traders are betting a report expected early this week from a task
force regarding Japan's banking problems is a sell signal for the
yen whether it is hard-line or soft in its implications for reform.
A hard-line approach to their bad loan problem is seen prompting
a surge in tradable bad news, while anything less is seen as a drag
on the yen anyway.
Everybody seems to be bearish on
the yen, but they should be bearish on the dollar. On Thursday,
New York Fed President William McDonough said:
The only markets
that have seemed relatively calm are the foreign exchange markets
- Reuters, Oct 17
The first chart at the top is a two-year
chart of the US dollar index. This index hasn't been as volatile
since 2000. Even in 2000, while the volatility was greater than
it has been this year, the US dollar index only finished up slightly
less than it is down so far this year.
Of course, the US dollar index is
only down 8% in 2002, and by that absolute measure, Mr. McDonough
is right, it has been a calm decline.
If, however, the Fed President means
the 3-month period (see blow up of past 3 months - second chart
from the top) since August, it's important to note a few things.
The CRB rallied 10 percent in those three months.
We take it as a signal that the dollar's
purchasing power continues to deteriorate, despite its Forex relationships,
and the questionable aggregate price data.
So while the dollar may have seemed
relatively calm in foreign exchange markets during the period it
was quite weak against most commodities (including gold prices),
excluding Silver, Lumber, Cotton, and Orange Juice.
This is important in our view, because
we view the break through the 108 level on the dollar index (see
top chart) to be a primary rollover, but subjected to the following
- a primary
bull market signal in Gold ($340),
- a primary bull market signal in
either the CRB (255) or Oil ($31), and
- the continuation of the down leg
in the dollar index (i.e. break through July's low), particularly
in the Dollar/Yen relationship, which appears to be about
as contrarian a call as there possibly is today.
in the dollar against the yen would be a sign that the dollar is
definitely in trouble, since we agree; the Japanese economy is in
dire straights. Yet, I think it's noteworthy that the yen has held
up well in light of the barrage of bearish sentiment. In fact, while
it's too early to say anything, who's to say the yen isn't building
an important bottom here? See chart.
A relentless bear market in stocks
and record low yields in the United States I think continue to undermine
the fabric of the dollar's liquidity (or investment) premium, the
premium we hypothesize that investors put on the dollar in the foreign
exchange markets to reflect the normally higher expectations for
returns on dollar denominated assets.
We believe that the break down in
the US dollar during June/July signals a primary bear market for
it, and barring a sharp bear market rally in shares the dollar should
continue lower relative to any currency that the US maintains a
chronic trade deficit with (where it is dependent on the inflow
of foreign savings), as well as relative to gold, and the CRB (or
In light of the dollar's moderate
decline (only 11% from the 18 year high in the dollar index) so
far, the criticism that gold should be doing better is unwarranted.
Since the dollar's peak (July 2001), gold has rallied 18%. On that
basis gold is doing just fine, isn't it?
What's missing is the bull market
signal. But even here, critics beware that the bear market signal
for the dollar index occurred only in July, if that's indeed what
So Gold is only three months behind
in breaking through $340. In our view, the dollar has only one real
chance to prevent a primary gold market reversal any time soon,
and that's a strong bear market rally on Wall Street that's able
to withstand a likely rise in yields, which means that earnings
prospects at least have to stop deteriorating.
The bulls have their work cut out
We're still betting on gold. Besides,
war is one of the few ways of sustaining inflations and deflecting
domestic strife. At least according to Buffett.
No, not Warren, his father, the honorable Howard Buffett. On the
eve of our current international predicament, it could be appropriate
to take a trip down memory lane:
"Because of our economic
strength, the paper money disease here may take many years to
run its course. But we can be approaching the critical stage.
When that day arrives, our political rulers will probably find
that foreign war and ruthless regimentation is the cunning alternative
to domestic strife. That was the way out for the paper-money economy
of Hitler and others. Those elements here and abroad who are
getting rich from the continued American inflation will oppose
a return to sound money. You must be prepared to meet their opposition
intelligently and vigorously. They have had 15 years of unbroken
victory. But, unless you are willing to surrender your children
and your country to galloping inflation, war and slavery, then
this cause demands your support. For if human liberty is to survive
in America, we must win the battle to restore honest money" -
Human Freedom Rests on Gold Redeemable Money, reprinted
from the Commercial and Financial Chronicle May 6, 1948,
by Congressman Howard Buffett
That was about a generation ago.
We've already passed that critical stage once when it led to dollar
devaluation and war in the seventies, 25 years later. What a forecast.
Look how right Bush is making that (underlined) statement
again today, another quarter of a century after the last dollar
15 years before 1948 was 1933, the
year in which the dollar ceased to be redeemable in gold. One could
argue that 1933 was the year the imperialist fate of the United
States was sealed. I don't mean to sound like a doomsayer, but there
is plenty of history and economic evidence that supports the notion
that an inflationist system is the tool of the welfare-warfare state.
The roots of the final demise of sound money in 1933 go back another
60 years or so, but it was in that year the dollar became 100% paper,
which is what Mr. Buffett means when he says, "they have
had 15 years of unbroken victory."
Thus, today it would be more correct
to say, "They have had nearly 70 years of unbroken victory," though
it wouldn't be unbroken since it was interrupted in the seventies.
Nonetheless, again we seem
to be at the precipice of a war, and if we're correct in our analysis,
another major dollar devaluation.
As for economic strength, the fact
of the matter is, the strength that Buffett meant was
derived from the institutions of private property and sound money.
At least the latter disappeared long ago, and some would argue both
Inflation Finances Government
We probably would all agree that there has been a creeping socialist
wind over the last century threatening to prove free market proponents
(and Mises) wrong, that socialism is indeed inevitable. Mises argued
But as a matter of fact, government
growth in the developed world continues without abandon, and it
has done this in America just as fast as anywhere else by some measures.
The reason I bring it up is because
the United States Constitution promised limited government. Now,
over the course of the 20th century we've witnessed how a sound
system of private property could become engulfed in bureaucracy
and enslaved by a growing nation-state. It's easy. All we had to
do is ignore Ben Franklin's advice.
So, the question that needs an answer
is how does an economy make the transition from a bureaucracy dependent
on inflation and war, and mired in high tax rates as well as large
national debts, back to a system of sound property
rights and limited government?
The only model we have so far is
that this kind of progress is born of crisis. I'm just sticking
with the facts in saying this. For the creators of the US Constitution,
it took revolution. They were in fact terrorists to the British
monarch. But we already know the winners write history.
If one were to look at the history
of global banking power, arguably, there has been a shift over the
past 200 years from Europe to the United States. It would be hard
to argue that the Federal Reserve System isn't on top of the world
today, much like the Bank of England was in its glory days, for
much of the last millenium. What happened in the United States that
suddenly, out of nowhere, came this immense banking power?
Capitalism! Not the kind that's apparently
practiced all over the world today. It
occurred to me that if any single nation adopted its own system
of private property and sound money it wouldn't be too long before
its banks became a force to reckon with in the global banking establishment.
It wouldn't be too difficult to argue that was the way in which
America gained its alleged economic strength in the first place.
Still, none of this answers the question,
how a country with enormous debt and high taxes can suddenly start
over. How does society rid itself of big government once it has
obligated its citizens in some way or another by accumulating massive
debt, and by hooking the economy on government incentives?
I don't know. Maybe nothing can be
done about it. Why would the masters of such a system concede any
power anyway? What politician would come into office, initiate a
new constitution, and actually reduce taxes, government spending,
as well as the debt, the foundation for his own subsistence?
How do we go back to limited government
from where we are today? That is what I would like to know. How
can we prove Mises right, and Buffett wrong? Is there another way
out for this "paper-money economy" besides the historical examples
set out by countries like Germany after their central bank exploded
in 1923, or by Russia after the epitome of too much government finally
gave way 10 years ago, or in China where it took a massacre of its
own people to get the nation thinking about freedom?
20th century history is littered
with doomsayers calling for the downfall of capitalism, as did even
the honorable Howard Buffett in his day by his warning. But is there
one among us that can not only warn, but figure out how the socialism
could be unwound as inconspicuously
as Greenspan is currently deflating the stock bubble?
Or are the doomsayers going to be
right, that it will end badly? Well, almost certainly that critical
day has arrived again, and foreign war and ruthless regimentation
are indeed proving to be cunning alternatives to domestic strife.
The Federal Reserve will quickly find itself with a new mandate.
International crisis will necessarily follow. And one day, perhaps
not too far off, the Fed will necessarily go the way of the Reich
Inflationist doctrine only moves
in one direction. Towards a complete annihilation of the value of
the currency, and thus, all debts. Deflationists be warned.
A Privately Chartered Non-Profit
Who owns the Federal Reserve System? It's a privately chartered
institution technically owned by the Federal Reserve banks.
Is it independent of government?
How can it be if it creates policies for the economy along side
the Treasury and the Joint Economic Committee, and is answerable
to the government, or at least was until 1999?
Regardless of who owns it, and who
runs it, and how it is claimed to be run, who is going to foot the
bill when it crumbles? Government. You and I. Either through monetary
debasement or higher taxes, or both, or worse.
So when we talk about the monopoly
over money today, it is not the private sector, regardless of who
owns the Fed. It is effectively
the government. Any action as a lender of last resort is a government
action. When it comes down to deciding on the level of interest
rates, it isn't the free market, it's public policy.
The government does in fact use the
Federal Reserve System to help it achieve many aims, and the private
banks that have a stake in the Fed continue to use it as a petty
cash fund when times get rough on their inflation agendas. Both
the government and banking system together have created a monetary
aristocracy where their monopoly on global money is shared.
And it's naive to think there is
no gold market manipulation when almost every "policy" aim of our
inflationist regime compliments the strong dollar "policy." What
the heck do you think policy is, a recommendation?
Casey's just sore because he didn't
say it first. Jab, jab, all in good fun right? Of course, we agree
that many reasons carried gold's bear market other than manipulation,
and we agree that many factors will drive its bull market besides
the effects and realization of any gold market suppression, which
is why we discuss so many factors besides manipulation. In fact,
that is the last thing we normally point to in order to explain
a gold move. But that doesn't mean we don't believe it exists any
more than the lack of evidence means it doesn't.
What it boils down to is that either
Casey is underestimating the US government or we're overestimating
it. I doubt he would argue there is no motive to manipulate gold
prices. If he did, who would care? He'd be wrong. Sorry Doug.
The way I see it is that the obvious
motives combined with a reconciliation of trading behavior, as well
as recent samples of the government's underhanded policy tactics
in manipulating interest rates,
currencies, and in promoting financial propaganda are enough I think
to infer the manipulation... at least it's safe to assume so from
an investor's point of view, and particularly
when it's not very arguable that an inflationist policy is one where
power is ultimately concentrated in relatively few hands anyway.
The people possessing this enormous
power would have to be fools not to act on the motives that could
give them almost unlimited control over the world's resources while
it lasted. But that would be a prospect not consistent with the
If you want to call all market intervention
foolish, then they're fools, yes. However, if you want to assess
the government's ability to fool most of the people most of the
time, they aren't fools, as far as we can tell.
Let me say it again, if the government
hasn't manipulated gold prices, and hasn't figured out yet that
it would be in their interest to do so, then we've completely underestimated
United States dollar and economic policy. And if we have, and after
reading GATA's charges they still haven't figured out why it's in
their interests to do so, then they'd be even dumber than Mr. Casey
C'mon, don't bet on it, don't be
a fool, at least not with your own money!