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Friday, January 9, 2009

Panic could herald dollar rout By John Browne

Every now and then I run across an article I feel worthwhile to share with others. There are so many people not connected with American media, politics or financial instituions that seem to have a finger on the "real" pulse of our economy. Their opinions are not jaded by nor influenced by local, industry biased situations. They seem to be just opinion of facts and information they gather.

We simply do not get all the information nor do we get accurate information here. We get only what works for those informing us.

I ran across John Browne's article in the Asian Times. A link to the actual article is available by clicking on the title to this post above.

John Browne is senior market strategist, Euro Pacific Capital. Euro Pacific Capital commentary and market news is available at">. It has a free on-line investment newsletter. (Copyright 2009 Euro Pacific Capital.)

Here is a copy of the article.

Panic could herald dollar rout
By John Browne

One of the few things more troubling for an economy than government intervention is government intervention driven by panic. Time and again, history has shown that when governments rush to engineer solutions to pressing problems, unintended difficulties arise.

In the current crisis, there is growing evidence that Washington is in a state of increasing panic. Despite its massive cash injections, market manipulations and "rescue" plans, the recession is clearly deepening and spreading. With little to show thus far, politicians don't know if they should redouble past efforts, break ground on new initiatives, or both. However, all agree, unfortunately, that the consequences of doing too little far outweigh the consequences of doing too much.

Although there are many parallels between the current crisis and the crash of 1929, one key difference is the global profile of the US dollar. In 1929, the dollar was on the rise, and would soon eclipse the British pound sterling as the world's reserve currency. Furthermore, the American economy was fundamentally so strong that in 1934 America was the only major nation able to maintain a currency tied to gold.

Ever since, the US dollar's privileged "reserve" status has been a principal factor in America's continued prosperity. The dollar's unassailable position has enabled successive American governments to disguise the vast depletion of America's wealth and to successfully increase US Treasury debt to where the published debt now accounts for some 100% of GDP. The total of US government debt, including IOUs and unfunded programs, now stands at a staggering $50 trillion, or five times GDP! If the dollar were just another currency, this never would have been possible.

In today's crisis however, the dollar is likely making its last star turn as the leading man in the global financial drama. Other stronger, less-burdened currencies are waiting in the wings for the old gent to take his final bows.

The dollar's demise is being catalyzed by the neglect of the Federal government. Instead of enacting policies that would restructure the US economy and restore productive, non-inflationary wealth creation, Congress is simply financing the old crumbling edifice.

Faced with the growing realization that America is not doing the work necessary to right its economic ship, it will not be long before America's primary creditors begin to seriously question the nation's ability to service, let alone repay, its debts.

There is now the prospect (inconceivable until recently), that America could lose its prestigious triple-A credit rating. In today's risk-adverse market, this could cost the Treasury 1% in interest on long bonds. Each additional percentage point of interest would cost America some $10 billion a year on each trillion dollars of new debt, or some $300 billion over the life of a 30-year bond.

Many of the foreign governments who hold huge amounts of US dollar Treasury debt, such as China and Japan, have announced plans to spend money on their own ailing economies. Should these foreign central banks divert to domestic initiatives some of the funds used to buy US Treasuries, serious upward pressure on US interest rates will result. Should they actually sell parts or all of their holdings they will likely put serious downward pressure on the US dollar. Last week, a Chinese official claimed the US dollar should be phased out as the world's reserve currency.

In the short term, as dollar carry-trades continue to be unwound and questions of political will and falling interest rates haunt the euro and some other currencies, the US dollar may be the recipient of some upward appreciation. But with the American government appearing increasingly to be in panic mode, a run on the US dollar could develop rapidly into cascading devaluation. Even if no such panic run materializes, the long-term outlook for the US dollar is one of high risk and low return. This beckons major upward pressure on precious metals.

I believe that our crisis here economically is worsening. I believe it will worsen for at least this year and next. It will take several years to climb out of this "R"ecession even with the stimulus packages being talked about. We know that the last so called rescue packages only rescued those high paid financial company execs and their respective companies - not any of us.

The next one, if allocated to infrastructure will begin to infuse badly needed dollars to the street which is where it is needed if we are to recover. The additional tax credits or tax breaks for individuals I don't think will do much at all. One reason being in order to get tax breaks you must first have income. With unemployment on the rise, fewer have incomes from which to save taxes on.

As a reformed optimist - now a realist - my hope is that everyone is fully and honestly aware of the situation for what it is so as not to be lulled into a false sense of security. Modifications are necessary to our daily lifestyles as are positive actions to survive the tide.

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