Agora Financial’s Rude Awakening

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Laguna Beach, California

• When even the Iraq dinar rallies against the greenback!
• The perils of harboring faith in the modern economist,
• 18 hours remaining to grab $500 off the Emerging Capital Report

Joel Bowman, with a few quick worlds from the United Arab Emirates…

Before we get stuck into your usual Monday Rude, I’d like to take a moment to
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Before you get stuck into today’s Rude, I urge you to have a quick gander at
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You Gotta Have Faith
By Bill Bonner

Early in WWI, the French were urged to turn in their gold in exchange for
paper bank notes. They would not lose “any part of their savings,” they were
told. Nor would they have to “pay any more for anything they wished to buy.” 

The war over, France was unable to keep its commitments. But what did you
expect?

More recently, we recall visiting Argentine president Carlos Menem in the
1990s. At the time, Argentina had boldly solved its inflation problem by
fixing the peso to the dollar, one to one. This stability gave the Argentine
economy a boost. Foreign investors felt they could invest safely. Lenders
felt they could place money down on the pampas, collect high yields, and
still get back money of more or less the same value as the money they lent. 

Still, there was some doubt about whether Argentina could maintain the fixed-
rate exchange policy. So, we put the question directly to the head of state:
“Will the peso/dollar exchange rate hold” we wanted to know.

“Yes,” he replied.

About two years later, Argentina abandoned the dollar peg, defaulted on its
debt and the peso lost two-thirds of its value.

Now, this past weekend, Henry Paulson, told a crowd in India that the US is
“strongly committed to a strong dollar.”

According press reports, the U.S, Treasury secretary neither smiled nor
waited for laughter. Instead, he continued speaking, just as though he had
not just told one of the biggest whoppers in financial history.

If there has been any progress in central banking it is surely this: the
authorities don’t have to lie as much as they did in the past. French
officials in 1915 had to separate the public from its money. In 2007, the
public and its money have already been parted. Now, we all have bank notes,
and plenty of them. 
.
Today, anyone who is a bull on the dollar (or on the pound or the euro, for
that matter) has to be a bull on human nature…and on economics too.  
Economics is merely the study of man and his money. But reported in the
International Herald Tribune was the curious finding that people who had
studied economics for 6 months scored no better on tests of basic economic
principles than people who had never opened an economics book. The
researchers were too timid, in our opinion. A follow-up study will show that
those who go on to study economics at an advanced level will actually score
lower than those who never studied it at all. It is a value-subtracting
discipline. The longer you study it, the less you know.

Still, this week, the whole world seemed to hold its breath, wondering what a
committee of economists would say. Would the US central bank lower rates? Or
raise them. Economics itself has been in a bull market for many years. Now,
economists control our money and get their faces on our news magazines.

But we live in a world of remarkable wonders. Improbably, even the Iraqi
currency – the dinar – is going up against the US dollar. In January, 2004,
it took 1,480 dinars to buy a dollar. Now, Iraqis willing to stand in line in
a public place can buy them for just 1,240. While the inflation rate was
recently clocked at 30% per year, the Iraqi central bank nevertheless lends
out money at 20%. Last week, at an auction in Texas, a bookstore owner
reported paid $100,000 for a lock of Che Guevara’s hair. And in Argentina,
this past April, it rained spiders.

We don’t know what to make of it all. So, we will draw only the most obvious
conclusion: there’s no telling what nature – even in its human form - might
get up to.

In the past, one did not need so much faith in human nature to stock up on
dollars, pounds, francs or deutschemarks. Behind every one of them, until
fairly recently, was a fixed quantity of something that man did not make; and
neither could he duplicate it, destroy it or diddle with it – gold. 
Ultimately, everyone who held a franc or a dollar could count on exchanging
it for gold, at a stated rate. Only in the case of an extreme emergency –
such as World War I – would the central banks renege. And even then, the
default would be only partial…tentative…and shameful.

But the man who walks the street with a pocket full of paper money today is a
man walking on air. A public official may tell him that his dollars are
’strong,’ but what does that mean? Against other major currencies, the dollar
has lost nearly 10% of its value this year alone. Measured in oil, gold, or
wheat the damage has been even greater. Meanwhile, the supply of dollars is
increasing at 15% per year – 5 times faster than America’s output of the
goods and services the dollar is supposed to buy. And the Financial Times
tells us that the world market in credit derivatives, almost entirely in
dollars, grew 32% in the first half and increased 75% over the year to the
end of June.

A dollar bull has nothing solid beneath his feet. He only has faith. He has
to have confidence in modern economists. He must not worry that members of
Congress will spend too much. When the Treasury secretary says we will have 
’strong dollar,’ he must believe him. And he must believe that the American
president will show restraint and prudence. And, most importantly, he has to
think the folks at the Fed, America’s central bankers, will exercise their
authority with foresight and intelligence. 

Do we need to say any thing more?  We didn’t think so.

[Joel's Note: Bill Bonner is the author, with Lila Rajiva, of the New York
Times bestseller, Mobs Messiahs and Markets: Surviving the Public Spectacle
in Finance and Politics. If you haven’t already read it, you can nab yourself
a copy right here: “Yes thanks Rude, send me a copy of Bonner’s ‘mobs.’”

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Rude Endnote: Yesterday we got news that things have reached boiling point
across the Gulf in the troubled state of Pakistan. This powder keg of
political volatility looks certain to worsen over the coming days as
Musharraf’s henchmen do everything they can to impede Pakistan’s transition
to democracy.

Either there will be a peaceful resolution…or we’ll have front row seats to
yet another fireworks display here in the Gulf. Throw in the escalating
rhetoric with Iran, a few more PKK attacks over the Turkish border and the
was the U.S. claimed to have won in Iraq a few years back and, well, you’ve
got yourself one severe case of acid reflux running up and down the world’s
“oil windpipe.”

What will be the effect on prices as crude flirts with the magic $100 mark?
Do I hear a retreat back to $70? Anyone?…Anyone?…(sounds crickets
chirping in the background)

We’ll be back tomorrow with more from the Rude desk. Until then, be sure to
catch your daily 5, out after lunch.

Cheers,

Joel Bowman
Rude Awakening