Former Fed Chairman Alan Greenspan, in speaking to the Commercial Association
in Washington today said, "We're beginning to see some move from the dollar to
the euro, not only from the private sector, but from Central Banks." He then
added that the move is due to a desire to diversify after a concentration of
global investment in U.S. assets.
Readers of FIR and MoneyNews will not be surprised by this news as we have
long predicted a depreciation of the dollar and in September closed out, (at a
profit of some 6.5%), a recommended switch from dollars into euros.
What was quite surprising was the manner in which Greenspan pointed very
frankly to what he felt were the root causes of the dollar's decline.
Greenspan told his audience that he did not feel the U.S. trade and budget
deficits were a long-term problem or that the U.S. economy was bad. Instead he
pointed very frankly to ballooning, "Medicare costs; a pretty awful education
system and the threat of protectionism which would result in a level of
stagnation that Americans would find extraordinary."
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Greenspan went on to point out that, "The U.S. education system is leading to
a shortage of skilled workers and is concentrating income at the top of the work
force. It is pulling society apart." These were very strong words.
[Editor's Note:
Warren Buffett is betting billions on a falling dollar.]
I have met Greenspan and can quite understand why he is so highly respected
throughout the world. Now he is retired from the Fed, he can speak more freely.
Prudent investors should listen more carefully to him than to many senior
people, still politically shackled by official salaries and pensions.
The key part of Greenspan's speech was hard hitting and drove straight at the
deep, fundamental social issues that are now causing foreign governments to
diversify out of the U.S. dollar on a major scale, posing most serious problems
for the Fed.
Few politicians or civil servants would dare to speak so openly about the
clear failure of the "soft," PC policies of the Democrat Party, that now
threaten America itself, through it's currency.
The main difficulty, as Greenspan also pointed out, was that, unlike budget
deficits the problems of Medicare and education are structural and are, "going
to be tough" to fix.
We feel it is hard to overestimate the vital, long-term importance of
Greenspan's assessment of the legacy of structural weakness, left by successive
Democrat governments. It is a legacy of economic ruin that Republicans have too
often proved afraid, in our media-dominated adversarial political system, to
risk the unpopularity of restoring the economic integrity that once made America
so strong.
On the whole, foreign governments behave in a manner that is supportive of
international monetary stability. Unfortunately, they now clearly see deep,
structural problems in American society that threaten directly the long-term
viability of the U.S.!
Such an international view should not be taken lightly either by investors or
by politicians.
This movement of official and private funds out of U.S. dollars puts renewed
pressure on the dollar. As MoneyNews has hinted before, the Fed is placed in a
difficult position.
Unfortunately for the Fed, the international interest rate field is not flat.
The European Central Bank, that overseas the euro, has only a single mandate,
to curb inflation. The U.S Fed, on the other hand, has a dual mandate: to curb
inflation and at the same time, to encourage growth.
This dual mandate places the Fed at a competitive disadvantage in any
"interest rate differential battle" to defend the dollar. It now represents a
serious dilemma for the Fed.
Long-term weakness of the dollar will act as an inflationary influence on the
U.S. economy. FIR and MoneyNews have long believed that the U.S. inflation rate
is far higher than that shown by the "politically distorted" official CPI.
In addition, economic history shows that a weak currency leads in the
short-term to increased exports but in the long term, to increased imports and
negative trade balances. This is described in the notorious "J" Curve.
[Editor's Note: Hedge
Fund Investing's currency trades have brought in gains of 185%, 171%, and more!]
As the Fed contemplates a possible increase in U.S interest rates to support
the dollar and to curb inflation, it must be very careful not to stall the U.S.
economy and herald another era of the damaging stagflation that savaged America
in the 1970s.
We believe, like Fed Governor Jeffrey Lacker, who voted Wednesday for an
increase in the Fed Funds rate, that in the long-term interests of the economy,
the Fed should have increased rates. Of course, we understand that to do so
yesterday may have added risk to a Republican majority in Congress. We therefore
feel that U.S. rates will start to rise soon after the November election.
In the meantime, we urge investors who speculate against the dollar by buying
euros, to do so on a short-term basis. Like Morgan Stanley, where I once worked,
we feel the euro is a flawed currency, in the long-term.
Speculators might be better advised to go with our forthcoming recommended
trade from U.S. dollars into sterling.
Editor's Notes:
