THE CONSEQUENCES:
Shrinking Dollar

The U.S., at its current pace, has absorbed approximately 80 percent of the savings of the nations of the world. U.S. consumers, following suit, have taken household debt to almost $10 trillion, and their saving rate is next to zero. The dollar is shrinking in strength-and many economic experts are predicting a dramatic downturn is imminent. Their observations are difficult to ignore.

“Back in the 1960s, I used to talk to Hamilton Bolton (a founder of the Bank Credit Analyst) about debt and the GDP (Gross Domestic Product). Ham warned that it was taking more and more debt in this country to produce less and less in terms of the nation’s GDP. As I remember, in those days it took about $1.50 of debt to produce one dollar of GDP. Today the estimate is that it takes $7 of debt to produce a dollar of GDP. The U.S. is running up the down escalator of debt, and somewhere ahead the U.S. is going to get tired, mighty tired.” - Russell, Richard (2005), Editor, Daily Remarks, Dow Theory Letters, 1/13/05

The highly regarded Bank Credit Analyst agrees with Mr. Russell:

“The dollar stumbled after another massive trade deficit was reported this week...The structural headwinds from the current account deficit and mounting net foreign indebtedness will ensure that the primary trend in the dollar remains down.” - Bank Credit Analyst, Weekly Bulletin, 1/14/05

“The U.S. is running up the down escalator of debt, and somewhere ahead the U.S. is going to get tired, mighty tired.”

So what? What should be done-and what might be the outcome? Last June, the Economist stated:

“...central banks would be wise to do more to mop up today’s excessive flow of liquidity. Mr. Volcker, who bravely launched the successful fight against the ruinous inflation of the 1970s, would understand why. ‘The truly unique power of a central bank’, he once observed, ‘is the power to create money, and ultimately the power to create is the power to destroy.’” - Economist, Vol. 371 Issue 8380, 6/19/04

By November, the tone coming from the Economist sounded more ominous:

“America’s current account deficit is running at a record 6 percent of GDP this year, and on existing policies it will continue to widen...the deficit is unsustainable: sooner or later it will need to shrink, and that will involve a cheaper dollar. A new paper by Maurice Obstfeld, an economist at the University of California, Berkeley, and Kenneth Rogoff, of Harvard, a former head of research at the International Monetary Fund, predicts that the dollar will fall by another 20 percent in real trade-weighted terms even if America’s external deficit unwinds gradually. If the adjustment is more abrupt, the dollar will dive by more than 40 percent...As Mr. Rogoff puts it: ‘The world is set to jump off the top of a waterfall without knowing how deep the water is below.’” - Economist, Volume 373 Issue 8401, 11/13/04

In January 2005, Richard Russell added this observation:

“Looking ahead two things must happen. Either we’ll print the paper in an effort to finance all this debt, and that will be highly inflationary. Or we’ll be unable to handle all the debt, the dollar will swoon, and the U.S. will sink into a recessionary deflation. Either way, it seems to me that the dollar will be in extreme danger. If we inflate, it will simply be a dilution of the purchasing power of the dollar. If we deflate, the very stability of the dollar itself could come into question.” - Russell, Richard (2005), Editor, Daily Remarks, Dow Theory Letters, 1/13/05

Read More...THE SOLUTION: Gold, More Gold... Gold Coins.