 Benson's Economic
& Market Trends
When Our
Dollars Come Marching Home
Richard Benson
Archives
December 2, 2004
The financial
and popular press has lately focused on the now-obvious
problems for the dollar created from our massive budget and trade
deficits. Indeed, everyone now realizes that for the deficits
to be brought into balance, the dollar must go down. It seems
that virtually every financial pundit, though, still assumes
that not only will the Asian and other foreign central banks
continue to accumulate dollar assets forever, but that "those
foreigners will never spend their dollars." However,
very little is written about what will happen when all the dollars,
built up as foreign central bank and private holdings, get spent.
Indeed, we believe that not only will the dollars get spent,
but this spending will have massive inflationary implications
for America.
Up to now, foreign central banks - particularly the Asian central
banks that currently hold over $1 trillion in dollar assets -
have had every reason to accumulate as many dollar credits, in
the form of U.S. treasury securities, as possible. Accumulating
these dollar assets has cost foreign central banks nothing as
long as they have a trade surplus and can print up more of their
own currency for free and swap their free money for U.S. treasuries.
Rather than spending their dollars today, America's trade
partners are saving them so they can be spent tomorrow. Moreover,
as long as our dollars are happily accepted by countries that
produce oil, raw materials, and goods and services they need,
America's trade partners can profit in the future in exchange
for paying nothing today, simply by running mercantilist policies!
Another perspective on what is happening is if trade flows were
currently matched, foreign countries would not be building up
dollar credits; they would be spending dollars "taken in
trade today!" This dollar spending would increase the demand
for goods and services in America and raise prices, creating
inflation. The very fact that foreign countries have not been
spending their dollars now but are, instead, storing up massive
dollar credits, means there is going to be a whole lot of dollar
spending in the future. One can compare this to a huge dam filling
up with dollar credits, but look out when this "dollar dam"
breaks and the pent up dollar reserves flow out and flood America.
Sooner or later all currencies come home to their native country
to be spent, but as long as the dollar is viewed as the international
reserve currency, the process of massive credit and dollar inflation
showing up is delayed. The fact that the dollar has been the
world reserve currency simply means that the dam full of dollars
has been allowed to fill up higher than anyone could have ever
imagined.
Take China as a shinning example. China has amassed over $500
billion in dollar credits and is a developing country with 1.3
billion hungry, needy and politically restless people. The Chinese
government has built up dollar credits temporarily, but as their
citizens learn more about the good life - which includes electricity,
heat, air conditioning, two cars and meat in their diet - the
government may have to share some of its wealth with them. Not
only is it possible for the trade deficit to swing into balance
if this occurs, but all those dollar credits will get spent while
they are still worth something.
What is on China's shopping list? Already announced are purchases
of Noranda and Husky in Canada, the large mining and energy groups,
as well as other significant investments in synthetic oil (tar
sands). A major Chinese supplier of automobile parts has been
buying up rustbelt auto part suppliers in the American Midwest.
President Hu of China just came back from Latin America and announced
plans to invest over $30 billion in Argentina and Brazil in order
to build plants that are needed to extract raw materials. We
expect that China's shopping list will continue to grow and they
will start buying up the world with America's money!
How do our dollars finally get back home to our country?
Well, if China does buy Noranda, the Canadians can invade shopping
malls south of the border. If China also buys Latin American
resources, Latin Americans can then buy the rest of Miami. As
dollars get spent and move from country to country like a hot
potato, eventually the dollars will come marching home because
a dollar will always buy something in America, even if it isn't
very much.
The fact that dollar credits will get spent will help pressure
the dollar far more than is currently appreciated. There are
reports that the average man in China is already willing to stand
in a long line at a bank to convert dollars into the Renminbi;
they have already dumped over $20 billion of U.S. dollars this
year. How many Americans do you know are willing to wait in line
to dump their dollars, other than Warren Buffet or George Soros?
The Russian President, Vladimir Putin, recently announced that
his country will diversify foreign exchange holdings away from
the dollar. Upon hearing that, every Russian or Eastern European
gangster, drug-runner or plain old tax-avoiding businessman,
should take the hint from Putin and swap old greenbacks for crisp
new appreciating Euros, rather than consider holding on to our
new pretty pink $20 and $50 dollar bills.
Think for a moment of all that cash in German Marks, French Francs,
and Italian Lire that came out from under the mattresses to be
converted into Euros. Now, consider that as much as two-thirds
of all U.S. currency is still held outside the 50 states. Every
foreign citizen who holds dollars should pray that their central
bank will buy even more bad dollars at current levels so that
they can get out without further loss.
The real problem for dollar investors is that as soon as
it is realized that dollars will get spent - meaning significant
dollar inflation - it is clear that the dollar can no longer
be a stable store of value. So, even before our dollars come
marching home, anyone holding dollars can see there is a light
at the end of the tunnel, but it's a train! He who swaps out
of the dollar first, loses the least!
Foreign central banks hold about 75 percent of their total
foreign exchange reserves in dollars, yet the financial markets
have only vaguely acknowledged the problems associated with the
spending of these dollar credits. As an investor, you should
expect a further decline in the value of the dollar and the beginning
of significant long-term U.S. inflation.
December 2, 2004
Richard Benson
Archives
President
Specialty
Finance Group, LLC
Member NASD/SIPC
2505 S. Ocean Boulevard
- Suite 212
Palm Beach, Florida 33480
1 800-860-2907
eMail: rbenson@sfgroup.org
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321gold
Inc
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