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Just a few words today. I want to talk fundamentals.
The economic fundamentals are as follows –
China and Asia can, and are, producing merchandise far below the cost of what that merchandise can be produced for here in the U.S. Now the service industry too (think India) is moving towards Asia.
This is creating huge imbalances in the transfer of funds. It’s producing half a trillion dollars a year in a U.S. negative trade balance.
On top of this, the U.S. Federal budget is out of control to the tune of another half trillion dollars.
These enormous imbalances must be addressed sooner or later. They are unsustainable.
This means that either the U.S. accepts a major recession, which cuts consumer buying way back in the U.S. or –
The U.S. dollar sustains a huge drop in value against other currencies, particularly the Asia currencies or –
The Chinese and most of Asia agree to a major revaluation upwards of their currencies and particularly the Chinese renminbi.
Or the U.S. puts up stiff tariffs.
Which of these are the most likely to occur?
We know the U.S. administration, backed by the Fed, will not accept a recession or even a slowdown in business. Thus, we see the Fed fighting any recessionary tendencies with everything in its arsenal. The main idea is to keep consumers buying, and this adds to the problem, since it keeps the negative trade balance going and even increasing.
The U.S. authorities would like a weaker dollar, but Asia has been fighting this by buying dollars in an attempt to keep the dollar strong.
Tariffs would lead to retaliations and a trade war.
The Chinese have no intention of allowing a major revaluation upwards of the renminbi. They like matters the way they are, since they have the acute problem of putting millions of Chinese unemployed to work.
My belief is that ultimately the dollar must fall, maybe 30%, 40% or even more against a basket of all currencies including the Asian currencies. This is a fundamental market solution.
Even if this happens it may not solve the trade imbalance problem. But it would be a fundamental move in a situation that is unsustainable.
The longer the dollar solution is held off, the worse the situation. The twin problems of the Iraq and Afghanistan are pushing the U.S. budget imbalances even further and further into the red. The U.S. policy of being policeman to the world, I believe, will prove to be unsustainable over time. It is also an added pressure on the dollar.
From my subscriber’s standpoint, we need insurance. We take out insurance against car trouble, we take out insurance against home trouble, we take out insurance against our lives.
What about insurance against the item that everything we own is denominated in – and obviously I’m talking about the dollar?
Insurance against the dollar consists of gold, to a lesser extent gold stocks, and another currency. The main competing currency to the dollar, as I see it, is the euro.
Thus I believe it is wise, if not mandatory, to own gold, gold stocks and probably euros in the form of German short-term bonds denominated in euros.
The above are the fundamentals, as I see them. Two and two equals four. Yet if you tell people that two and two equals five often enough and with authority, in time many people will believe you.
Many years ago the dollar “was as good as gold,” since you could turn your dollars into the government and receive gold. Today the government is implying that the dollar is still “as good as gold.” After all, you and I continue to work for dollars, don’t we?
Yet today the dollar is simply as good as our confidence in the dollar. Intrinsically, the dollar is worth nothing, and dollars can and are printed by the billions every week by the government. Yet by law we must accept dollars because the U.S. government states that they are “legal tender.”
Logically, this tells us (at least it tells me) that the dollar as a store of value is doomed. It’s only a matter of time before the dollar falls, and falls big time.
The above are the fundamentals as Richard Russell sees them. Only God knows the timing of the dollar’s fall, but the ultimate fall of the dollar should be understood by every one of my subscribers. And that’s all I have to say for this weekend. Mull it over, guys and gals, because I firmly believe that it’s the truth.
As for gold, it will fluctuate, but head generally higher, since gold is in a primary bull market.
The central banks will do everything they can to halt the rise of gold, since rising gold, particularly fast-rising gold, constitutes a red flag for the central banks. It’s a red flag that tells the world that intrinsic wealth is preferable to fantasy wealth, and fantasy wealth is what the central banks are now offering to the world in the form of fiat currencies, or paper. (October 4, 2003)
Russell's record speaks for itself...those who ignore his opinions on the dollar do so at their own peril.