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2011-06-01 10:02:00

Our borrowed existence - series

Answer: Like I always say…I’m glad to be asked. For the past four issues, I have presented my case on why the US Dollar (USD) is closer than it has ever been to losing its “borrowed existence” as the world’s reserve currency, and what this will mean to each of us. I have used research from a wide variety of places, such as Stansberry & Associates, Kiplinger, Weiss Research, the Wall Street Journal, the New York Times, the Congressional Budget Office, the National Inflation Association, the Center on Budget and Policy Priorities, several others…as well as my own analysis...for what it is worth. If you have read these, you know that I believe there are some very serious things that are happening in this country and in the world that are not being talked about by nearly enough people. I would have much preferred people with much more knowledge in these areas than myself to do so, but it wasn’t being done. I am not an economist. I am not a politician. I do not have an agenda…other than using this column to inform as many people as I can of the things I see and have researched, in the hope something can be done before it’s too late. Maybe it’s already too late. Last month, we talked about what is going on in the rest of the world relative to the USD and its days being numbered as the world’s reserve currency. It is most interesting to me to see the timeliness of our information. We featured a graph in our June 1st issue showing how China is getting out from under the US debt it owns. On June 6th, 2011, the below report surfaced from Stansberry & Associates and The Wall Street Journal… Between May 2009 and March 2011, China sold 97% of its U.S. Treasury bills that mature in one year or less. As of March, China held only $5.69 billion in short-term U.S. debt, down from a peak of $210.4 billion. Until last October, China would make up for its decrease in short-term debt by buying longer-term U.S. Treasuries – its net Treasury position grew. But in each of the past five months, China’s Treasury position has decreased. China’s total holding of U.S. debt has fallen from $1.1753 trillion last October to $1.1449 trillion in March. Some would say, “What do they know.” Others might ask, “What do they know?” I will let you decide which comment you would like to make. This month, I will finish the information portion of this series with some history about our monetary system and how it relates to the happenings of present day. Again, it’s a bit “meaty,” but it will “put the pants” on all we have covered. At one time in American history, the benefits of sound money and the risks of easy credit were completely understood. It was during the founding of our country… just after the Constitution was ratified. The Second Congress of the United States passed the Coinage Act of 1792. The act established the dollar as the currency of the United States and defined precisely what a dollar was: 24.1 grams of pure silver. To ensure the quality of America’s money, three coins were taken from every major batch minted. Each year on the last Monday in July, the chief justice of the Supreme Court, the secretary of the Treasury, the secretary of State, and the attorney general witnessed these coins being assayed. If the sample coins did not meet legal standards, the officers of the mint would be dismissed and the $10,000 surety bonds they posted would be seized. Further, if any officer of the mint was found guilty of embezzlement or of debasing the coins, the penalty was death. Compare that system – where the most senior members of the federal government are in charge of maintaining the soundness of our money – with today’s system. Under the current system, the Federal Government has become the biggest counterfeiter in the world. That’s a bold statement, but look at what has happened. Fed Chairman Ben Bernanke has tripled the monetary base of the United States in only two years. The dollar lost 50% of its purchasing power under Alan Greenspan. And since the dollar was taken off of the gold standard in 1971, it has lost 90% of its purchasing power. How long could these folks have lasted at the time our country was formed? Imagine if the dollar was still defined as 24.1 grams of pure silver (the exact amount of silver in the famous “Morgan Dollar”). Imagine if companies paid dividends to shareholders in silver coins (or a mixture of gold and silver coins). Imagine when you saw the S&P 500 quoted in dollars, those dollars represented amounts of silver, not empty promises from the Federal Reserve. What would our stock exchange look like if our money was still “real?” The chart below shows the value of the biggest U.S. corporations, as measured by real silver dollars, since the founding of our country. You can see a long and powerful uptrend that begins just after the Civil War and continues until the late 1960s. That’s when the trouble starts. The rest of this is a bit “meaty,” but try and stay with me… In the late 1950s and early 1960s, the U.S. economy began running a constant and growing deficit with the rest of the world. Borrowing – mainly in the public sector – fueled these deficits, as the government tried to expand its social spending and fight a foreign war without raising taxes. Facing the possible loss of all its gold reserves, sharply higher borrowing costs, or both… the U.S. simply repudiated these debts, abandoning the pledge we’d made at Bretton Woods in 1944 to always allow foreign central banks to exchange their dollars for gold. Bretton Woods was a place and point in time…where 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, for the United Nations Monetary and Financial Conference, in the hope of rebuilding the international economic system as World War II was still raging. The delegates deliberated upon and signed the Bretton Woods Agreement during the first three weeks of July 1944. The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world’s major industrial states. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states. In short…in the late 50s and early 60s…we cheated our creditors, rather than repay our debts. The value of the U.S. dollar collapsed as a result. The loss was so severe that during the 1970s, the “real” value of the S&P 500 – as measured in silver – fell by almost 90%. Of course, since most people didn’t look at the world through the lens of real money, few realized what was happening. In terms of paper dollars, stocks ended the 1970s about where they began. But in terms of purchasing power – in terms of real money – stocks would not regain their 1960s highs for 27 years. By using paper money instead of silver, politicians discovered they could easily hide declines in America’s standard of living and our national wealth. In short, they discovered it was easier to “paper” over our problems than allow failing institutions and businesses to go under. It was easier to cheat our creditors than pay our debts. On the other hand, sound monetary policy (in my opinion and the opinion of many others, thanks to Paul Volcker) drove the big bull market of the 1980s and 1990s. But toward the end of the 1990s, debts began to explode again relative to the size of our economy. This second credit bubble, fostered by Alan Greenspan, wasn’t limited to the public sector. Private debts soared too… especially credit card, mortgage, and student-loan debt. These policies sparked another huge devaluation of the dollar, one that has continued almost unabated today. That’s why, in terms of silver, the value of the S&P 500 has been in a steady bear market since 2000. Take a look… The supposed recovery we saw from 2003 to 2008 never shows up on this chart. It was all financed with funny money – debts the market knew would never be repaid. What’s the end game? How will our country (and most of the developed world) learn to live within its means? At best…it will most likely be “painfully.” There just aren’t many happy endings in history for countries with this much debt or with corrupt political systems that wield so much power. To do what we have done with all of the indicators before us is a big sin. To fail to learn from history is the bigger sin. This sets up my article for next month. I think you might appreciate seeing some similarities of our present situation and a couple of others I will show you.