Inconvenient Truth

Haven’t you heard? The United States dollar is toast. That sucker is going DOWN.

Short interest rates are incredibly low and no rational person thinks longer-term U.S. interest rates are headed anywhere but lower, given a looming, if not already-loomed recession. The American government is planning to borrow 5% of GDP on a single bailout package and that’s just one program added to an orgy of spending. The amount of dollar credit flowing out of central banks into the system worldwide is unprecedented. Gold is through the roof and the U.S. trade balance? Forget about it. It’s huge.

And we have been doing all this incredible stuff for at least a year now. So naturally, unquestionably, the U.S. dollar is finished - D to the O to the A. Cataclysmic inflation is moments away. Ron Paul’s face will be the only one we see on currency commonly used inside our borders within months. So long Kingsford, hickory chips and clean-burning propane. Hello dead, smoldering Presidents. Next summer, it’s “Grillin’ With Greenbacks”. Welcome to Weimar America. Enjoy the tangy, smoky, Fiat Flavor.

If you follow the financial pages, you have read this a minimum of a hundred times already, so surely you should have gotten the message by now. Everybody knows it.

Except, of course, that with all this unprecedented madness the dollar index is flat on the year, up 7% off its July lows.

But don’t get me wrong, here. Other than that one little inconvenient truth, the theory is ironclad. I mean it is bedrock solid. After all, the euro – the world’s next great reserve currency – okay the euro is down 8% off its highs but that’s not important. The point is that ours is now a multipolar world. Earth, she is a BRIC house. Mohamed El-Erian says it and he works for PIMCO.

PIMCO.

‘Nuff said.

And, again, other than the fact that three of the four BRIC currencies have fallen off the table (those being the ones that are actually traded in the marketplace), the theory is as beautiful as the Taj Mahal, as strong as a Russian oligarch and arguments against as scant as a Brazilian bikini.

It’s all about industrial production, you see. Note that the Japanese yen is up against the dollar about 4% this year. That may not seem like much, given the trade deficit between the two countries, and it is also 6-7% down from the highs,…making it seem like even less, come to think of it. But the point is that the yen has been the strong currency of a massive industrial powerhouse for decades and in that time the people of the world have been using it…okay, mainly to buy investments denominated in other currencies, but that is not germane because of...um…hang on, I’ll get it…

China! That’s it! The dollar is down decidedly against the Chinese yuan, no counter-trend, end of story. We all know it. China will dominate the world and soon we will all be using Chinese yuan to buy everything from alphabet soup to bicycles to…well…china. Of course because of currency and capital controls, we will not only have to use our yuan to buy from China but also in China, since that’s the only place on the globe you can actually spend Chinese yuan.

Wow, the lines are going to be murder.

But the important thing, Ron Paul reminds us, is that saving in a strong currency protects the value of your assets from inflation. Now, it’s true that Chinese wholesale inflation is at ten percent, but I’m sure that’s an anomaly. And by “anomaly” obviously I mean: “decade-long, upward trend.” But Chinese consumer inflation is at 5% and the Chinese Communist Party would never manipulate consumer prices to keep the Chinese people from getting upset or intervene in the stock market or anything like that. And by “would never” obviously I mean, “definitely would,” but...

Gold! Today’s gold coins come in convenient denominations between $900 and $900 and are accepted at all Sharia-compliant financial institutions, third-world bazaars and survivalist training camps. Gold has been money for 5000 years. Yes, the trend has been towards the acceptance of book-entry debits and credits over the last 700 of those years, but why be trendy?

The point is that the U.S. dollar is finished. You can read it in all the papers.

May you live in interesting times