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"The End of the Dollar as We Know It?" | Main | "Creative Destruction, the Bailout and its Ultimate Costs"

Posted on June 2, 2009 -
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By John Reizner |

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It is widely known that government authorities across the globe are attempting to pump prime their nations' depression-racked economies by printing vast sums of paper money. Some nations, including the United States, are running trillion dollar deficits and will go deeper into debt in future years in order to finance an expansion that may not materialize as planned.

If we reach that point where the pump priming from the Fed and the fiscal excess of the government fail to keep the economic shell game going, the financial markets may lose greater confidence in our dollar (the dollar index is currently at 79.19 on June 1, 2009), Treasury bonds and stock market {Dow Futures at 8688 {(though the stock market may move higher as it has exceeded its 200 day moving average: a widely watched indicator)}. 

In this scenario, the federal government might potentially lose what limited influence it currently has over the future of our economy. I wrote about the possibility of this loss of confidence before the U.S. Presidential election in an earlier article on the potential effects of an Obama administration on our financial markets (see related articles below).
But the government appears to have a plan to get us out of this mess. By printing money at an unprecedented rate and increasing public indebtedness, our leaders may believe our economy might be lifted. At that point, the Federal Reserve could withdraw its monetary ease once the recovery seems solid, giving us an economic recovery without great inflation.

I have written consistently over the last two years that I thought we may be in store for a 1970's double digit inflation and stock market decline. Even the oracle of Omaha, Warren Buffett, an Obama supporter, stated in a recent interview on a major financial news network that we could experience in the coming years a wave of price inflation that could match the 1970's embedded inflation. Or, he stated, it could be much worse. If the Treasury runs out of fiscal ammunition and the Federal Reserve cannot give up on monetary ease because of the state of the economy, then I agree that the inflation could be much worse.
How can one protect one's portfolio and family from the potential ravages of a great inflation? I saw years ago that our commodity bull market had begun in 1999. Inflation and the oil and gold markets were rising and I looked back to the 1970's stagflation era for lessons that I could use from that time to benefit from those trends.
At that time, gold and silver rose powerfully (gold ran from $35 per troy ounce in 1971 to $850 in 1980 and silver ran from $2 In 1973 to $49 in 1980), oil and oil service companies soared (oil surged from $3.50 per barrel in 1970 to $40 per barrel in 1980), interest rates soared to double digits as many long term bonds lost half their value, and the Swiss franc was highly regarded as a hard money investment against a falling dollar. Were it not for the monetary discipline of Fed Chairman Paul Volker in the early 1980's, we might have entered hyperinflation at that time. We may need Paul Volker's monetary discipline again.
Gold and silver may be poised to accelerate their rallies (gold is currently priced at $977.90 per troy ounce and silver at $15.60). There has been a great deal of discussion that potential IMF gold sales could harm the gold market, but I believe that if the sale goes through and there is a negative effect on the market, the decline would (i) likely be temporary, and (ii) represent a potential buying opportunity. I have owned gold coins and bars for over five years, which generally act as inflation hedges in the event of sharply rising consumer prices. I have invested in silver bullion in the last two weeks.
The price of oil has rallied from below $40 to over $68 per barrel. It may continue its rise to the $80 per barrel range. I am holding my investments in major multinational oil firms and established oil service companies.
The September 2009 30-Year T-Bond futures lost more than three points on June 1st, settling at 114.18. It appears to be entering an area of price support on the weekly and monthly charts with many market participants expecting increasing inflation down the road. There has been a five month sell-off in long term bonds, which inversely means interest rates are going up.
I missed my chance to refinance my mortgage, but I think keeping a fixed rate mortgage with a stable payment is best if you can do it. I am avoiding long bonds, and I have sold my mutual funds that had greater exposure to longer maturities.
There is now much justified concern about the fate of the U.S. dollar, which is under pressure due to our government's decades of borrowing overseas to finance our citizens' consumption and the severity of our economic crisis. Many participants are worried that we are at an inflection point: that the dollar may go into freefall. I have heard one commentator who has stated his view that there may be a managed decline of the dollar. In a previous article, I have stated my opinion on the monthly U.S. dollar index chart. In 2007, we fell through a twenty year shelf of support at approximately 80 on the dollar index. In late 2008 and into 2009, we rallied back into that previous support area and have in May 2009 resumed the decline.
I continue to hold the Franklin Templeton Hard Currency Fund and for now the CurrencyShares Japanese Yen Trust to maintain asset diversification. Both potentially benefit from a falling dollar. I also own mutual funds which invest in foreign stocks.
In the resolution of today's crisis, Americans ought to come together to solve our problems as a people without great discord while protecting our government's ability to continue without running out of viable fiscal options.
Regarding our personal welfare, what can we learn from the actions of families weathering the inflationary economy of the 1970's? In the late 1970's, hard money newsletters were in the mainstream. Many households were buying gold, silver and even diamonds as hedges against inflation. Some citizens stocked up on canned goods and prepared to survive for the worst of times. Others rushed to buy goods to beat anticipated price increases.
Prices were indeed rising in the late 1970's, but famed commentator and investor Jim Rogers has stated recently that he expects food shortages in a few years with sharply rising prices for food. He states that presently farmers cannot get loans for fertilizer and equipment because of the credit squeeze. Consequently, he says that less food may be produced and there may be shortages in the future.
I would like to draw attention to the fact that commodities are notoriously volatile and can be known to turn on a dime. I will say that as long as our government can afford to continue its farm loan programs, then our farmers may be more insulated than elsewhere, but you may draw your own conclusion on that. Rogers is recommending, among other investments, an agricultural index.
All of us may be hurt to some degree by an embedded inflation, and many families may be hurt dramatically by such an event. In this environment, perhaps the best one can do is to hedge one's bets and plan for the possibility of future inflation. Should it come to pass, one may be more prepared to protect one's family and one's portfolio.



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