-->The Disappearing Dollar

The Daily Reckoning

London, England

Tuesday, 6 January 2004

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*** Big day for the Dow -- plus 134 points. Predictions for
2004...

*** Big day for gold too -- up more than $8! Bernanke's dollar
tanks...

*** Consumer debt doubles in 10 years... rich capitalists are
patsies... stand for something... India... and more!

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What's ahead in 2004?

We do not know; but we can guess as well as anyone.

You pay nothing for these guesses, dear reader; we hope they are
at least worth the price.

But who knows?

"I think we have to face it," writes a DR reader."You guys
missed a huge market move over the past year. Yes we know all
about the debt, dollar, etc etc etc. But the lost opportunity has
been massive. Unfortunately, those of us who analyzed everything
to death lost out huge.

"The gold move you gloat about was peanuts next to small caps
that increased 5 - 10 -20 times their price a year ago.

"You fought the Fed and that was the biggest mistake."

So this is the thanks we get? We were right about the major
trends -- the dollar fell, gold and the euro rose, just as we
said they would. Investors who followed our advice for the Trade
of the Decade switched out of stocks in early 2000... and bought
gold. They missed the entire downdraft of the stock market and
are up nearly 50% on their gold.

Some readers are still not satisfied. They regret having missed
out on the techs in The Great Moronic Rally of 2003. It was,
after all, a year when the most benighted investors made the most
money. While Buffett, Soros, Templeton, Rogers -- not to mention
the Daily Reckoning -- were running for cover, investors who were
dumb enough to buy biotechs without visible means of support made
more than 6 times their money.

Making money without tech stocks, on the other hand, is a little
like taking a nap without lying down on a nest of fire ants -- it
is not as exciting, but much more agreeable.

Besides, dear reader, the point of our advice here in the Daily
Reckoning is not to make you rich. Wealth... without wisdom...
is a burden and a trap. No, our aim is to not to make you money,
but to merely to help you deserve it.

"We cannot guarantee success," said George Washington,"but we
can deserve it."

And here we pause a moment -- aghast at our own immodesty. As
soon as we think we know something -- we make fools of ourselves.
And in the last few paragraphs we have admitted that we think we
know not only the major trend... but the mind of God! The Trade
of the Decade implies falling stock prices and rising gold prices
for years to come. And how do we know when or how or who merits
wealth? Isn't that a matter for higher authorities to decide?
Don't the gods punish those who crash their parties and dare to
trod on their turf?

Maybe. So we rush from the fear of arrogance to the cozy comfort
of our own incompetence. Gold soared $8.70 yesterday. We still
own the metal... and plan to buy more. But we wonder how we could
have been so stupid as not to buy it the day before yesterday.

"Will gold continue to advance in 2004? Will the dollar continue
to fall?" The questions were posed in a telephone interview
yesterday.

"We don't know," was our stock reply."But we think we are facing
a major crisis. While we can't know exactly what will happen...
or when, or how... the most likely outcome will be the collapse
of the dollar -- against gold. Gold is nature's competition to
paper money. Gold is what you want to own when paper money is in
crisis."

"Noboby seriously doubts that the global cycle has turned and
something of a boom lies ahead," writes Anatole Kaletsky in The
Times of London. Mr. Kaletsky never spoke to us. Because we
seriously doubt that a boom lies ahead. Our guess is that a bust
lies ahead. A big bust.

Hardly anyone doubts that the dollar will continue to fall...
and almost all expect the dollar decline to contribute to the
world economic boom. Our guess is that the dollar will surprise
everyone. It will rise, in response to the illusion of boom-like
conditions. Then, it will begin to fall again. Faced with another
20% loss on their investment positions, foreign holders will
panic.

Stick with the major trends, we urge readers. Avoid distractions
and temptations. You may not make profits, but at least you will
deserve them.

Over to Eric Fry, our man-on-the-scene in New York. [If you'd
like to see Eric in action, he will be appearing on CNNfn's
"Market Call" from 9:00 AM to 10:00 AM this week on Thursday,
January 8th and Friday, January 9th]...

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Eric Fry in Manhattan...

-"No crisis!" says Ben Bernanke... and millions of American
investors seem to agree. The outspoken -- and somewhat wacky --
Fed governor says that the dollar's serial collapse is no problem
at all... and certainly not a"crisis." During a panel
discussion at the American Economics Association meeting over the
weekend, Bernanke opined:"The depth of international financial
markets and the integration of global financial markets means
that the risk of a dollar crisis is quite low - not zero - but
quite low."

- The international financial markets are deep indeed... deep
enough for the dollar to drown in. If the dollar's 40% drop over
the last two years is not at least crisis-like, what, we wonder,
would qualify? A 60% drop? 80%? 99%?... One day, perhaps,
Bernanke may find his poor, abused dollar at the bottom a
monetary Marianas Trench - hopelessly submerged under an ocean of
debt, trade deficits and fiscal mismanagement.

- But that unhappy fate -- we are delighted to report -- is a
problem for another day. Today, Mr. Bernanke assures us, there is
no dollar crisis. On Monday, the healthy-as-can-be dollar fell
for the 15th time in the last 18 trading sessions. The dollar
dropped 100"ticks" to $1.2684 per euro from $1.2584 on Friday.
The dollar also hit a fresh 11-year low against the British
pound... Our American colleagues in the London office can
scarcely afford a steak and kidney pie.

- But the dollar's woes did not trouble stock market investors
one bit. Buy orders flooded in from morning until evening, and by
the closing bell, the Dow had jumped 134 points to 10,544, while
the tech-powered Nasdaq had rocketed 2% to 2,047 - a new two-year
high.

- Investors also tossed a few buy orders into the gold trading
pits, as the ever-more-precious metal rocketed $8.70 to $424.80
an ounce - its highest price in 14 years! The gold buyers seem to
differ with Mr. Bernanke about the severity of the dollar's
collapse. The yellow metal's 50% rally over the last two years
may not say"dollar crisis," but neither does it say"dollar
confidence."

- The Bernanke Dollar is dropping against almost every commodity
these days. Silver soared 28 cents yesterday to $6.25 an ounce -
a new five-year high; copper jumped four cents to $1.083 a pound
- a new six-year high; while palladium soared $31.20 to $842.50 -
a new 23-year high!

- Meanwhile, energy futures also jumped yesterday, thanks to
forecasts of an artic chill descending upon the northeastern
United States. The weather forecast calls for temperatures in
Chicago to drop to 4 degrees Fahrenheit today, and to fall to
zero by Thursday. Crude oil jumped $1.26 to a nine-month high of
$33.78 a barrel, while natural gas surged 10% to $6.83 per
million Btu.

- At the current quote, natural gas costs about 40% more than it
did at this time last year. That's not a crisis, perhaps... but
neither is it painless. Several of your New York editor's friends
report that their monthly heating bills have become even larger
than their wives monthly credit card bills.

- Trips to the gas station have also become quite unpleasant.
Filling up the gas tank of an SUV now costs more than a sushi
dinner for two. But these rising costs are little more than an
annoyance... as long as the stock market is rising. In the
Bernanke Economy, the S&P 500 is the coin of the realm. The
dollar may crumble and commodity prices may skyrocket, but as
long as share prices are rising (and homes values are trending
higher), the lumps will continue spending money they don't have
on things they don't need... and America's GDP will continue to
charge ahead.

- Furthermore, even if GDP should pause for an instant, Bernanke
and the other Fed governors stand at the ready to continue
debasing the dollar, if need be, to spur economic activity.

Translation: The gold bull market is not over.

--------------------

Bill Bonner, back in London...

***"Consumer Debt More than Doubles in Decade," reports the
Associated Press.

*** Another news item tells us that capitalists are finally
catching on. A study by U.S. Trust found that 79% of the rich --
people who either earn more than $325,000 per year... or who have
a net worth of more than $5.9 million -- have come to distrust
corporate America. Wall Street and the Feds make patsies out of
the lumpeninvestoriat -- and the rich too. The lumps are lured
into debt and hopeless stocks. There is no way out. They can sell
their stocks to a greater fool... but who is a greater fool than
they are? And their debts? They count on the Feds to devalue the
dollar to bail them out. But there is no guarantee that the Feds
can control the value of the currency... or that lenders will
take the loss.

In Marxist theory, corporations are expected to exploit their
workers for the benefit of the capitalists -- the rich owners.
But in late, degenerate American capitalism, the workers get
nearly all the money. Dividends are currently less than 2% -- or
considerably less than the current rate of inflation. Corporate
managers set up stock option plans, bonuses, retirement programs,
health insurance -- all for the benefit of employees. In the end,
the shareholder's only chance of making money is the forlorn hope
of selling the shares to someone who is even dumber than he is.

Eventually, stock prices fall to the point where an investor can
get a decent dividend from his stocks. But by then, the public's
attitude has changed. They want nothing more to do with them. And
the rich man's trust fund manager tells him that stocks are
history.

*** Another DR reader... another kvetch:

"You say there is nothing George Bush or Alan Greenspan can
do to save our nation. This is not clever, it is not funny, it is
not constructive, and it is totally inconsistent to say that
there are many things the followers can do to better themselves,
but nothing the leaders can do. What you advocate is individual
initiative, but collective anarchy. It is ridiculous, and though
you certainly stand out with your stance, it benefits no one. For
shame. If there is nothing
Greenspan or Bush can do, we do not need them, or any other
leaders for that matter.

"Of course there are things that can be done. Curtail corporate
crime. Restore the justice of a truly progressive income tax
system. Institute the fiscal sanity of an approach to balanced
budgeting. Stop getting into phony, exploitive wars of
imperialistic expansion. Respect our one-time allies instead of
treating them like idiots or second class citizens. Pursue a
middle east peace strategy that can be made to work instead of
the current one which can never work. Encourage basic research
into worthwhile endeavors like non-polluting energy (there are
revolutionary technologies being suppressed by the energy
cartel). Develop new products that benefit mankind, not just
weapons, and sell them around the world. Show the world how to
control its population and why it makes sense to do so. Stop
excessive immigration into the U S in its tracks. Stop pitting
people against each other in the name of religion, but in the
cause of financial exploitation. Teach every school child
about saving, finance, investment. Clean up our polluted
environment and sell other nations the know-how and technology to
do the same. Develop and produce low cost, life-saving
drugs, and sell them around the world to benefit the living.
Encourage creativity in developing new products and services, not
just using financial subterfuges to create wealth.

"Show some creativity. Stand for something. It is interesting and
flip to talk about what is wrong with our society, and there is
plenty, but, if you want to really be someone, and do something,
tell us what George Bush and Alan Greenspan, and all
the rest, can do to make this a better world. Don't tell me there
isn't anything. To do so is just plain stupid, and from reading
your incisive, clever letters, I know that you and those you
quote are anything but stupid. Be your real selves for a change.
You might actually enjoy the difference. Best wishes for 2004
(God knows we will need all the luck we can get)."

*** Of course, we reply, there are many things our leaders can do
to make a better world, most of which involve undoing the efforts
of previous leaders. But there is nothing they can do prevent
what Nature has decreed. A super-boom must be followed by a
super-bust. A rush into debt must be followed by a rush out of
debt. You cannot have a spring without a winter... nor a
Resurrection without a Crucifixion.

Here at the Daily Reckoning, we stand firmly with Fate...
wherever that is. Que sera sera. And we recognize that sometimes
things happen that no one wants to happen... and that are in no
one's interest.

*** And here's a little something we picked up from Richard
Russel's always-delightful Dow Theory Letters site:

The interviewer is FORTUNE editor-at-large Brent Schlender. The
title of the piece is"GURUS: Peter Drucker Sets Us Straight"
To a question: Does the U.S. still set the tone for the world
economy?

Peter Drucker answers as follows:

The dominance of the U.S. is already over. What is emerging is a
world economy of blocs represented by NAFTA, the European Union,
ASEAN. There's no one center in this world economy. India is
becoming a powerhouse very fast. The medical school in New Delhi
is now perhaps the best in the world. And the technical graduates
of the Institute of Technology in Bangalore are as good as any in
the world. Also, India has 150 million people for whom English is
their main language. So India is indeed becoming a knowledge
center.

In contrast, the greatest weakness of China is its incredibly
small proportion of educated people. China has only 1.5 million
college students, out of a total population of over 1.3 billion.
If they had the American proportion, they'd have 12 million or
more in college. Those who are educated are well trained, but
there are so few of them. And then there is the enormous
undeveloped hinterland with excess rural population. Yes, that
means there is enormous manufacturing potential. In China,
however, the likelihood of the absorption of rural workers into
the cities without upheaval seems very dubious. You don't have
that problem in India because they have already done an amazing
job of absorbing excess rural population into the cities--its
rural population has gone from 90% to 54% without any upheaval.

Everybody says China has 8% growth and India only 3%, but that is
a total misconception. We don't really know. I think India's
progress is far more impressive than China's.

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The Daily Reckoning PRESENTS: A lone, sane voice in Washington
.. on Alan Greenspan and empty political slogans.

THE DISAPPEARING DOLLAR
by Ron Paul

Those who follow financial markets may be familiar with the term
"strong-dollar policy," which is used by Bush administration
officials and Federal Reserve Chairman Alan Greenspan himself.
One might assume that such a policy entailed a course of action
designed to strengthen the value of the U.S. dollar. However, if
we judge Fed policy by Mr. Greenspan's actions rather than his
words, it appears we have a weak-dollar policy, a policy that
erodes the value of your personal savings.

The"strong-dollar policy" is nothing more than an empty
political slogan.

The inescapable truth is that the value of the U.S. dollar has
fallen over 30% in the past year, which to most people would not
seem indicative of strength. There are several reasons for this
decline, but the single biggest factor has been Mr. Greenspan's
relentless increase of the money supply. There are roughly
sixteen trillion dollars in worldwide use today, five trillion
more than when Greenspan became Fed chair. The law of supply is
immutable: When dollars are abundant they are also cheap.

For much of our history a gold standard imposed discipline on
U.S. dollar policy, since every dollar printed theoretically was
redeemable in gold. Since the last links between the dollar and
gold were severed in 1971, the dollar essentially has operated as
an article of faith. Christopher Mayer, writing for the Ludwig
von Mises Institute, states:"Faith that paper money itself was
of any lasting value would have struck our forebears as patently
absurd."

The problem is that faith can be shaken, and the precipitous drop
in the dollar shows how investors around the globe are very
concerned about American deficits and debt. When government
policies in a fiat system are the sole measure of a currency's
worth, the currency markets act as a reliable barometer of how
those policies are viewed around the world.

Politicians often manage to fool voters and the media, but they
rarely fool the financial markets over time.

When investors lack faith in the U.S. dollar, they really lack
faith in the economic policies of the U.S. government. The
Medicare prescription drug bill passed two weeks ago provides an
example of this phenomenon - the day after the bill passed, the
dollar dropped once again. Investors understand that the new
entitlement will cost trillions over coming decades, trillions
that will come from Treasury printing presses and further devalue
existing dollars.

Ultra-cautious investor Warren Buffett is trading heavily in
foreign currencies for the first time, demonstrating his lack of
faith in the dollar. His predicament is simple: He holds billions
of dollars, and cannot afford to sit by and watch the value of
those dollars drop another 30%. By taking a position against the
U.S. dollar, his actions speak volumes.

Unlike Warren Buffett, most Americans are stuck with their U.S.
dollars. Average people, particularly those who depend on savings
or fixed incomes to fund their retirement years, cannot abide the
continued devaluation of our currency. A true strong-dollar
policy would require constriction of the money supply and higher
interest rates, both of which would cause some short-term pain
for the American economy.

In the long run, however, such a correction is the only
alternative to the continued erosion of our dollars.

Regards,

Ron Paul
for The Daily Reckoning