 The US Trade Abyss
Don't feed
the dead cat
Alex Wallenwein
August 16, 2004
The already infamously large US trade 'gap' has widened into
a yawning abyss in June of this year. The dollar, with its well-known
'leaden duck syndrome', has until recently been prevented from
rolling over the crumbling edge by an intricate network of ropes
and pulleys. That 'safety catch' is about to expire on its own
terms, leaving the dollar free to comply with the immutable laws
of economic gravity.
They say a picture speaks louder
than a thousand words, so take good look at this chart from James
Turk of GoldMoney.
The dollar index has just bounced
off the top of its downtrend channel that goes back to January
2002. James Turk's expert commentary on this chart ends with
this paragraph:
In short, Federal Reserve actions
suggest that they believe that the economy can better handle
higher energy prices and more inflation than rising interest
rates. The consequence is a lower dollar - and in time, much
higher gold."
I have been saying for about
six months now that rising rates are the real danger to the US
economy. Unfortunately, rising rates are the only thing that
can tear the dollar out of its current funk - but the economy
just won't survive it. That doesn't paint a very pretty picture
of what is to come for the dollar.
It is also noteworthy that
the dollar's downtrend channel is not a descending converging
triangle that begs for a breakout tot he upside. These two lines
are perfectly parallel, which means that the downtrend can go
on for a long, long time.
With all of the soft economic
news around, with security jitters, a building global oil crisis
leading inevitably to domestic price inflation, with US consumers
(responsible for a full one third of total GDP) over-stretched
to the max under a crushing debt load while facing rising interest
rates and therefore debt-servicing costs, the dollar index has
no way of reversing its downtrend anytime soon.
I know that gold investors
are completely beside themselves. This was supposed to be the
year that gold hits $500 or more, and all we have seen so far
is gold back below $400 for the most part. What gives?
Answer: take the longer term
perspective.
As you can very well see, gold
is doing great, actually, since the dollar is rocking and rolling
itself into the ground. It's just that, when you move your face
right up to a small boulder that's lying in your path, at ground-level,
and look at it from a few inches away, the darn thing seems to
block the entire horizon. You can see only it, nothing else.
A lot of people do that when
looking at their gold investments. When the road immediately
ahead is clear and the price of gold is rising, they are ecstatic
- but they descend into a morass of self-pity and demoralizing
doubt whenever someone throws a little rock into their path.
They creep right up to it and whine and whine at the "insurmountable
obstacle" and the "evil machinations" of the gold
manipulators.
Honestly: whose side would
you rather be on? The side of the manipulators who, like Circus
jugglers, have to keep all of their balls in the air at all times
or lose everything? Or would you rather be on the side of gravity?
Gravity really doesn't care
if the juggler is in control or not. Gravity knows the balls
will ALL come down eventually - and the longer they have stayed
up, the sooner that time will come.
People who hold physical gold
are on the side of gravity. They KNOW that things will eventually
turn their way, sooner or later. They also know that, this time
around, the manipulators don't really have any arrows left in
their quiver. Paul Volcker shot "the big one" back
in 1981 when he raised US interest rates to 15 percent and higher
to lure investment funds away from gold and back into the dollar-fold.
That 'arrow' is now gone forever.
Raising interest rates even back to 'normal' levels is out of
the question under current conditions. And those conditions are
not going to get any better, anytime soon!
The entire world economy -
still largely dependent on the US - is slowing down together
with the US. The European Union's persistently anaemic growth
is slowly hemorrhaging whatever blood it had left in it. Germany,
for example, the former economic power house of Europe, sees
its 'growth' firmly entrenched in a trading range between zero
and next-to-nothing (from 0.2% in Q4 last year to a "whopping"
0.4% in Q1, and then "all the way back down" to 0.3%
in Q2 of this year). France fares no better. England's real estate
boom is about to crack wide open. Italy's economy is barely worth
mentioning.
Japan, since March this year
only barely out of the woods after trekking its decade-and-a-half
long trail through the deflation jungle, is already watching
its tiny economic upswing taper off and die. If this continues,
Japan will soon have to go back to literally buying its economic
survival by selling freshly printed yen for overprinted dollars
to keep the yen low enough for Americans to keep splurging on
Sony and Toshiba products. This will become harder and harder
as the dollar suffers from its catastrophic trade gap problems,
plunging ever deeper into the abyss of monetary profligacy.
China and India are having
severe inflation problems that are exacerbated by skyrocketing
energy costs. Both countries are applying their economic brakes
already.
The US trade-gorge and the
downward pull it exerts on the dollar may help US exporters somewhat
by making their products more competitive. But in an age of stumbling
US stock prices, with no more low-interest rate crutches to support
the stock market's buckling knees, this colossal walking-corpse
economy is about to reveal its true Zombie-nature.
The US consumer's consumption
is already severely curtailed by the constantly rising gasoline
expense. Increased transportation costs will soon be factored
into regular consumer goods as well, including food. The long
term uptrend in interest rates only adds to that pressure.
Fed-in-the Box
There is no way out. If the
economy is great and demand-led price pressures develop, the
Fed must raise rates faster, which will kill consumer spending
and therefore the economy. If the economy sucks and foreign investment
in the US drops off precipitously, it must raise rates too, so
it can re-attract foreign capital. Either way, the maxed-out
US consumer eats dirt and the Fed loses out - big.
If the Fed were to fail to
raise interest rates during any of the upcoming FOMC meetings,
it would thereby tacitly admit that Greenspan's rosy picture
of US economic health was nothing but a fib - and the dollar
would sink like a Russian submarine. If the dollar does for some
strange reason explode upward and out of its long term downtrend,
US exports will suffer, putting further downward pressure on
the economy, and the trade-gap will turn into a tectonic plate
shift. The promised land of economic recovery will swim ever
further away from us.
It doesn't matter which way
you skin this cat - it's still a dead cat, whether it happens
to be bouncing for the time being or not.
The big question is: in the
face of all this, what are you going to do with your money?
Will you use it to try and
feed the dead cat, or will you use it to buy something that can
sustain you in the long run? Buying into dollar-assets is like
buying Enron stock after the scandal broke. Remember that "buying
dollar-assets" includes betting on paper-gold rather than
buying gold itself.
Remember also that, in the
not so distant future, after all is said and done, we will either
live in a world where fiat is spent and gold is saved (and freely
traded), or in a world where the only "legal" way of
buying and selling anything is through biometrics-activated,
central government-controlled "virtual money" accounts.
In the latter case, gold and silver will be "black market"
money for those who refuse to be plugged into that Matrix-like
nightmare.
 Owning gold is
a good way to prepare for either contingency - unless you want
to be a human battery.
Got gold?
Aug 15, 2004
Alex Wallenwein
Editor, Publisher
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 Alex Wallenwein writes the Euro vs
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