didn’t take any chances; it forced its conquered nations to render tribute... slaves... gold... and wheat. The American empire depended on trade... and the dollar. As long as the US had a commercial advantage, the empire was profitable. But as the 20 th century aged, so did the US economy. Its competitors – notably Germany and Japan – had a big advantage. They had been bombed out in the ‘40s. They could build anew. America’s trade advantage slipped away... and then its trade balance went negative in the mid-‘80s. It has been getting more negative almost every year.

The trade losses shrank after the fall of the House of Lehman. Americans cut back. But today we get news that the trade deficit has just grown more than in any month in the last 10 years. Have Americans suddenly become big spenders again? Probably not. But we’ll have to wait for another explanation; we don’t have one.

No account of America’s glory years – roughly the period between the reign of George Bush I and that of his son, George Bush II – would be complete without mention of the events that happened on this day 8 years ago. A small group of terrorists pulled off an amazing coup – bringing down two of America’s iconic buildings, right in the heart of New York City... and on prime-time TV! Historians might be tempted to use this event as a milestone, marking the end of the period of maximum happiness in the United States of America. We caution against it. It was only later that it became apparent that the US reaction to the terrorist incident was suicidal. The nation desperately needed to bring its ambitions back in line with its means. It needed to save and invest in new factories and new infrastructure. Instead, it wasted trillions fighting phantoms and nobodies. But as far as anyone knew, US influence, prestige and power remained near its zenith throughout the wars on terror and Iraq.

The fall of Lehman changed things. Then it was obvious that not only was America vulnerable, she was an enemy to herself. She had diddle-daddled during the glory years, dawdling with the lion cubs that would grow up and maul her. Now, in the period we are living through, she attempts to go back to sleep and rerun her balmy dreams. That is what “recovery” is all about – a return to the land of nod and nonsense... in which people think they can actually become wealthier by squandering money they don’t have on things they don’t need.

Fortunately, as near as we can tell, most private citizens are now awake. A report at the beginning of this week showed that they repaid debt at a rate 4 times faster than economists projected. Savings rates are rising. Spending is falling. People are doing what they should do – they’re cutting back.

But the feds continue their efforts to sabotage the correction and destroy the empire. They have already blown-up the budget – with $9 trillion in deficits expected over the next 10 years. Now, they’re working on the dollar.

Yesterday, the dollar fell to $1.45 per euro. Gold remained just below the $1,000 an ounce mark. And the Dow rose 80 points.

Stock market investors seem to be looking forward to another big bull market. But with the economy deteriorating, they are probably just dreaming too. Median household income fell 3.6% over the last 12 months. Of course, that’s just what you’d expect in a correction. But it’s not what the feds were hoping for. So, they’re pulling out all the stops to try to turn it around. Most important, they’re pulling out the stop that keeps the dollar from rolling down the hill.

More… after the news: “ Asian, European Stocks Advance, Led by China; Dollar Declines,” yells a Bloomberg headline…

“The MSCI World stock index rose for a seventh day,” says the article, “the longest streak since July, as China’s strengthening economy buoyed shares in Asia and Europe. The dollar fell as investors sought higher-yielding currencies.”

“As the dollar continues to fall, gold perks up once more… poking its head back above the $1,000 level,” explained Frank Hemsley in today’s editorial meeting.

“Is this the real moment that gold bulls have been waiting for since 1982? Of course we don’t know that yet, but one thing is certain. Now that this level has been crossed, there are a lot of new eyes looking at gold. We need to warn readers about this and tell them to prepare. We need to let our subscribers know about gold.

“Of course, they know about it. What I mean is make sure they know how important this level is. Make them aware that gold is much more than a story in their daily newspaper. The newspapers will only carry the headlines – they won’t tell people how they can make money from it. That is down to us. If you’ve not got gold in your newsletter portfolios, then find another way for people to invest in it. Make sure they have been given the opportunity to get in on this. Introduce them to Dominic Frisby’s Gold Profit Plan . That gives them six excellent ideas.”

Of course, we know that gold will probably fall below $1,000 again. That’s not important. What’s important is that it has broken above a key psychological level – one that has not been breached since February. Before that, it had not been breached since March 2008. And before that, it had not been breached since 1982.

Everything is falling into place for the next leg of a great bull market in gold. Already technical analysts are talking of targets of $1,032 (the March 2008 high), of $1,250, $1,300 and $1,350.

This from The Telegraph: “Those most bullish on gold suggest that prices could go as high as $2,000 per ounce. According to the World Gold Council prices spiked in the 1980s at $850 per ounce. This is below current spot prices, but if this figure was inflation-adjusted it would be closer to the $2,000 figure.”

Have you noticed all the ads in newspapers about gold? “Send us your unwanted gold, broken jewellery and so on and we’ll send you cash” and that kind of thing. In Germany, you can now buy gold in street vending machines. The Chinese government is urging private investors to buy gold and silver as a way to save.

Gold has not turned into a mania yet. But the foundations have been laid. People are catching on. When it turns into a mania… when your taxi driver… and your hairdresser… and the lady on the supermarket checkout start talking about gold… that’s when we’ll have a gold mania on our hands. By then, the chances are it will be time to sell out as the gold price will have accelerated higher. You want to be in ahead of that.

By all means, consider owning physical gold for the long term. Bullion Vault is the online gold market where you can buy gold, own, and sell gold at current gold prices. And it allows you to trade gold trading, from one gram up. In fact, when you register, you get a free gram of gold – a great way to see how this works. Click here for more.

But also consider owning gold related shares. Dominic Frisby has found six that you may not have heard about. And he believes each of them has the potential to double your money if gold really starts to move higher.

Click here now to get in on these six gold money doublers.

And now, back to Bill with more thoughts...

*** The dollar’s weakness hasn’t been missed by it biggest foreign holder – China.

Reported earlier this week in the Telegraph:

“We hope there will be a change in monetary policy as soon as they have positive growth again," said Cheng Siwei… talking about America.

"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies,” he said.

China 's reserves are more than – $2 trillion, the world's largest.

Mr. Siwei continued: “Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets,” he added.

Then, two days ago, in came a report that China is going to issue bonds of its own – in yuan.

This news is a shot across the bow of America’s imperial currency. It signals that China is moving into position to eventually challenge the greenback. Investors will have another alternative to the dollar... another bond issued by another government and backed by another economy... maybe one that is on the way up, rather than on the way down.

Meanwhile, Americans grow poorer. Bloomberg reports:

“The decline in incomes we’re seeing certainly has implications for consumer spending, particularly post-housing bubble when families can’t tap into home equity through loans,” said Heather Boushey, a senior economist at the Center for American Progress, a research organization headed by John Podesta, a leader of the Obama administration transition team.

“The poverty rate is likely to keep rising through 2012, even after the recession ends, adding to pressure on the Obama administration to enact a second economic stimulus package, said Isabel Sawhill, a senior fellow at the Brookings Institution in Washington, a policy research group.

“We will likely have not only a jobless recovery but also a poverty-ridden recovery,” Sawhill said. “The stimulus money is going to go away long before the poverty rate peaks.”

How can a consumer economy grow when its consumers are becoming poorer? We take up that question in today’s essay, Fed’s Fake Recovery...

*** Meanwhile, the empire sinks into the mud. Yes, this is the downhill period... the slide into corruption...the period in which Juvenal complained that Romans were only interested in ‘bread and circuses.’

When you are on the board of a decent corporation, for example, if you have a direct financial interest in a matter under consideration you’re expected to ‘declare an interest’ and absent yourself from the vote. But in a mature democracy, the most self-interested citizens are those most likely to vote. Currently, about 20 million people work for government. About 45 million receive Social Security benefits. About 34 million depend on food stamps.

(People who count on the government to feed them, warned Jefferson, “will soon want bread.” That doesn’t seem to worry many people. But at least the state of Maryland has an Orwellian sense of humour about it. People who depend on government for food are given “ Independence” cards.)

That’s 99 million people who have a direct interest in expanding government outlays... with some overlap, of course. And it doesn’t mean that every person receiving a Social Security check is going to back the feds. But it doesn’t count all the millions more who get subsidies, bailouts, welfare payments (often masquerading as tax credits), government contracts, and so forth, either.

Well, how many people does it take to win a national election? Obama won with 63 million votes.