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"@Close" <bill.moore@dtn.com> wrote in message
news:2678758a.0302210637.608f1fdc@posting.google.com...
> The Daily Reckoning PRESENTS: What a long, strange trip
> it's been. The International Speculator's Paul van Eeden
> takes us on a scenic tour of the dollar's demise and the
> rebirth of gold.
>
>
> THE GOLDEN ROAD
> By Paul van Eeden
>
> In 1992, the Brazilian economy buckled under debt and
> runaway inflation, resulting in a complete collapse of the
> Brazilian real. The real literally went to zero and was
> replaced with the new real.
>
> During crises, money flees to the safest haven. The
> Brazilian crisis caused large amounts of capital to seek
> asylum in the US. Careful analysis shows that the influx of
> capital from Brazil caused a noticeable uptick (about a 10%
> gain) in the US dollar from 1992 to 1994. This marked the
> beginning of the greatest bull market in history,
> encompassing stocks, bonds and real estate.
>
> The next year, 1995, Mexico experienced its biggest
> economic collapse since the Revolution and the peso lost
> 50% of its value. Being our southern neighbour and one of
> our largest trading partners, this caused additional
> capital to flee to the US, which in turn strengthened the
> dollar even more. Our stock and bond markets followed suit.
>
> At this stage, the US economy was robust, real interest
> rates were running at 5.02% compared to Europe's 3%, and
> given a stronger economy and higher real rates of return,
> it is no surprise that capital migrated to the US as
> economic mayhem continued to plague the world. But the
> stock market was already overvalued, with the Dow at around
> 3,500.
>
> In 1996, the South East Asian Tigers caught a bad case of
> the flu. This time, however, the new capital influx into
> the US was staggering, totalling $356 billion during 1996
> and 1997 alone. It is not a coincidence that gold peaked in
> February 1996 at $415 an ounce.
>
> The world was still sniffling from the Asian Flu when
> Russia defaulted on its debt in 1998. In January 1999, the
> euro was launched and promptly started falling against the
> dollar, eventually losing as much as 35% during the ensuing
> two years. More capital made its way into the US attracted
> by reports of a "New Era", supposedly as a result of
> productivity gains and the ultra-efficient US economy. Not
> to mention the gains in the US stock market from earlier
> flight capital infusions...and of course there was still
> the perception of the US as a safe haven for foreign
> capital. By this time, it was already difficult to
> distinguish between the roaring 20's and the roaring 90's.
>
> From 1992 to 1999, more than $1.2 trillion (net) flowed
> into the US economy. This had to have ramifications.
> Initially, the money was invested primarily in bonds,
> leading to a spectacular bull market in that sector, but
> more importantly driving down US interest rates.
>
> The falling cost of capital had an immediate effect on the
> US economy and the markets. Lower borrowing costs increased
> corporate cash flows and profits. Higher profits led to
> higher stock prices as more cash flow allowed companies to
> increase capital expenditures and R&D. The latter two
> stimulated the economy by increasing jobs and the velocity
> of money in the system.
>
> Individual consumers also benefited. Unemployment declined,
> along with mortgage rates and the interest on bank loans.
> Cheap access to money induced both corporations and
> consumers alike to take on debt at a staggering pace. From
> 1992 to 2002, consumer credit increased 119% and corporate
> debt 95%.
>
> It's important to realise that Bill Clinton and Alan
> Greenspan did not engineer these 'good times'. They were
> merely bystanders, spectators and orators. The markets did
> not listen to Greenspan in 1996 when he warned of
> irrational exuberance because he could not stem the influx
> of capital. Likewise, Greenspan will not be able to
> alleviate the correction we are now experiencing any more
> than he succeeded in have preventing it. Finally, the
> emperor is seen for what he is.
>
> As mentioned, the dollar's run started in 1992, but it was
> not until 1996 that it really got going. And the stronger
> dollar had consequences. Exports from the US became more
> expensive, hurting the export industries. Imports got
> cheaper, hurting those competing with lower prices
> (imported products, as in the steel industry). Lower import
> prices also stimulated demand for imported goods, causing
> the balance of trade to get out of kilter. A negative $36
> billion trade balance in 1992 expanded to over $420 billion
> by 2002.
>
> Undeniably, a negative trade balance leads to a negative
> balance of payments. The influx of capital during the
> 1990's and the expanding trade deficit are two sides of the
> same coin. Foreign demand for dollars was offset by demand
> for imported goods.
>
> The problem with an expanding negative balance of payments
> is that never before in the history of the world has there
> been a large balance of payments deficit that was not
> followed by a recession to correct the imbalance. The
> magnitude of the ensuing recession is also in direct
> proportion to the size of the deficit. The problem is that
> the balance of payment deficit in the United States today
> is exceptionally large by any measure. On a nominal basis,
> it is the largest the world has ever seen.
>
> The magnitude of our balance of payments deficit suggests
> that we are going to have a long and severe correction
> ahead of us. The influx of capital into the US, which
> lowered our borrowing costs and led to exorbitant capital
> expenditures, suggests that we are not merely looking at a
> recession, but a full-blown depression.
>
>
> Regards,
>
> Paul van Eeden,
> for the Daily Reckoning
>
> P.S. Foreign capital has not yet left the US en masse, as
> evidenced by our still negative balance of payments. But it
> is becoming ever more difficult to attract new foreign
> capital on economic and investment merits. Bush is not
> helping, either, by changing the previously favourable US
> climate for foreign capital to a perilous one with
> terrorism-related seizures and the freezing of accounts.
>
> The US economy is stumbling over a cliff, and it's going to
> take the dollar with it. The result will be slower, or
> negative, economic growth, collapsing stock and real estate
> markets, and spectacular bankruptcies.
>
> This collapse in asset prices creates deflationary pressure
> that the Fed is going to fight tooth and nail with as much
> money creation as possible. That will ultimately lead to a
> real inflationary problem that could be far worse than
> anyone is currently imagining. Navigating through this
> investment environment will not be easy.
>
> P.P.S. Fortunately, there is hope. The future is bleak for
> the dollar whether we face inflation of deflation. That is
> because during the current deflationary period, US economic
> growth is grinding to a halt, thereby reducing the allure
> of US stocks, bonds and real estate to foreign investors.
> As foreign investors reduce their investment in the US, the
> dollar will fall. To combat deflation, the Fed is going to
> try to devalue the dollar, which is obviously bad for the
> dollar.
>
> Since gold acts as a stable international monetary asset
> and since the gold price in US dollars is inversely
> proportional to the US dollar exchange rate, the gold price
> will increase as the dollar falls.
>
> Furthermore, war games around the world are likely to cause
> the average gold price to increase as well, further
> increasing the US dollar gold price. The question should
> not be whether to own gold or not, but how to invest in
> gold and related assets.
>
>
> Editor's Note: Paul van Eeden is co-editor of The
> International Speculator. Originally from South Africa,
> Paul brings an international perspective on markets and
> gold in particular to his analysis. He is well known for
> his work on the relationship between gold and the currency
> markets. In addition to his expertise in gold, Paul enjoys
> an insider's understanding of minerals exploration, having
> been intimately involved in the financing and evaluation of
> resource companies since 1995.
>
> -------------------------------------------------------
>
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> Posted by @Close as an information service.