I realise that many people on both sides of the Atlantic believe that the official in-flation
figures are misleadingly low. There is even a conspir-acy theory suggesting that the figures are deliberately cooked.
Suffice to say here that the markets do not believe that the inflation numbers are grossly
understated and neither do the central banks. They both react to the official figures - and last week there was enough in
those to get them excited.
The demise of the dollar has long been predicted but with little success, until now. Over
the last month the dollar has lost nearly 7%. In December 2004, The Economist, featured a cover story on "The Disappearing
Dollar," just as the currency began a counter trend rally. That rally was fuelled by a one time gimmick engineered by the
Bush administration that allowed companies to repatriate overseas profits into dollars at a preferential tax rate. That gimmick
caused companies to repatriate billions in profits from international subsidiaries and catalyzed a 15% rally in the dollar.
With that gimmick out of the way, the stars are now aligned for a dollar debacle.
Never in history was gold manipulated down as extensively as it was under Bretton Woods
agreements. Signed on July 22, 1944, they actually created the International Monetary Fund and the World Bank, whose meeting
in Prague this year was adorned with Professor Mundell's remarks that will be analyzed here.
Under Bretton Woods agreements, the currencies of the IMF member countries were to be
defined pro forma in weight of gold, and those "gold parities" were to be translated into par values against US dollar, whose
gold parity at $35 per fine troy ounce was 888.67 milligrams (or 15 and 5/21 grains 0.9 fine). The currencies of the IMF member
countries became convertible to dollars at "fixed but adjustable par values", but only dollars were made officially convertible
to gold. (Not to American nationals, only to foreign central banks.)
In fact, reversing our CPI numbers, a silver height of $14 today translates to about $5.50
in 1980 dollars. That happened to be silver's price on the 19th January 1979 and way to the left and beyond on our Silver
Peak map. Can Son of Peak Silver really ascend such fantastic heights? How high can it go before the other side of the mountain
range is revealed to us? Will a sheer drop await more investors at the other side, or will the ascent be that more gentle
with the occasional plateau upon the way?
When a currency loses the confidence of its people, its fall becomes exponential, as has
happened to the Zimbabwe $, where in 1982 one U.S.$ equalled 1 Zimbabwe $. Today around Z$200,000 buys one U.S.
$ if you can find someone idiot enough to sell one for the Z$.
In day-to-day terms, the smallest note in Zimbabwe a Z$500 is the size of a U.S.$.
The price of a single-ply sheet of toilet paper is more expensive at around Z$867.
The happiness mongers are out in full force. Something must be amiss. Unlike them, we
don’t claim to know better than anyone else what the future will bring. Instead, we look to the present and try to see what
it has brought already. And what we see is a public as short on worry as it is on cash. And that, dear reader, is precisely
why the economic news is so good. Because consumers are spending their fool heads off. People are still buying houses, as
Mr Stelzer points out. The GDP is still increasing. Why? Because people are spending money they haven’t earned yet. Worried
people don’t do that.
In reality, however, annual inflation is over 8%, unemployment is around 12%, and annual
GDP growth is flat. Not only does common experience support the latter set of numbers, but also taking a close look at how
government economic reporting has been manipulated over time. What will surprise many, though, is that the annual 2005 federal
deficit was $3.5 trillion (not billion). That extraordinary number is as reported by the U.S. Treasury, using generally accepted
accounting principles.
Are we to a "housing bubble" meltdown? Are we going to see the real estate boom reverse
and turn into a real estate bear market anytime soon? Will 2006 see the onset of declining property prices on an intra-regional
basis? In short, I think we'll find the answers to at least the first two of these questions will be answered in the negative.
For select regions, however, there will be rather pronounced slowdowns in construction and housing sales that may seem like
the bubble has burst, especially when compared with the high growth rates of the previous 3-4 years. We'll discuss some of
these regions here.
Yet as of now, the financial markets and mainstream media barely seem to acknowledge this
silent yet huge dollar crash, rather quite the opposite. In terms of risk premia, credit spreads and volatility, global financial
markets continue to be more euphoric than at any time in the past twenty years, as I pointed out on 3/24 link. The IMF's April
"World Economic Outlook" link raised its global growth forecast for 2006 0.5% to 4.8%, which would be the fourth straight
year above 4%.
If you ask me to name the proudest distinction
of Americans, I would choose- because it contains all the others . . . the fact that they were the people who created
the phrase "to make money." No other language or nation had ever used these words before; men had always thought of
wealth as a static quantity . . . to be seized, begged, inherited, shared, looted or obtained as a favor. Americans were
the first to understand that wealth has to be created.
