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By Bill Bonner
"We came, we saw... we borrowed!" Addison Wiggins proposed a suitable motto for the U.S. imperium.
But the dollar keeps rising. Dollar strength has surprised most analysts. We have no particular view about the dollar – except that we don't like it. We don't much like the euro either. All the world's paper monies are bound to be a disappointment over the long term. Our guess is that the euro will be less of a disappointment than the dollar, but it is merely a guess. Europe has less debt than America, and a positive current account.
Warren Buffett has lightened up on his bet against the dollar. He made $3 billion when the dollar fell against the euro. He's given back $1 billion since then, as the dollar rebounded. Now, he's cashed in 25% of his anti-dollar position. It may turn out that he should have waited longer, we don't know.
But for the present, the dollar is going up...against other paper currencies. Against real money, gold, all paper – no matter whose picture is on it – is going down, fast. This is what we have always expected. Yesterday, the price of gold – the anti-paper – rose more than $10, to nearly $480 (December contracts).
Right now, we rather regret it. Because gold has, so far, been unwilling to correct to our current buying target: $450. This leaves us to wonder whether we should buy at the market price – whatever it is – or continue waiting. Over the long run, we doubt that it will make much difference. The supply of paper – in all its forms – is multiplying rapidly. Money supplies everywhere are going up two, three, even five times as fast as GDP. Debt levels, too, are going up much more quickly than real economic output. And credit derivatives? Don't even mention them; they're soaring. About the only thing that is not outpacing economic growth is the supply of hard assets generally, and gold particularly. Over time, we have little doubt that the price of paper will fall...compared to gold. How, when, and why remain the subjects of much debate and uncertainty.
Meanwhile, helping to support the dollar are foreign investors, who are buying record numbers of U.S. assets. But the assets they are buying seem to be shifting from debt to equity. That is, while they may be cooling on U.S. Treasury bonds, temperatures are rising for U.S. stocks. Again, as expected, foreigners are turning up their noses at more IOUs. They want to own U.S. businesses and American resources. They want something that has real value. In September, foreign investors put a record amount of money on Wall Street, a net of more than $100 billion.
For the moment, this foreign buying is helping to push up Wall Street and the dollar. But we also know that the growth in U.S. dollar claims, obligations, and debts is growing at a rate that can't be sustained. A "Fiscal Hurricane" is coming, says USA Today. For the next 10 years, $1.6 trillion in federal deficits are projected. Altogether, the national debt is expected to grow by $3 trillion through 2010, to a total of $11.2 trillion. This is in addition to Americans' $7 trillion in mortgage debt. Of course, these are only a fraction of America's financial obligations. There are also all the automatically expanding programs for health and retirement – all set to explode when the boomers begin to retire in 2011. The interest on the national debt alone, in 2010, will be more than all the rest of the world combined spends on defense.
Where will it all lead? Broadly, it will lead to a lower standard of living in America (so much money has been pledged to so many different places, there will be less left over to spend). It will also lead to a lower dollar, though not necessarily directly or immediately.
What's the best investment strategy right now? Sell inflated property; buy gold.
November 18, 2005
© 2005 Bill Bonner
Bill Bonner is the author, with Addison Wiggin, of Financial Reckoning Day : Surviving the Soft Depression of The 21st Century.