Friends and Foes of the US Dollar

Monty Guild from Guild Investment Management Inc has written a very interesting piece of editorial, called View from the Sandbox, in which Guild speculates on what the allies and the enemies of the US Dollar would do.

Here is a snippet from his editorial.

5 YEAR CHART OF THE U.S. DOLLAR

THE MARKETS ARE REALIZING THAT THE US BUDGET DEFICITS
ARE HERE TO STAY

This means more bond sales by the U.S., more interest expense and bigger deficits. It also requires finding someone to buy the bonds.

Many friendly countries have been going through the following process for the last few months, and realizing that a balanced U.S. budget is far in the future.

• Realizing that President Bush is militarily and economically overextended.
  
• Realizing that the U.S. is in a very weak negotiating position, many countries are using the current opportunity to protect their big asset in U.S. dollar debt.

How will the friends of the U.S. do this?

• By shifting their assets from the U.S. dollar to the Euro or some other currency.
  
• By buying more gold to hold as an asset in their treasury instead of IOU’s from a free spending, heavy bond issuing country.
  
• By stockpiling more base metals and oil.

They want to diversify out of the dollar, but want to do so without setting off a major rout of the dollar. It is a delicate balance, especially for the friends of the U.S.

The enemies of the U.S. have an even bigger goal. It is to destroy the U.S. as an international power. In this effort, they are being aided unwittingly by those who will spend public funds to a level beyond the means of the U.S. economy to support the expenditures.

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Interesting eh?

But...

What if you are just in it for the money?

What's the logical thing to do? And looking ahead, what lies ahead for the US Dollar.

Here's some suggestion and more commentary from Guild:

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The dollar is falling because of the problems outlined in above.

What we see ahead is more of the same. But why?

How can the U.S. quickly correct the problem? I cannot think of a quick fix for this problem. All the solutions, even the most radical, will take at a minimum of several years. Many will take much longer.

A recent study by State Street Research points out that U.S. consumption of goods and services exceeds domestic income by 7 %. In recent years, people have borrowed against their assets to finance this spending. The study shows that asset values (mainly real estate) and household debt would have to rise forever in relation to incomes to keep the current U.S. growth rate trending at the same level.

I would now like to quote John Plender of the Financial Times who said in an article entitled, “The Waning Dollar and the Brave new World” published Dec 4 2006:

• “Markets are adjustment mechanisms. When liberalized, as the capital markets have been on a global basis, they tolerate extremes for longer while retaining the potential to revert more brutally to the mean when policy fails to address economic problems.”

Most obviously, U.S. economic policy has failed to address the problem of our triple deficits. In my opinion, a REVERSION TO THE MEAN would send the dollar to much lower levels versus other major currencies. Part of the adjustment process could easily be the U.S. standard of living falling for an extended period of time. Not a pretty picture.

1 YEAR CHART OF THE U.S. DOLLAR

SUMMARY

PROTECT YOURSELF

Live within your means, and vote for people who will have the U.S. live within its means. Own foreign currencies, precious metals and foreign stocks, which may hold their value much better than the U.S. dollar over the long run.

These are themes we have supported for a long time. The recent and continuing decline in the U.S. dollar brings them more into focus and should cause more investors to get serious about protecting themselves and beginning to act to solve the problem.