The"Advantages" Of A RESERVE Currency

If you are NOT an American, but a resident of ANY other nation in the world, please ask yourself this question. What do you think would have happened
to the exchange value of your currency if the NET external debt of your nation had risen by 44% last year? Now, here`s another question to ask yourself.
What do you think would have happened to the exchange value of your currency if your Central Bank had cut its controlling interest rates almost in HALF
so far this year, the year AFTER your nation`s NET external debt increased by that 44%?

We`ll make it simple. Do you think your nation would still HAVE a currency?

Well, maybe it would, but we think that you will agree when we say that your currency would be in very sad shape indeed. Since you are NOT an
American, your currency is NOT the world`s RESERVE currency, and is thus subject to all the trials and tribulations of rational valuation.

But the U.S. Dollar IS the world`s RESERVE currency. And because it still holds that position, it is not - YET - subject to any type of rational valuation at all.

As a prelude to what follows, let us state that in 1985, for the first time since before World War I, the United States became a NET external debtor. That
means that foreigners held more U.S. assets than Americans held foreign assets. 1985 was sixteen years ago.

The U.S. Commerce Department has just (on June 28) announced a series of what should be extremely sobering facts. Last year, the NET external debt
of the United States increased by 44.1%. Don`t forget, the U.S. has been building its NET external debt position for SIXTEEN years, and this increase took
place over ONE year.

Here are the figures from the Commerce Department (T = Trillion)

1999: US holdings abroad: $7.21T -- Foreign holdings in US: $8.73T -- NET US debt: $1.52T
2000: US holdings abroad: $7.19T -- Foreign holdings in US: $9.38T -- NET US debt: $2.19T

In 2000 alone, the NET U.S. external debt increased from $1.52 Trillion to $2.19 Trillion, a rise of $670 Billion. A rise of $670 Billion from a base - in 1999 - of
$1,520 Billion is an increase of 44.08% - IN ONE YEAR!

This trajectory of indebtedness is totally and absolutely UNSUSTAINABLE! It took 15 years (1985-1999) for the U.S. to increase its net external debt from
$0 to $1.52 Trillion. That`s an average increase of just over $100 Billion per year. In 2000, the increase was $670 Billion - almost SEVEN TIMES the
average for the previous fifteen years.

As you know, the U.S. has been adding to its net indebtedness this year. But the picture becomes even more astonishing when one considers what the
Fed has been doing since January. It is pathetically obvious that the U.S. is now borrowing ALL of whatever"growth" it can eke out of its economy.
Usually, investors like to get some kind of a"return" on their investments. But this year, the Fed has cut short-term U.S. rates almost in half, U.S. stock
markets are all in the red, and corporate and Treasury debt paper is a wasteland.

The foreign debt of the U.S. is exploding, U.S. interest rates are imploding, U.S. markets are hanging by a thread. And what is the Dollar doing? IT IS
RISING! On June 28, the U.S. Dollar index hit a 15-year high of 120.29. Economic history provides very few spectacles to equal this one.

Now, if you ARE an American, here`s a question for you. How long do you think that the Dollar can maintain its present lofty position in the face of what
you have just read? Have you made any provision to protect yourself in the case that it can`t hang in mid air much longer?

As we have stated many times, both in these pages and in the pages of The Privateer, the ability of the U.S. economy to defy both financial prudence and
economic rationality is based on the fact that the U.S. Dollar is the world`s SOLE reserve currency. Until the end of 1998, there was no other contender
for this title. Now, with the advent of the Euro at the beginning of 1999, a currency specifically designed to create a"United States - Of Europe", there is.

How has the U.S. reacted to the birth of the Euro? In March 1999, through NATO, it instigated a (Balkans) WAR on European soil - the Euro fell. In the year
between June 1999 and May 2000, the Fed INCREASED U.S. rates - the Euro fell. In late 2000, a U.S. Presidential election hung in the balance for over a
month. The Euro stopped falling and recovered. In 2001, the Fed has been slashing U.S. rates while hurling increasingly strident demands at Europe that it
inflate its currency to take some of the"strain" off the U.S. - the Euro fell again.

Now, according to the Wall Street Journal, a U.S. Treasury official has DEMANDED that Europe slash its rates and Japan begin to literally print money to
"aid" in the efforts being made by the U.S. to"re-start global economic `growth`". Why is the U.S. demanding this? Because the U.S. economy is TOTALLY
dependent on foreign investment to"grow". If the Europeans and the Japanese don`t inflate, there won`t be enough foreign capital available to lend to the
U.S. so that it can"grow". The stakes in THIS game are now extreme

The essence of the whole situation is that the U.S. is playing a gigantic game of financial"chicken" with the rest of the world in general, and with Europe
and Japan in particular. In essence, they are saying this:"We are too big to fail, and if we fail, we`ll take you all down with us".

Gold`s place in all this is what Gold`s place in all this has ALWAYS been. It is the alternative to a global"money" which is given"value" by fiat and which
is given"acceptance" by the raw power of its purveyor - the United States. As long as physical Gold literally exists, it will act as the ultimate"brake" on
the profligacy of debt-based financial systems.

What we face is simply a matter of facing facts, and of exercising patience. The present financial trajectory which the U.S. is on is absolutely
UNSUSTAINABLE. It cannot last. Unless and/or until the Euro becomes a currency which is officially REDEEMABLE in Gold, there will be no other
protection against a U.S. Dollar swan dive except Gold (and Silver). Right now, Gold forms 15% of the official reserves behind the Euro, but the Euro is
NOT redeemable in Gold. The U.S. has long since declared Gold as financial public enemy NUMBER ONE. There is no official connection between the U.S.
Dollar and Gold at all.

The U.S. is now in a position in which it has to hold Gold down"forever", or see its position as the purveyor of the world`s sole reserve currency come to
an end. This will prove an impossible task, all that remains to be seen is how much MORE damage is done in the process.


von www.the-privateer.com

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