Some of you might remember this Newsweek headline from early 2005.
Bottom Dollar
The greenback's fall is stoking fears of a global crisis.
I remember plenty of alarmist diaries about the crashing dollar back then.
Then suddenly the emergency was over. The headlines about the falling dollar were over. The currency rose. The crisis was over...or was it?
As of Friday the dollar is trading at its lowest levels since early 2005, around the same level that created alarm just two years ago. And if you measure the dollar honestly, it now trades at much lower levels than it did two years ago.
So what does it mean? Why doesn't anyone care today?
More on that below the fold.
The first thing to understand is - how are they measuring the strength of the dollar?
The dollar index, as reported by almost all the financial media, is a reflection of relative strength against a small basket of currencies, as such.
As you can see, an overwhelming percentage of this dollar index is against europe, and it understates our trading volume with Canada as well. Our 2nd and 3rd largest trading partners, Mexico and China, aren't even represented in this index. Nor does it include most nations we import oil from. So what good is this index if it doesn't show who we actually trade with?
Fortunately there are an index that reflects our trading partners.
As you can see, a true measure of the dollar shows that it is weaker now than when the financial media was screaming. In fact, it is at its weakest point in a decade. Part of the reason for that is because China is slowly moving away from the dollar since early 2005.
You have to remember that Wall Street is in the business of seperating you from your money, just like Las Vegas only less honest. Remember in late 2004 and early 2005 the financial media was trying to scare you into selling dollars and buying other currencies like Euros. However, they knew something that few Wall Street insiders knew - the trend was about to change. Congress had just passed the The American Jobs Creation Act.
The AJCA allows companies, on a one-time limited basis, to repatriate offshore cash balances at a reduced tax rate. The act temporarily reduced the 35 percent rate and replaced it with a 5.25 percent rate on dividends in excess of normal distributions from foreign subsidiaries. That is, if an American company's foreign subsidiary turns a profit and wants to return that profit to the American company as a dividend, the dividend is taxed at 35 percent minus any taxes paid abroad. Those electing to take advantage of the lower rate would forfeit their ability to use the foreign tax credit on the funds subject to the 5.25 percent rate.
No one knows just how much money was repatriated, but the estimates I've seen are in the hundreds of billions of dollars. Instead of creating actual jobs, most of that money was pushed into the stock market as corporate stock buybacks. This artificially pushed up the values of all those stock options that CEO's are paid with. What those hundreds of billions of dollars also did was push up the value of the dollar. The AJCA expired in 2006.
In other words, the financial media was scaring you into doing the opposite of what you should have been doing. Why would they do that? Because the smart, insider money needed someone to sell to.
Now compare that to today, when the dollar is dropping to new lows but the financial media isn't reporting it. They also didn't report the on the falling dollar all the way through 2002, 2003 and early 2004. The fact is that when there is easy money to be made the financial media is clueless.
So why isn't the financial media reporting on this alarming trend? Simple. They don't want to scare the public.
Last summer the Federal Reserve Bank of St. Louis released a study asking the question, Is the United States Bankrupt?. To make a long story short, the answer is - Yes.
If you want a true measurement of this, look at what our government decided just a few months ago.
The United States Mint, concerned that rising metal prices could lead to widespread recycling of pennies and nickels, has banned melting or exporting them.
Why would someone want to melt down pennies and nickles? Because they are worth more as metal than their face value.
"Government is the only agency that can take a valuable commodity like paper, slap some ink on it, and make it totally worthless."
Ludwig von Mises
It was only about a year ago that Dallas Federal Reserve Bank President Richard Fisher said "the U.S. dollar is a `faith-based currency' dependent on the credibility of a central bank".
I guess faith in the dollar is sagging.
The International Monetary Fund called for a significant dollar devaluation. The last time they did this in 2002, the dollar fell 40% against the Euro. This time they want it to fall against Asian currencies.
The Bank of International Settlements called for a "radical overhaul" of the global economic system. These are the same guys who actually run the global economic system.
"The few who understand the system, will either be so interested in its profits, or so dependent on its favors that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantages...will bear its burden without complaint, and perhaps without suspecting that the system is inimical to their best interests." - Rothschild Brothers of London communiqué to associates in New York June 25, 1863
So why is this happening to the dollar? Simple - they are printing too many dollars. The law of supply and demand says that the more you have of something, the less it is worth. That's why the Federal Reserve stopped reporting the M3 over a year ago. Fortunately, some people are still calculating the numbers to see what the M3 looks like.
Why would they be doing that? Well, where else are you going to get all those dollars to fund your war for a country without any savings, huh? You have to print them out of thin air.
So what does this all mean to you and me?
The most immediate and obvious consequence is that prices are going to keep going up. They aren't going up because the goods are more dear. They will go up because the money you pay with is worth less.
Another consequence is that eventually, sooner or later, foreign investors who have funded our massive budget and trade deficits so far will start selling dollar-based assets. Eventually they will get tired of losing money on treasury bonds and corporate stocks because of the falling value of the dollar. When that happens the dollar will really start to drop and we'll see a brief period of hyperinflation. It will bankrupt a lot of Americans.
So what do you do to protect yourself? During the last dollar scare two years ago everyone here was telling everyone else to buy Euros. If you followed that advice you lost a lot of money.
My advice at that time was to buy gold instead, but few were interested in that investment strategy. If you followed my advice you made a lot of money.
My advice hasn't changed. You should still buy gold and silver. The dollar has a long ways to fall and most other nations are actively engaged in competitive devaluations. All the currencies are sinking, its just that some of them, like the dollar, are sinking faster than others. History is clear: all fiat currencies eventually return to their true value - zero.
Gold and silver can't be devalued. It can't be printed out of thin air. It's your protection from government irresponsibility. What's more, it's been a better investment than the stock or bond market for three straight years and counting.