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Posted on August 19, 2009 -
Read Reizner's Way to Wealth
By John Reizner |


Both Warren Buffett in his August 18, 2009 editorial in the New York Times and Curtis Mewbourne in an August 2009 report on investment manager PIMCO's website appear to concur on the fate of the U.S. dollar: that it may continue to fall. The dollar index (September 2009 contract) closed August 18 at 79.035.

Buffett points out that "the current account deficit - dollars that we force-feed to the rest of the world and that must be invested - will be $400 billion or so this year." He adds that there have recently been indications that foreign nations holding U.S. dollars have been investing in our companies, financial markets, and real estate in addition to U.S. Treasury instruments. According to Wikipedia, lenders from Japan and China own over 45% of U.S. foreign debt.

It is troubling that countries that already own much of U.S. debt instruments may turn to buying up real assets in our economy. This may be a short term fix to our current economic woes as foreign investors liquefy both healthy and troubled U.S. asset holders. Yet, these potential investments in quantity may cede even greater control of our economic destiny to the whims of nations and whose goals may not coincide with our government and citizens.
 
In his piece, Buffett quotes economist John Maynard Keynes, who wrote that through the tax of inflation governments can secretly confiscate much of the wealth of their citizens. The middle class can be economically damaged by an embedded inflation, as occurred during the late 1970's.
 
Indeed, Buffett has stated that inflation in the coming years could be greater than that of the 1970's. The annual inflation rate topped out in 1980 at 13.5%. If Buffett's prediction of higher price levels comes to pass, it may take a greater number of dollars to buy a can of Coca-Cola. The dollar may be worth-less.
 
Buffett concludes that the fate of the U.S. dollar lies with Congress.
 
Pimco's Curtis Mewbourne in an August 2009 report writes that we are witnessing "a loss of status for the U.S. dollar as a store of value" even while there may be no sole real alternative to the dollar as a reserve currency at this time. The U.S. dollar benefited during the financial crisis, but those capital flows have reversed to a degree, he reports.

Mewbourne states that emerging countries hold a large share of international reserves and that the dollar is likely to continue to decline, especially against emerging market currencies. Further, he writes that China may be transitioning from an export-led to a domestic demand driven economy. While China with its stimulus plan has been able to maintain GDP over 6%, India has kept GDP over 5% without such a plan, Mewbourne notes.
 
China and India have 30% of the world's people. China's car sales may soon eclipse U.S. car sales. In July, Bloomberg reported that Franklin Templeton's Mark Mobius stated the Chinese stock market capitalization may exceed U.S. capitalization within three years. However, this would include Chinese state-owned enterprises.
 
Mewbourne writes about the "New Normal," where highly indebted developed economies such as the U.S. experience potentially reduced growth rates. Accordingly, the emerging economies may experience less export demand from more levered developed countries, but they may have opportunity to grow their internal markets.

I believe that the "New Normal" economic order may bring investment opportunities. I have written in this blog commentary on the potential decline of the U.S. dollar (see related articles below).
 
I own in my portfolio investments which may benefit from a further decline of the dollar over time. These include the Franklin Templeton Hard Currency Fund, the Matthews Asia Pacific Fund, and other funds holding international equities. I also continue to own gold and silver, though I would look to unload partial positions should those markets take off.

 

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