Snow Job
Thursday, April 1st, 2004
By Michael Lombardi, MBA for Profit Confidential
Forgive me, dear reader, if my writing of late is pre-occupied with the demise of the U.S. dollar. My emotions and logic both run high when I speak of the U.S. dollar because of the many economic pros and cons of a lower-valued greenback and how it will affect stocks.
On the positive side, I’ve commented about how the systematic decline of the U.S. dollar against other world currencies, specifically the Asian currencies, will make foreign goods expensive for Americans, forcing us to start buying American- made products again… and hopefully creating jobs.
A lower U.S. dollar also means Americans will stay home to vacation this year instead of going to Europe and other countries, because our dollar just won’t go that far anymore. Imagine the foreigners who have bought our bonds. They will actually lose money if they hold them to maturity, because they will get back less in their currency than they put in.
But a quick-falling dollar could backfire for the U.S. Why would anyone want to buy our bonds if our dollar is falling so quickly in value against other currencies? That would be a big problem, because foreign buying of our bonds funds our annual federal government deficit. Further, if the U.S. dollar did go into a free-fall, how long would it be before OPEC and Venezuela started demanding euros instead of U.S. dollars for their oil? This could become a real problem, since the Fed’s printing presses print U.S. dollars, not euros.
But anyway you look at it… whether we are smart enough to pull off a gradual decline in the value of our currency to stimulate spending in the U.S…. or if we blow it with a free-fall in our currency value to such a degree that no foreigner wants to buy our bonds again, the U.S. has done a great snow job at convincing the world (maybe except me and a few others) that the U.S. dollar is real money, not gold.
For proof, just look north to our Canadian neighbors. The Bank of Canada has sold almost all its gold holdings. Maybe it thought the U.S. dollar was the right reserve currency to have backing the Canadian dollar.
But what do we have here — the Canadian economy actually shrunk in January! Yes, GDP in Canada fell by 0.1 per cent in January after growing 0.5 per cent in December. To quote a TD Bank senior economist, “It tells you the (high) Canadian dollar’s impact is slamming the Canadian economy pretty hard… Exports collapsed during the month.”
Through our various administrations, the U.S. has convinced about 70% of world central banks to keep U.S. dollars as reserve currencies in their vaults, as opposed to gold bullion. As the American dollar declines in value, these foreign countries will pay dearly for their fatal judgment error. One day we will look back on these times and say, “that was one great snow job we pulled off on the rest of the world.”
Canadian manufacturers are a perfect example. They became so comfortable, almost complacent, shipping goods to the U.S. and getting $1.50 Canadian for every $1 American order. Now the Canadians are only getting $1.30 Canadian for that same $1 American order. Who knows… maybe it will be $0.90 Canadian for $1 American in the future? There goes the Canadian economy, likely with others along for the ride.
Is it any wonder gold bullion prices are near their January highs? Now just imagine what would happen to the price of gold if world central banks started accumulating the metal again to back their currencies. Some serious food for thought.
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Tags: GDP, gold, gold bullion, U.S. dollar
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on TwitterTweet
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