Debt & the US Dollar | Investing

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For years now we have been warning our readers to avoid debt as much as possible. Debt is what we see as the single most dangerous aspect that is affecting the US economy and citizens.

Excess debt has become a disease. Throughout the past few years, excess debt has kept growing and in fact it has been the willingness of Americans to take on more and more debt that has kept the economy moving. We have corporate debt, government debt, consumer debt, and bank debt. We have seen recently, newly created securities that piled debt on top of other debt, multiplying other debt ten fold.

Today, according to the Federal Reserve, we have almost $50 trillion in interest bearing debt. According to the US General Accounting office, we have another $50 trillion in what is called contingency debt. In derivative debt, according to the US Comptroller, there is $164 trillion. All told, these different debt levels add up to over $260 trillion in debts, which is 20 times the size of the US economy.

Up until now, this debt creation game has survived as newly created debt was used to pay other debt – as Peter borrowed to pay Paul. This game was perpetuated until now. Now we have the lending institutions, who previously were dishing out money like there was no tomorrow, recoiling in horror. They have closed the lending door – afraid to lend to consumers, or even to other banks. While the Wall Street pundits are broadcasting that the worst is over for the credit crunch, we do not agree.

For over 4 years now, we have warned that the US economy was being driven by excess debt creation and that at some point, this house of cards would collapse. As this credit crunch has hit the US economy, we are now seeing lenders refuse to lend and consumers and businesses having to pull back. For many consumers they are like drug addicts, and now their pusher has refused to sell them anymore drugs. They are now on withdrawal. .

The issue here is that Americans and the government do not want to face the fact that you cannot simply continue to pile more and more debt at the problem – at some point the debt must be paid. Instead of facing the music and reducing debt, the government continues to look for new ways of throwing more debt at the problem. What we are seeing is more and more Americans walking away from their debts. For American corporations, the ones with all of the clout, they are convincing the US politicians to cover their bad debt. The end result has been that the once mighty US buck has lost over 40% of its purchasing power in the past 5 years.

What is so surprising to us is that while the US dollar has lost over 40% of its value in the past 5 years, the average American seems to be oblivious to this fact. But as we hear more and more negative news, we need to be aware of the impact of these news articles on the US dollar, which is the world reserve currency. As we hear of more and more foreclosures, understand that this is negative for the US dollar. Whenever we hear of another big Wall Street firm suffering billions of dollars in losses, this is negative for the US dollar. When we hear of US airline companies going bankrupt, this is negative for the US dollar.

But the most important item is that whenever you hear that the Federal Reserve is coming to the rescue of these large Wall Street banks to bail them out, or cutting the yields on the dollar, or by flooding the economy with more newly printed money – these are all negative for the US dollar. It does not take a rocket scientist to understand that when the government creates billions of new dollars each week, those dollars currently in circulation get devalued. The end result is price inflation as we now have more and more paper dollars chasing the same goods. You can see the results of this when you go shopping as the price of everything is going up – bread, milk , eggs, gasoline, heating fuel, natural gas, and you can clearly see it when you travel to other countries and realize how little the US dollar buys today.

In the Forex market (the foreign exchange market) most all other currencies are surging, except one – the US dollar which is declining. In fact, since 1984, the US dollar has declined a whopping 54%! What is so surprising is the apathy to this incredible attack on the US dollar. Americans have been brainwashed by their government in believing that somehow this is a good thing. The fact is that the devaluing of the American dollar is a silent tax on every holder of US dollars.

As investors we can not do anything to stop the slide of the US dollar. But we can be aware of these conditions and invest accordingly. Back in September, we suggested that subscribers could defend themselves from a falling dollar by buying gold and other currencies. For the other currencies, we suggested buying the Japanese Yen, the Swiss Franc, the Australian dollar and the Canadian dollar. As you look at the currency charts in this issue, you can see that those subscribers that purchased the ETFs in these currencies did very well.

The US dollar is driven by two key factors – economic growth and interest rates. There is no mistaking the fact that on both of these indicators, the US dollar has been getting killed.

As the US economy drifted towards a recession, the Fed dropped interest rates in an effort boost domestic consumer spending. While this strategy worked to some degree, it had a very adverse affect on the dollar. By lowering interest rates, the Fed made the dollar less attractive to foreign investors and made the dollar less competitive compared to other currencies. The result was that the global “hot money” that we often talk about, moved to other currencies and away form the US dollar. Those other currencies (Yen, Canadian dollar, Aussie dollar, Euro and Swiss Franc) benefited greatly from this devalued US dollar.

In addition, the US is losing its global competitiveness and has run up massive Budget and Trade deficits. As a result, many believe the dollar’s status as the world reserve currency is in jeopardy. All of the above has had a negative impact on the dollar.

While we are still long term bearish for the US dollar, we are expecting the dollar to rally here – perhaps a fairly strong rally. Prior to last Wednesday’s rate cut, we saw the dollar trying to finally get off the floor and make a rally move. Wednesday’s rate cut set the dollar back a bit, but since then the US dollar has started to turn upward. .

There are still many factors that work against a US dollar rise, such as the concern that countries are looking to trade in currencies other than the US dollar – such as Iran who will no longer trade oil in US dollars. In addition the massive US fiscal and trade deficits work against the dollar in the long term until these are addressed by government. But in the short term, we do not see the US dollar’s status of the world’s reserve currency being challenged to a great degree. Long term it will be challenged, but in the short term we do not see a real alternative.

The Euro has been a major beneficiary of the declining US dollar, but this may soon change. One thing that does not get a lot of air play is that the Federal Reserve has been very quick on the trigger to drop interest rates as the US economy started to be negatively affected by the sub prime and credit crisis’s. But as we get nearer to the bottom of the US economic woes, we suspect that maybe most of the bad news is still priced into the dollar. And conversely we suspect that maybe there is still a lot of good news priced into the Euro, as the European community has not aggressively being cutting rates and may soon have to follow the US lead in that regard.

In fact, we are seeing the UK heading down the same path the U.S. has been on, and there is very real possibility that Europe will follow suit, meaning we could see some aggressive rate cuts in the UK and Europe coming up. Currently the US Fed has its rate at 3.25%, while the Bank of England is sitting at 5%, and the European Central Bank rate is still 4%. Should these central banks tighten the gap, and/or the US starts to raise rates, then we could see a jump for the US dollar.

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