Tax & Financial Consulting Services
The Eight Ball Look on When the Dollar Dies
Karibu (Welcome) G&G Readers,
Been quiet all week because I was busy attending a wonderful “Doing Business with Africa Trade conference in Suffolk, VA.” The conference was put on by Diversity Restoration Solutions, Inc. and the wealth of information I received from attending was priceless. I suggest checking them out on the web for more info and I suggest becoming a part of the wealth and growth of Africa which is about to take place in the world.
Mother Africa is the birth of the greatest civilization to ever exist in which that knowledge has been lost, but don’t worry … that greatness is about to shine again. Question … will you be a part of that development?
Ok … now to something more pressing or depressing depending on where your money resides. What to look for and what will happen once the dollar eventually dies. Now, don’t hate me I’m just the messenger. Plus, you can’t deny the truth as history and common sense surely are on my side here.
History Repeats Itself Once Again
It is the world's single greatest trophy.
Cutting a 120-mile-long course, it is 79 feet deep and 673 feet wide. It took 10 years to build. The total construction cost is nearly impossible to calculate because the original construction depended on slave labor, and since then, hundreds of millions of dollars have been invested in improvements.
What's it worth?
What’s known is that the British paid 4 million pounds in 1875 for a 44% interest in this asset. That's roughly the equivalent of $3 billion today. You could argue a fair market price today would equal around $6 billion. But you'd be off by a wide margin. The Brits acquired their stake in a distressed sale.
I’m talking about the Suez Canal. Its real value is nearly impossible to quantify.
Roughly 20,000 or so ships traverse the canal each year. They carry nearly 7.5% of the entire world's trade. More important, most of the oil imported by Europe travels through the canal. Without the canal, ships would have to travel an extra 2,700 miles around the Cape of Good Hope in South Africa.
The strategic importance of this waterway is immense. Its hypothetical replacement cost would run in the hundreds of billions of dollars. It is a completely irreplaceable, one-of-a-kind asset: There's nowhere else you could construct a sea-to-sea canal connecting Europe and Asia.
I'd wager most people don't know private investors from around the world – mostly from France – originally owned the Suez Canal. The company raised money in 1858 and began construction in 1859. The canal opened in November 1869. It ushered in a new, greatly expanded era of world trade and colonialism. Unfortunately, it ended up costing twice as much as its builders expected. When the canal was finished, Egypt owned 44% of the company that owned it.
Ownership of 44% of the canal allowed Egypt's rulers to live far beyond their means. They offered as collateral for any money they borrowed a large piece of one of the world's greatest assets. From 1867-1875, Egypt's foreign debts grew by 32,000%. Bankers were happy to lend against the future revenue of the canal. But... when those revenues didn't materialize fast enough... Egypt was forced to sell its stake in the canal for a bargain price to the British. It didn't stop there. A few years later, Egypt lost its sovereignty as Britain sent in its troops to protect the canal and collect taxes to pay back Egypt's bad debts.
This put Great Britain in control of all European trade with Asia. It also allowed it to establish and maintain huge colonies in India, Singapore, and China. The Suez Canal was the key to making Great Britain the wealthiest, most powerful empire in the world.
Pay close attention here.
Just imagine the worldview of a British banker in 1910. The sun never set on your empire. You earned a percentage of a majority of the world's trade. Everywhere you went in the world – from Singapore to Central America – the business community not only spoke your language (literally), it also used your currency. This led to a nearly endless demand for your government's debt. Surely, you believed your economy was as strong as your invincible navy. But less than a decade later, Britain was nearly bankrupt...
Its currency, ONCE the world's standard, began to collapse in the Great Depression. Investors around the world started buying GOLD instead of British consols (bonds). Britain was forced to abandon the GOLD standard in 1931. The cost of maintaining its foreign colonial outposts skyrocketed. Does this sound familiar yet? If not, pay even closer attention here.
In Egypt, it had to cut back. In 1936, just prior to World War II, Britain signed a treaty with Egypt agreeing to share revenues from the canal and withdraw all troops from the country except those necessary to defend the canal. Those revenues, though, were paid in British pounds. With a weakening country backing them, those pounds continued to fall in value. This gave Egyptian nationalist politicians a pretext to break the treaty and seize the canal. In 1956, they finally did.
The British are now long gone. So... who protects the canal today, dear reader?
If you live in the U.S., you do. (Well, your taxes do, anyway)
In 1979, Israel and Egypt signed the Camp David peace accords. According to the treaty, the U.N. was supposed to take over canal security. But the U.N. Security Council never approved the use of its troops (thanks to a Soviet veto). A multinational peace keeping force was organized. It contains a handful of troops from countries like Uruguay. The majority of the troops, of course, are U.S. soldiers.
And so, once again, the country running the Suez Canal seems to be going broke. History has a wonderfully ironic sense of humor, does it not?
Yes, from where us G&G Investment Society (GGIS) subscribers sit, with plenty of gold and silver stored away and a portfolio well-positioned for the coming collapse of the U.S. dollar, we can appreciate the irony of history. We hope you're in the same position. For most Americans, I fear the next year will be a disaster.
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The Beginning of the Panic
Today, our country will enter a period without precedence in our experience.
Today, the Federal Reserve has pledged to cease buying U.S. Treasury bonds. This is the second time since the financial crisis it has intervened in the Treasury market in a major way. The program of buying new Treasury issues has been dubbed "quantitative easing II" (QE2).
I'd wager not one in 1,000 Americans has any idea (or at least any real understanding) of what has been going on in the market for U.S. Treasury bonds since the financial crisis. For the last nine months, the Fed has been printing up new dollars and buying huge amounts of newly issued debt from the U.S. Treasury – $600 billion of bonds. And these purchases followed a $1.75 trillion program of quantitative easing that ran from March 2009 to March 2010.
It is no exaggeration to say that a printing press has kept our economy going for the last two years. But what will happen when the printing stops?
While I honestly don't know that answer, I’m going to speculate that, in the short term, the U.S. dollar will rally and commodities will suffer a serious correction. We will see a dramatic slowdown in the rate of monetary inflation. People will think prices will stop going up. Economic activity will begin to decline. Fear will lead a lot of investors to "go to cash." That means buying short-term U.S. Treasury bonds because they're the most liquid, most frequently traded form of cash.
As this process unfolds, I expect to see another global panic. Especially if Bernanke's decision to stop the presses coincides with a Republican political gambit – refusing to raise the debt ceiling, which could cause a default on U.S. Treasury bonds.
Whether the debt ceiling is raised or not, it's only a matter of time before the Fed will have to turn on the presses again for reasons detailed below. And when "QE3" begins, it will send our creditors an unmistakable message: “You will never be repaid in anything other than massively devalued paper.”
That will be a horrible day for the value of the US Dollar. It may even mean the end of the U.S. dollar as the world's reserve currency.
We Can't Borrow Forever... and We Can't Stop
On May 11, the U.S. Treasury updated the public on our federal government's finances. So far this fiscal year (which began October 1, 2010), the feds have borrowed nearly $1 trillion. April marked the 31st consecutive month of deficit spending at the federal level. It did not matter that tax receipts have rebounded substantially – growth in spending on social programs has far outpaced the increase in revenues.
In total, President Obama's economic mandarins now forecast the fiscal year 2011 deficit will come in at $1.6 trillion.
To put this figure in perspective for you, when Ronald Reagan took office, the entire national debt totaled less than $1 trillion. Even as late as 2002, the national debt was only $6 trillion. Obama's administration will almost surely borrow more than $6 trillion in only his first term. In four years, the Obama administrationwill double our entire national debt from its pre-financial crisis levels.
Keep in mind, President Obama, after taking office in 2009, held a widely publicized Fiscal Responsibility Summit and pledged to "halve the deficit we inherited" by 2013.
Again … don’t shoot the messenger, just reporting the truth.
President Obama, while a U.S. senator, called 2006 efforts to raise the debt ceiling "a sign of leadership failure." He voted against raising the debt ceiling to $9 trillion, proclaiming, "Americans deserve better." Obama noted, accurately in my view, these mounting federal debts were "shifting the burden of bad choices onto the backs of our children and grandchildren."
I hope history will hold our government leaders accountable for their actions. But, I’m not holding my breath. Federal, state, and local government spending now makes up about 45% of the U.S. economy. Hardly any major business in America doesn't count on the government for a significant amount of its earnings. While we used to call this kind of system "socialism," today the popular term is "crony capitalism."
Whatever you call it, it leads to collapse.
Another worrisome sign? A record number of people (almost 70 million) now depends on the U.S. government for their daily housing, food, and – most of all – health care.
Today, 45% of American households receive some form of direct government payments. And 132.5 million people pay no federal taxes whatsoever – a record number of people who neither paid federal income taxes in 2010 nor were claimed as a dependent by another taxpayer.
The Math Don’t Lie …
Tallying up all these numbers, you discover something quite amazing. A tiny number of Americans pay for the well-being of nearly a majority. While half of the population may pay something in taxes, only the top 10% – people earning more than $113,000 – pay a substantive amount. These few citizens pay 70% of all the income taxes collected.
Fact … benefits funded this way are unsustainable. According to a recent study published in the Wall Street Journal, the average couple that retires at age 66 on Social Security and Medicare will receive $1 million in benefits. On average, they and their employers paid $500,000 into the system.
BL: the federal government is taking an excessive amount of money from its few high earners – a wealthy minority – and redistributing inefficiently to pay for services the country can't realistically afford.
Individuals, of course, are not the only beneficiaries. Entire industries gush cash thanks to the generosity of the federal treasury – mortgage REITs, defense companies, and most of the health care complex.
The system is so broken, not even the already lopsided system is enough. Not even close. Every week we hear more demands for the "rich" to pay their "fair share." The political reasons for spending are so powerful, until the government can take it from there, they will continue to borrow it from somewhere else.
I don't believe Americans are intrinsically superior to the Egyptians of the 1870s or the British of the 1910s. Surely, many people in those societies recognized the approaching financial disaster. Any American with the ability to balance a checkbook can discern the serious nature of this financial situation, and the politics that explain its origins. Yet the borrowing and spending continue to accelerate. In the battle between political expediency and financial honesty, the lust for power will always win.
A Hard Reality
Rather than face these unpleasant facts and consider where they are leading us, most people continue to think, "It can't happen here, this is America."
Meanwhile, our country has been depending on a printing press to make our economic system work. When is the last time that happened in America? (Hint: the Civil War.)
How many other things most people didn't think would ever happen in America have happened recently? What about the collapse of our investment banks, the bankruptcy of General Motors, the liquidation of Fannie Mae and Freddie Mac, the failure of AIG, hundreds of banks being seized, millions of homes in foreclosure, real unemployment rates close to 20%. Should I go on?
As I frequently point out to my critics, the question isn't when this crisis will begin – it started in 2008. The question is, when will it end and how bad will it get before it does?
Don't forget: Today, the Federal Reserve will stop buying Treasury bonds.
That's the first time since March 2009 our economy will stand on its own two feet. And I expect... just like a child riding a bike without training wheels for the first time ... it will crash.
But, we are not alone.
Bill Gross, manager of the world's largest bond fund, has put 4% of his fund short U.S. Treasury bonds. Just consider that for a minute: The most powerful fixed-income manager in the world (not just in America) is selling the U.S. Treasury short.
The University of Texas endowment fund recently took physical delivery of $1 billion gold bars. That's an enormous bet that the U.S. monetary system falls apart, from some of the wealthiest and best-informed investors in the world.
Finally, in what we believe is the ultimate death knell for the U.S. dollar, our trading partners are moving out of the dollar and into gold. Mexico, for example, one of our most important trading partners, just purchased almost 100 tons of gold.
All around the world, more and more central banks are selling dollars and buying gold. They're doing so because they can plainly see America's credit has become unreliable and the value of the dollar is likely to decline. If you think you might be trading in something other than U.S. dollars in the future, then you might not want to be holding U.S. dollars. You might want to be holding that currency. And if you can't hold that currency (i.e if you don’t know how or can't hold the Chinese yuan), you might consider holding gold.
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Asar Gary Gray
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LEGAL NOTICE: This work is based on SEC filings, current events, interviews, corporate press releases and what I've learned as a financial consultant. Nothing herein should be considered personalized investment advice. It may contain errors and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility.