-- Posted Sunday, 12 February 2006 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Monday, February 13, 2006
For investors who’d rather be smart than lucky
Worried that you’ll awaken one day to news that the dollars you’ve got in the bank have to be exchanged for “new” dollars? You’re not the only one. Subscriber Ben Woo allowed here yesterday that that was one of his worst fears, financially speaking. “It would be suicidal,” for the government, he wrote, and there would be “blood in the streets.” But would it really be that bad? To put Ben’s mind at ease, I solicited comments from readers, at least a few of whom were bound to be more sanguine. And so they were, including one reader, our old friend Bob Visser of Johannesburg, who’s already been there, done that. He writes as follows:
“Some time ago you published my war-time experiences in the Netherlands. Same dealt with the "Printingpresses" of the Nazis and was inspired by the same machine mentioned by Mr Bernanke. Reading now of Mr Woo's concern, I would like to add to my story if I may. During the dark days of 1944/1945, the "Hungerwinter," when barter was the main means of survival for the ordinary citizen, there were indeed greedy fools who accumulated the useless Nazi -Guilders, thinking that Hitler's thousand-year Reich would indeed last all that time. They did see a bright future for themselves in the fuerer's Arian paradise with their paper wealth. The name for these parasites was: "Black marketeers", known and despised by the common folk.
“Fortunately for us, we were liberated by the Allies under Gen Eisenhower in April 1945 -- in our particular case by the Canadians.( I will be for ever grateful to them.). To come back to Mr Woo's worry, the new government in Holland declared all German guilders to be no longer "valid tender" after the liberation. Citizens could exchange a certain amount of old currency for the new issue (I vivdly remember standing in the queue with my mother at the local bank), but individuals who presented exorbitant sums of old currency had to explain how they acquired such vast sums. Invariably the black marketeers were found out and many went to prison, considered not much better than traitors.
“So Mr Woo, based on this, if you have honestly accumulated your wealth, your future administration will exchange your old Dollars for new ones. I however doubt that they will still have the same purchasing power by then. In any case your currency today is already worth some 80% less than the Dollar of 1945 and is losing value daily. I acknowledge that this is in no way a scientific explanation, but it certainly is based on practical experience which I think Mr Woo is looking for. However it is also the reason why I am today a goldbug.”
Swiss Dinars
Here are some more world-wise observations concerning the dollar from Hal Muller, author of a provocative letter published here earlier:
“ didn't realize that your concept of surviving deflation involved cash under the mattress. There is a recent precedent for that kind of activity. After the Gulf War of 1991, the Kurds in Nothern Iraq lived free of Saddam Hussein's control. But they continued to use Iraqi banknotes printed before 1991 to conduct commerce (the so-called Swiss dinars, because they were printed in Switzerland). They wouldn't accept any of the later-printed Iraqi bank notes. I guess the design changed, in any event there was an easily ascertainable difference. The supply of the "Swiss Dinars" was finite. No more were being created. So they all accepted that paper as money.
“It's a curious situation. Logically, those pieces of paper had no more intrinsic value than Saddam Hussein's later issued currency. The only difference: the supply was ended.
“So to move the discussion to our world, what happens if our financial system implodes? People in our society are so accustomed to paper money, I think they'll accept a new system of fiat currency introduced by the government even after the old dollar collapses.
“That has been the routine pattern throughout Latin America and Africa; when one currency becomes defunct, they replace it with a new issuance of paper. And life goes on. Of course, internationally the financial consequences to America and the world would be catastrophic, to say the least. No more dollar hegemony. No more buying the world's production on credit. And a lot of irate foreigners holding worthless dollar-denominated debt instruments. It would be the end of our empire.
Few Possess Gold
“Some people fantasize about a new economic order evolving out of such a crisis based upon silver and gold. That would take some time! First of all, how many people do you know who can start paying for stuff with silver and gold coins. More importantly, how many employers can start paying their people with silver and gold coins? How many merchants can pay their suppliers for new inventory with gold and silver? We're talking about a fundamental paradigm shift.
“And then there's the government. Do you think the powers that be will allow a laissez-faire currency system to evolve? Oh, Hell No! They'll declare it a mid-eastern terrorist plot and invoke the Patriot Act to stop any currency system functioning beyond their control. The world's central bankers and their elitist sponsors aren't going to throw in the towel. Their propaganda machine (CNBC et al.) will find someone to blame. And some kind of fiat currency will find a rebirth, one way or another. It may not last, but that will be their solution to a financial implosion. Just my opinion.”
Role of Interest Rates
And here’s a response to Hal Muller’s earlier letter from our long-time Seattle pen-pal, David S.:
“[He provided] an excellent focus on the real long-term monetary issues that investors need to address. One implicit issue in Mr. Muller's commentary is the assumption that there is a level of interest rates that would restore the credibility of the dollar against physical metal. I know that Mr. Volcker now believes that the 19-20% short rates were excessive -- I am not so sure, but even if he is correct, how high do rates need to go? Even if you assume that short rates in the 8% range would be sufficient -- and I believe that is below the minimum edge of the effective scale -- I believe Mr. Muller's point is correct -- even 8% would be sufficient to eliminate most of the producing labor and business activities. Our economy simply does not produce enough to bear the burden of an additional 3.5% interest.
So your response effectively raises two issues.
“Your bottom line response (‘[h]owever, I’ve argued here before that when cascading defaults reduce the supply of credit dollars effectively to zero, the relatively few physical dollars that remain in vaults and under people’s mattresses will retain their purchasing power’) assumes that all credit money is eliminated. How about credits that are direct charges to the Treasury? Such as cash management paper and Treasury Bills? Don't we think those kinds of credits will remain viable tender? [Yes. Government IOUs, including dollars, are likely to continue to serve as money or near-money, since they are backed by taxation. Consumer credit, however, will be harder to come by than poker chips in a monastery.]
Money, Post-Collapse
“Would not money market accounts invested exclusively in Treasury Bills remain viable storage of legal tender? How about Treasury Direct? On a bank account in a solvent institution? Are there not some institutions engaged in the banking business which would survive as transfer channels for whatever credit money remained? [The answer to all of your questions is, probably yes -- but in a post-Katrina-New-Orleans-kind-of-way.]
“If not, collapse of the dollar may not mean very much because owners of assets securing credit will simply keep the assets and stop paying the debt and absent a legal exchange system, who will hire the lawyers, judges, sheriffs, and other officials to keep the legal realization system in action? Or more precise, in what form of exchange will they be paid? [The rentiers will take a piece of everyone’s paycheck, whether in “new” dollars or “old”. But miss a payment and you will be out on the street.]
“That is essentially the end game I suggested to you several years ago which would return the system to hard money or at least to a state where hard money was acceptable transactional tender.
“Your second point is that when we reach the stage where the dollar is not acceptable tender because interest rates are not high enough, the government will issue a new series of dollars as legal tender that will be acceptable. That thesis is out there in general circulation at this point. However, I am skeptical because I am not able to come up with hypothetical facts on which a new fiat currency would be more acceptable than the existing issue. [The new-dollar scenario is not my thing; I’m a deflationist, remember, and that implies that I think the relatively few “old” dollars in circulation will serve as legal tender in a pinch. However, if deflation is preceded by an administered hyperinflation, as some believe it will be, then those who presumably would care about the rate of return they are receiving on their savings will already have been nuked. In this scenario, “new” dollars will flood the system on a regular basis, as occurred with the mark during the German hyperinflation of the early 1920s.]
“The problem is that the U.S. productive engine no longer produces enough to make the government promise to pay (interest) a credible support for a fiat exchange system. And the financial community at this point is sufficiently sophisticated to recognize that any fractional or fixed metal reserve system is in fact a form of fiat money, at best, no better than the legal system that would support enforcement against some predetermined standard.
“So I doubt there will be a replacement or "new" dollar.
“I cannot now predict the future course of US monetary policy. But Volker said several months ago that upon reflection, his worst mistake in the late 70's was ‘letting the price of gold get away from us’. He had options the current fed does not have.
“But I think we can say with some confidence that the fed will make a determined attack on the price of gold in the near future and it must be successful -- otherwise, the monetary system will collapse right now.”
Forcing Fed's Hand
We'll give subscriber Tony Rodrigues the final word today:
"In your latest deflation/dollar debate, you have finally come around to saying that the dollar value in the future is going to be only what the Fed wants it to be. That is a change from your previous position. [The more important part of my position is unchanged -- that neither the Fed nor all the central banks acting in concert will have enough muscle to manipulate currency values when market forces cause the global financial system to implode.]
"I think the question really is, will the marketplace have any say in the future value of the dollar? At some point, it will quickly become clear to the Fed that the longer-term viability of the U.S. financial system depends largely on the viability of its medium of exchange... i.e., the dollar. Gold, which is an honest medium of exchange, will force the hand of the Fed. Gold is in a bull market, and because of this the Fed will not be able lower interest rates as the economy slows down because the dollar value AND bonds will drop sharply. The dollar is a DEBT instrument, let us never forget that important point. It is created only when new debt is created. If you look on your dollar "bill" (debt instrument), it says 'Federal Reserve Note' (a 'note' is a debt instrument). Our financial system is built on debt, and the collapse of debt means that the value of that debt MUST go down, i.e., market interest rates RISE SHARPLY. The Fed will have no choice but to follow. All of the above in the fullness of time -- timing is everything in the marketplace.
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Note to Oz Readers
Margate, New Jersey’s favorite son, Capt. Joel S. Fogel, is competing today (Sunday) in the World Lifesaving competitions in Geelong. Thereafter, he’ll be in Lorne for the Iron Man, 2K beach run, rescue swim. If you’re in the neighborhood, I hope you’ll stop by to say hello and cheer him on. Joel is quite a guy – a member of the Explorer’s Club who has paddled the world’s oceans and rivers in a kayak, among other things.
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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2006, Rick Ackerman. All Rights Rserved. www.rickackerman.com
