-- Posted Thursday, 24 April 2003 | Digg This Article
Some First Thoughts
HEADLINE from the future: USS CHIANG KAI-SHEK TO BE BUILT
Washington: The Department of the Navy today announced that the USS Chiang Kai-Shek would be built, entering the service in two years. This aircraft carrier is the second in a series financed by the Republic of China. A spokesperson in Taiwan said that her government was pleased to be part of this joint effort to promote peace, and contribute to the continued need for funding of the U.S. current account deficit. The carriers are scheduled to serve as part of the security forces surrounding Taiwan.
Watching the Battle of Iraq unfold before us on FOX News was a truly remarkable experience for those of us that find history a grand story. Imagine if we could have had the same view at Concord or Iwo Jima or any of the hundred other places young Americans have shown their "shock and awe." What might the world be like today if we had witnessed the human costs of patience and appeasement over the centuries? Could millions of lives been saved from Stalin's butchery or the tragedy of the Second World War?
To this author the "awe" in the "shock and awe" were those young men and women we watched. Their confidence, capability and determination was breathtaking. They are the most powerful army ever put in the field not simply because of their weapons, but rather because of their training and ability to perform. A truly "awesome" group of young people that have now set a high standard for the generations that follow. In a few short weeks they accomplished more for freedom and liberty than all the "peace at any price" crowd that has ever lived.
Fortunately for these young people, the U.S. has been able to afford the equipment they need to carry out their jobs. The "fuel"for high technology military capability is money and wealth. More importantly though, the purchasing power of that wealth and money is what matters. Fortunately the U.S. economy has been able to generate over the years the wealth and income to support these young soldiers. Fortunately for them and the nation the U.S. economy has never been faced with monetary blackmail. That is, until the future that may await the U.S. economic might.
The "fuel" for high technology military capability is
the purchasing power of a nation's money and wealth.
Those of us that have argued for higher levels of Gold investment in portfolios have done so for generally two reasons. The first of those is the long-term bear market in financial assets in process that is helping to create a long-term bull market in real assets such as Gold and Silver. Secondly, many of us have recognized the growing likelihood of a devaluation of the U.S. dollar as a consequence of inept monetary policy at the Federal Reserve.
A third reason needs to now be put forth. The very sovereignty that serves as the umbrella of protection for our freedoms and liberties is threatened by the vulnerability of the dollar. Never before has the U.S. rushed toward a set of conditions where the nation is vulnerable to monetary blackmail. Never before has economic viability threatened U.S. military capability.
The coming money threat to the sovereignty of the United States is a concern that arose during the writing of "$1,265 GOLD." One of the chapters in that effort is an attempt to visualize what the world might be like after the U.S. economy and dollar crash against the backdrop of an already changing world. That was one of the few things this author has written with no expectation that it would be right or even reach a reasonable conclusion. But while not always right, we are usually never short of an opinion.
"Gold bugs" just seem to be generally ahead of the rest of the investment community. Most of us were talking about the threat of the current account deficit when CNBC was still talking about JDSU and the AOL merger. That the U.S. current account deficit is approaching a near fatal level for the dollar would have been ignored except for the "gold bugs" fretting over it. And when dollar devaluation is imminent the cable shows will trot out their gurus with twelve stocks to buy in order to capitalize on the situation.
The popular media generally ignored the concerns of the "gold bugs." Why worry about a NASDAQ Composite Index at 5000? Why worry about the Housing Debt Bubble? Why worry about terrorists? Why worry about the trillions of dollars that the U.S. owes foreigners? Why worry about the hundreds of billions of dollars of U.S. government debt controlled by foreign governments?
We have really only taken the first steps toward fully understanding the ramifications of a Federal Reserve out of control, without a contemporary economic foundation for decision making. That the bubble approach to economics practiced by the Federal Reserve is pushing the U.S. toward a current account crisis is now widely accepted. That the dollar will collapse under this mountain of debt is now readily acknowledged by many. That Gold will benefit from this situation we all know. But, perhaps the ramifications of the Greenspan Debt Bubble have not yet fully been explored.
HEADLINE from the future: US COMBAT TROOPS WITHDRAW FROM KOREA AND JAPAN
Washington: At a joint news conference the U.S. Secretary of Defense and the Ambassador of the Peoples Republic of China announced today the withdrawal of all U.S. combat troops from Korea and Japan. In exchange for this peace effort the Bank of China agreed to finance US$100 billion of Treasury bonds using that country's growing foreign currency reserves. The Secretary of the Defense said, "We are pleased to be part of this joint effort toward peace, and aid in the funding of the U.S. current account deficit."
Before proceeding let us agree on a few things. First, this author has not got all the answers on this subject. We are just beginning to explore the Weapons of Monetary Destruction facing the U.S., and the rest of the free world. Third, all of us need to be part of the research on this matter. Those of us that write these articles gain from the insights of others, and this author welcomes those comments. No pretense is made about being a military authority for our forte is global investing. Finally, these comments are not intended to be anti-military for this author did his three years and ten days in green. These thoughts are merely a projection of the ramifications of U.S. economic polices over the past ten years for the future military capability of the U.S.
The motivation for moving forward with this project was a news item flashed across the television screen a few days ago. As of that date, the U.S. military had accomplished ariel refuelings totally 25 million gallons. That may not be a record but it certainly qualifies as one monumental accomplishment. What caused it to stick out was that somewhere we had read that the total cost of delivering a gallon of fuel in the air is $16 per gallon. Do the math on that one and you start to understand the costs of deployment. (That volume estimate will probably be exceeded easily by the demand for fermented malt beverages by the troops when the shooting stops.)
The first graph portrays only the debt of the U.S. government to foreign investors. Please note that these figures are in trillions of dollars. That's right, we now have to calculate our debts to foreigners in trillions. Just another miracle of the new economy, and another productivity gain for Chairman Greenspan since we use less digits. Included in the chart is an estimate for 2003 and a projection for 2004.
HEADLINE from the future: U.S. WITHDRAWS AMBASSADOR TO ISRAEL
Jerusalem: The U.S. Embassy in Jerusalem will close tomorrow. Yesterday it was the site of the massive sale of all military land assets remaining in the region to the Islamic Democracy of Iraq. Last month the sale of all naval vessels remaining in the Middle East to Iran was completed. The sales were part of an ongoing program of swapping surplus U.S. military assets for U.S. Treasury debt held by foreign investors. The sales were seen as a way of reducing the debt of the U.S. government to the central banks of these nations, and were required as part of the IMF plan for financial assistance with the U.S. current account deficit.
Now let us relate these debts to the size of the U.S. economy. Back when an illusion of economic growth was being created by the stock market bubble, this debt appeared to be under control. However, when the U.S. economy faltered after the bursting of the stock market bubble the burden of this debt started to become more apparent. Now as the U.S. economy moves into full idle, with little happening other than the creation of mortgage refinancing documents, the growing indebtedness of the U.S. government to foreign investors is rising rapidly. The credit card balances are getting larger by the day.
ARMIES & MONEY IN HISTORY:
"Among the most effective instruments for provisioning the army in the field was the use of hard currency. Darius I(about 500 B.C.E.) was the first Persian monarch to coin money, using as a standard the daric coin weighing 130 grains of gold. Supported by the enormous Persian gold reserves, the daric became famous for its purity and stability. It became the only gold currency of the ancient world and could be spent anywhere. The use of a precise standard of weights and measures needed for coinage also had an effect in terms of the ability to obtain military supplies in precise amounts and weights. Unlike earlier times when armies on the march confiscated what they needed to the detriment of the local economy, the Persians could purchase what they needed with a universally accepted currency." (Richard A. Gabriel, The Great Armies of Antiquity(Westport: Praeger, 2002), 165.)
An accepted currency of exchange was established as important to armies about 2,500 years ago. Our armies no longer need to buy feed for their pack animals. They do however needs lots of oil and other things that come from foreign producers. And even that which the nation produces itself requires inputs from foreign sources. Our trade deficit in technology is greater than many imagine. The nation's ability to buy those essential goods and services depends in large part on the value of the U.S. dollar in foreign exchange markets.
Remember that our goal here is only intended to introduce the subject. The vulnerability of the U.S. to monetary black mail must be given further consideration given U.S. reliance on foreign funding of the current account deficit and federal deficit. The nation's ability to import goods and services relies on the willingness of foreign central bankers and investors to hold dollar denominated assets.
If foreign central banks, for whatever reason, decide to not hold more dollars the value of the dollar will fall on foreign exchange markets. The price of all those imports will rise. Interest rates will have to increase. A deeper recession will follow. An economy deep in another recession, with housing prices crumbling, will have trouble buying those "things" the armies need. The money for the high tech army may simply not be available.
The "what ifs" need to be asked now. What if, for example, the Peoples Republic of China does not like our friendship with the government of Taiwan and starts to sell their holdings of U.S. debt, sending U.S. interest rates up as punishment? Will the U.S. suffer a recession rather than letting Taiwan be "reunited" with China? What if our friends in the French government were to do the same the next time we had a policy disagreement? What if nations with strong Islamic leaders reduce their purchases of dollar denominated assets? What if the Shiite government of Iraq refuses to buy U.S. goods or debt with their oil revenues?
What if the dollar crumbles as a result of Federal Reserve policies? Our last graph shows the likely path of the dollar's value. How many fewer high tech weapons can the U.S. afford with a dollar worth 60% less? What will the world be like if the U.S. can not afford to deploy armies outside the U.S.? How can a President protect the nation if the creditors will not let him? Teddy Roosevelt sent the navy around the world figuring that he could get them half way and Congress's responsibility was to bring them home. Such an approach may not work with foreign central banks as the "loan workout committee" for the U.S.
This threat to our national sovereignty could be real. Money as a weapon of international policy is certainly not a new approach. Countries have been bidding for U.N. votes for years. What if the U.S. military can neither afford a deployment or is forced to back down due to monetary blackmail? Which will be worth more, your mutual funds or your Gold? More importantly, hopefully we all start to think about these concerns.
"Mexico announces plan to sell dollars"
Mexico announced yesterday that it would start to sell dollars in international markets, in its most concerted plan to do so since the devaluation it suffered during the 'Tequila Crisis' of 1994. ... Officials said the move was intended to allow an orderly reduction of its internal reserves, which have been at record levels for some time and exceed $50bn. ... According to the treasury ministry, the reserves do not generate a strong return, so the net benefits of holding them have reduced." (Financial Times, 21 March 2003, p.8)
Please remember that no method is perfect nor is the one running the model. All estimated returns are for the model portfolio and do not reflect those earned on actual portfolios.
Ned W. Schmidt, CFA, CEBS - April 22, 2003
Schmidt Management Company
-- Posted Thursday, 24 April 2003 | Digg This Article
