|
Since The Bretton Woods Agreement
was signed in 1944, the U.S. dollar has been viewed as the undisputed world's
reserve currency. Unfortunately, however, investors the world over are now
asking themselves if that should continue to be the case. They are instead on
an ever increasing basis seeking to rely on a more stable form of money
(gold) in which to park their global savings.
Having a currency in which the
entire planet views as a safe haven has remarkable benefits. Our "king
dollar" status allows the U.S. to consume much more than it produces
without having our currency collapse. It also keeps interest rates
unnaturally low, which provides a tremendous boost to economic growth. Our
nation's debt has now eclipsed $13 trillion dollars and the monetary base has
skyrocketed to over $2 trillion. If the dollar did not enjoy such a lofty
position in the opinion of global currency investors, U.S. interest rates
would soar as foreign central banks sold off their U.S. debt holdings and the
dollar's value would plummet. Therefore, one of the most important factors
for the future stability of our economy is that traders and investors across
the globe consistently regard the U.S. dollar and our bond market as a safe
harbor -- and one without peer.
However, foreign governments and
central banks have recently displayed a significantly greater predilection to
boost the value of their currency as compared to the United States. Unlike
our recalcitrant Federal Reserve, the Bank of Canada yesterday raised its
target rate on overnight loans between commercial banks to .50 percent from
.25 percent. Indeed, there is a growing list of countries that have recently
sought to protect the value of their currency by raising interest rates.
Brazil, Malaysia and Peru have already raised rates this year. And even
though the Reserve Bank of Australia opted out of boosting rates this last
go-around, they still have a comparatively very high rate of 4.5%, which was
achieved after six previous increases since October 2009.
The fact is that our central bank
has not displayed any effort what so ever to preserve the dollars status as
the world's reserve currency. In fact, they have simply taken it for granted
and showed disdain for the greenbacks eminent position. The Fed's balance
sheet remains over $2.3 trillion even though their purchases of Mortgage
backed securities ended over two months ago. Not to be outdone by our central
bank, the current administration believes the major problem we face is that
we do not yet have enough debt.
President Obama's Chief Economic
Advisor Lawrence Summers has advocated an additional $200 billion in deficit
spending saying, "I cannot agree with those who suggest that it somehow
threatens the future to provide truly temporary, high-bang-for-the-buck jobs
and growth measures," he said. "Spurring growth, if we can achieve
it, is by far the best way to improve our fiscal position." But how is
it that anyone can believe that a government can create viable growth or
sustainable wealth? The truth is that it's incapable of any such thing.
Redistributing savings from one part of the economy to another cannot lead to
growth. Borrowing money from foreign sources only amounts to a deferred tax
on future production with interest. And inflation is just another form of a
cruel tax placed upon the middle class without their consent.
But the real problem with thinking
what the U.S. needs to do is spend more and keep interest rates in the cellar
is that most of the rest of the world has already started to repent. They now
understand that they must reduce leveraged instead of borrowing more and are
raising interest rates to protect their currencies.
The twentieth century has taught
Europeans two valuable lessons. Namely, that killing each other isn't really
a good way to bring about peace and that massively inflating a currency
doesn't engender prosperity. Now the twenty-first century is hopefully
teaching them that debt cannot be bailed out by issuing more debt. Case in
point, Italy recently joined Greece, Spain and Portugal in enacting austerity
programs to slash budget deficits. In the case of Italy, their plan is to cut
spending by 25 billion Euros this year with the aim to slash the budget
deficit it to 2.7% of GDP by 2012. So while Europe is embracing austerity,
the U.S. is headed in the opposite direction.
The two most important factors in
protecting the value of any nation's currency is to have the central bank
provide interest rates that are above the rate of inflation and for the
government to ensure the debt of the nation can always be easily serviced.
Canada, Europe, South America and Asia are moving slowly towards that goal.
Those economies are also learning that any fiat currency (even the
"almighty dollar") can never truly be an adequate substitute for
owning gold -- especially when our government and Fed are determined to
undermine the dollar's purchasing power. But the pressing question has now
become how long those economies will continue to squander their savings by
parking them in U.S. dollars if we continue to debase both the value of our
debt and the currency in which it is based.
Michael Pento
Senior Market Strategist
Delta Global
Advisors, Inc.
Delta Global
Advisors : 19051 Goldenwest, #106-116 Huntington Beach, CA 92648 Phone:
800-485-1220 Fax: 800-485-1225
A
15-year industry veteran whose career began as a trader on the floor of the
New York Stock Exchange, Michael Pento recently served as a Vice President of
Investments for GunnAllen Financial. Previously, he managed individual
portfolios as a Vice President for First Montauk Securities, where he
focused on options management and advanced yield-enhancing strategies to
increase portfolio returns. He is also a published economic theorist in
the Austrian school of economic theory.
|
