Agora Financial’s Rude Awakening

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Dubai, United Arab Emirates

• The waning dollar and the mounting bills it must pay: You total debt,
• The easing Chinese appetite for American I.O.U.’s,
• What all this means for your savings, steering clear of currency
  robbery and more…

Joel Bowman, reporting from the Middle East…

Today your dollar buys you less than half a British pound and not even three-
quarters of a Euro. The beloved greenback is falling against most major
currencies, hitting new lows almost weekly.

The buck does not stop here. In fact, there’s no telling where it may stop.
Our guess is on an abrupt halt when it reaches its intrinsic value, i.e. the
value of the paper it is printed on.

Meanwhile, in inverse correlation to the depreciation of the world’s reserve
currency, the bills it must pay for are on an uninterrupted upward
trajectory. War and welfare are by far the biggest hands in your pocket
costing around $600 billion and $700 billion per year respectively. Throw in
a few billion in infrastructure bills, the cost of the ironically named
Social Security and a host of other “departments of this-and-that” and you
come up with a national debt of roughly nine trillion dollars…give or take
a few hundred billion.

Who’s going to pay for all this mess? Well, you’ll pay a bit…then your
children will pay a little more…then their children will pay a lot
more…and so on down the line.

One of the taxes you will be forced to pay it through is called inflation
tax. This insidious little tax is the result of an increase in the money
supply. With each and every dollar pumped into the economy, every one that
preceded it sheds a little of its weight.

The Romans used to clip gold coins to the same effect. Today the Fed,
unabashed in its endeavors to send us all to the poorhouse, simply prints
more green stuff. The more green stuff there is, the less it buys. The less
it buys, the more of it is necessary to finance that ever-increasing debt.

Thomas Jefferson remarked of this practice of bequeathing debt, “I sincerely
believe, with you, that banking establishments are more dangerous than
standing armies; and that the principle of spending money to be paid by
posterity, under the name of funding, is but swindling futurity on a large
scale.”

In the column below, the Free Market Investor’s Chris Hancock take a look at
the mounting cost of living beyond our means and the many little Peters and
Pauls who will find themselves footing the bill. Enjoy…

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Robbing Peter AND Paul
By Christopher Hancock

On Aug. 1, I-35W Mississippi River Bridge collapsed in Minneapolis…killing 13
and injuring 100 motorists. Since August 1, the dollar’s value has collapsed
3.4% against the world’s major currencies. Maybe there’s a connection…at
least metaphorically.

For decades, federal inspectors knew that a flaw in the structure of the
eight-lane I-35W bridge over the Mississippi could easily take down the
entire structure. But year after year, the government let the bridge pass
inspection. (Hmmm…reminds me of a certain green-hued currency).

Today, as Minneapolis workers continue removing the hundreds of tons of steel
lining the Mississippi riverbed…the government has plans to build a new
bridge, with costs for rebuilding projected in the $250-million range.

According to the U.S. Department of Transportation, 756 steel deck truss
bridges span America’s waterways, just like the one in Minnesota.

Built in the 1950s and 1960s… approximately 11% of these steel bridges have
weaknesses much like the one that caused the I-35W bridge’s collapse.

80+ bridges at $250 million a pop?

But it gets even scarier, when you realize America’s infrastructure crisis
involves roads, schools, dams, power grids, and water pipes too…

The American society of Civil Engineers now warns that the United States has
fallen so far behind in maintaining its public infrastructure - roads,
bridges, schools, dams - that it would take more than a trillion and a half
dollars over five years just to bring it back up to standard.

So dear reader, Uncle Sam now needs $1.5 trillion just to sprinkle Band-Aids
across America’s degenerate body.

For a quick perspective, consider this:

The Iraq war has cost the United States $458 billion to date.

Meaning, patching potholes and solid waste will cost roughly three times as
much as the full-fledged war.

How will John Q. Public pay for all that, we ask?

We’re not sure. But it seems to us that he will pay for it with dollars…and
that’s the heart of the problem.

Every imaginable rescue mission for the overly indebted American consumer,
not to mention the overly indebted American government, leads to increasing
quantities of dollars and credit, which can only mean one thing:

Dollar-holders beware.

Strong economies need strong infrastructure.

Strong infrastructure needs strong spending.

More spending means more government contracts. More contracts mean more
campaign donations.

It gets better.

Every elected official represents a district with a broken bridge. A new
bridge needs a new ribbon and a new name. Hence, the more bridges they build,
the more votes they receive.

And here’s the best part. They accomplished this benevolent feat without
losing lives or raising taxes!

Better yet, everyone in Washington can play along. 

Unfortunately, more spending means more debt. The U.S. Congress will turn to
the U.S. Treasury. The Treasury wants to balk. But they turned on CNN and
another bridge collapsed over the mighty Mississippi.

So they shrugged. 

The U.S. Treasury will turn to foreign buyers. Foreign buyers should (will)
require a higher rate of return for holding a depreciating fiat currency.
Interest rates should (will) rise. The race to sell U.S. assets to foreign
hands keeps flowing south like the mighty Mississippi.

To make matters worse, analysts forecast future rate cuts. The latest Federal
Reserve Meetings on Oct. 9 show a consensus supporting a 50 basis point
cut…maybe so, maybe not. We really don’t care. We have no idea what direction
interest rates are heading. But we do know this.

The American dollar should (will) continue heading south.

Eurozone finance ministers quiver. On Oct. 8, the day before the U.S. leaked
a forthcoming rate cut, the Europeans announced their intentions to actively
depreciate the euro against the Chinese renminbi, the U.S. dollar and the
Japanese yen. They claim a weaker euro will ease pressure on the European
economy.

Europe, in a sense, showed its hand. And the Fed quickly trumped it one day
later. Go, Fed!

This dubious policy is finance-speak for this: The sovereign nations of the
world are engaged in a perpetual sprint to boast the least valuable currency.
They’re in a race to the bottom, so to speak…a race to become, well, in a
sense, worthless.

The reason: Currency depreciation makes domestic goods less expensive to
foreign buyers. Consequently, a perceived re-emergence in a nation’s domestic
manufacturing may take place, as foreigners demand cheap “Made in the Most
Worthless Currency” widgets. 

You see, it’s a win-win for Washington.

Washington’s charitable handouts (debts) bought the bridges that bought the
votes. Those charitable handouts (debts) also undermined the dollar-
denominated debt.

The cheap dollar creates cheap exports. More exports create more jobs. More
jobs…more votes. The cycle continues.

But here’s the real kicker: Devaluing the greenback devalues the foreign debt
that started this whole mess to begin with. So in the long run, we don’t owe
as much as we borrowed, inflation adjusted.

It’s a win-win for Wall Street, too. The municipal underwriting business
takes off. Banks now repackage municipal debt like mortgage debt. The fees
keep rolling. Seven figure bonus days are here once again.

However, this game has one or two setbacks.

First, higher spending sans higher taxes works only when foreigners demand
our debt. But that may not be the case much longer. The Chinese have eased
their appetite for American IOUs.

Second, more debt means we print more money, which means more inflation.

Alan Greenspan is no dummy. He knew when to jump ship. Greenspan said that
over the long run, the biggest problem facing the U.S. economy is “the re-
emergence of inflation,” and rising interest rates.

We concur with Mr. Greenspan.

Unfortunately, high inflation combined with high interest rates kill the
middle class. That’s the real long-term problem of fiat currencies. A fiat
money system prompts legislative profligacy and inevitably produces
inflation. The system stimulates the growing gap between the haves and the
have-nots.

Consequently, the have-nots will turn to their elected saviors in Washington.
They’ll demand a change. And the elected saviors will provide some version of
“something for nothing.”

As Bill Bonner points out: “The goal here — as with all government programs
– is to produce the desired benefits while pushing the costs onto someone
else. That’s how politics work. You promise something…and you force someone
else to pay for it. You rob one Peter voter…and spread the loot among the
Pauls.”

But as the IOUs pile up, and the dollar’s value withers, the Pauls will
realize that they’ve been robbed as well.

[Joel's Note: One way to hedge against future robbery of your savings is to
hold your wealth in a form that has intrinsic value. Gold and silver are the
standard options here. If you are interested in really supercharging your
returns on the faltering buck, you can buy options on other currencies. The
folk over at the Sovereign Society have been doing just that, and to immense
success. In the following report, they’ll show you how to bet against the
plummeting buck and rake in profits of up to 4,400%. If you’re interested,
check out the World Currency Options Alert Here.

—– Chris Hancock’s Free Market Investor —–

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Rude Endnote: Oil hits a new high, gold surges to the mid-760’s and the
dollar continues to wither. Yep, there’ll be plenty to discuss in the 5-
Minute Forecast when Addison and Ian pour over the data for today’s issue.
Make sure you tune if around lunch for another edition of the 5 from our
Baltimore desk.  

Cheers,

Joel Bowman
Rude Awakening