Moneyization: The global financial phenomenon
of individuals and businesses moving their funds to
monies in which they have the highest confidence,
or money which has a higher store of faith.
Or, The Great Wall of America.
Finding something to read which does not
include reference to the financial disaster in the making
called the United States would be nice. That seems to
be a near impossibility. Course a group of delusionists
remain committed to rationalizing the economic mess
created by the Greenspan/Bush team. Fortunately, their
remaining tenure is limited. That the replacements for
both might not be an improvement is the scarey part
of the whole situation.
Most recently, The Exhaustion of the
Dollar by H. Peter Gray and A Closer Look at
Foreign Investment Behavior in the U.S. by Douglas
managed to further depress any residual hope for the
U.S. dollar. Both are recommended reading. And if residential
real estate is still viewed as your financial savior,
try The Mortgage Trap by Dean Foust in the
27 June issue of Business Week.
Course I flung that magazine against the
reading room wall when another reference to Bernanke's
Delusion was discovered. Bernanke is to head the Council
of Economic Advisors and some have said he is on the
short list to replace Greenspan. He is a major advocate
of the view that the U.S. current account deficit is
the fault of foreign countries. In this delusion, the
U.S. has a current account deficit cause some nations
have a surplus of money to invest. Or, she got a DUI
cause the bar had a surplus of liquor to sell.
The coming crisis involving the U.S. current
account deficit is a much documented phenomenon. Only
the policy makers at the U.S. government seem to be
unable to grasp the stark reality facing the country.
For those that have not seen a recent chart of the current
account situation consider the first graph. The bars
represent the current account deficit, using the left
axis, and triangles are that deficit divided by GDP,
using the right axis. The negative 6% line is the much
discussed danger level. Some forecasts have the deficit/GDP
ratio rising to 8 or 9 percent, which the dollar would
not survive. Regardless of the forecast, the situation
is dire. Serious dollar
devaluation will be necessary to correct the situation
due to the structural nature of the U.S. trade deficit.
The current account can be thought of
as part of the income statement for the country. Financial
statements have another important schedule, the balance
sheet. Gray, in his book mentioned above, notes that
the international net worth of the United States has
been in deficit for some time. The international net
worth of the country can be viewed as the equity in
the country's balance sheet. A nation's individuals
and businesses have investments in other nations. Those
investments are the asset side of the balance sheet.
Liabilities exist in the form of claims on U.S. assets
by foreign investors. Assets minus liabilities equals
net worth, or equity. What a nation owns minus what
it owes is international net worth, or the nation's
The second chart portrays the U.S. international
net worth, and comes from data produced by the BEA,
or Bureau of Economic Analysis. Black circles are the
U.S. international net worth, and use the left axis.
Red squares are that net worth as a percentage of GDP,
and use the right axis. Note also that this data is
soon to be updated and data for 2004 has not yet been
released. These are not small calculations and even
with computers takes them a while to do them.
Two observations can be made from this
chart. First, for most of the period shown the U.S.
international net worth has been negative, and is currently
just shy of negative $3 trillion. Interestingly that
period of negative net worth for the nation seems to
coincide with the reign of Greenspan at the Federal
Reserve. The presidency changed hands during this period
so blame cannot be directed at that office. Federal
Reserve policies seem to be the most likely influences
that destroyed the equity of the U.S. By
the way, how many of you would buy a stock that has
a negative book value?
The second observation relates to the
size of the negative equity relative to GDP. That percentage
is approaching 25%. Perhaps that might be some good
news. Citizens of the U.S. would only have to surrender
three months of national income to eliminate the negative
net worth. If the U.S. would give up everything produced
by the entire nation from July 1 to October 1, the negative
equity could be "eliminated." What a relief!
No wonder the Federal Reserve ignores what now seems
a trivial matter.
The two largest national monies available
for investors are the dollar and the Euro. Both have
a fundamental and political problem. The dollar's fundamental
problems have been well discussed, as done above. The
political problem we discussed in one of our recent
articles. If one needs to borrow money from the world,
one should make that easier rather than harder. One
should not create political and legal hurdles that make
it difficult for investors to lend you money.
However, the U.S. government continues
to "fight the war on terrorism" by making
the use of the dollar and the U.S. financial system
harder for people, particular foreign ones. The USA
Patriot Act, Bank Secrecy Act, court rulings and overly
enthusiastic bureaucrats are serving to criminalize
the use of dollars and the U.S. financial system. While
the U.S. needs to borrow a couple billion dollars each
day, the nation is making it harder for the world to
use dollars. The fundamentals may be bad, but the drive
by the U.S. government to put a wall around the U.S.
financial system will be as effective protecting the
nation as the Great Wall was in preserving the Chinese
emperors and empresses. The
Great Wall of the America is "terrorism" of
investors, and the dollar will pay the price!
These policy actions will serve only to
foster a parallel international financial system from
which the U.S. will be excluded, and in which the dollar
does not participate.
The Euro's fundamental problem is that
whatever positive trends might exist, it is still fiat
money. Euro is still a debt not an asset. Potential
for politics to interfere with the evolution in this
monetary union became clearly evident after the French
and Dutch votes. However, the impact of the
vote has been on the entire fiat money framework, not
just the Euro. Yes the Euro went down against the dollar, but all currencies
have been going down.
Consider the table below, in which all
values have been rounded for simpler presentation. For
each national money the value of Gold in the local money
is calculated for the end of May and today. Gold
went up in each of these local monies, every one of
them. That means each national money went
down in value. The final column refers to the
Gold price of the money, simply another way of looking
at the value of money. For each national money, how
much Gold was required to buy a unit of the national
money was calculated. That last column is how much that
Gold price of the national money changed. Each and
everyone of them became cheaper in terms of Gold, meaning
down in value.
in Local Money & Gold Price of National Money Change
Price of Money % Change
What this table tells us is that investors
have been moving away from fiat monies, all of them.
The vote on the EU constitution reminded investors around
the world that fiat monies are not really secure investments.
Investors around the world are shifting to the only
money that is an asset rather than a debt. Is the era
of debt money approaching an end? Is the era of debt
as an asset about to be snuffed out by massive losses
on housing loans?
The Euro offers an intermediate step for
the world's monetary system in the longer term transition
from the dollar to Gold. Structurally the world's financial
system is probably not prepared to shift immediately
from fiat money to Gold. Needed infrastructure for using
Gold as money remains to be built. Technology has reached
the level where the use of Gold as money is possible,
but providers of financial services are not prepared.
In the monthly letter a discussion has
been started on the wisdom in Gray's book. He wrote
it because of his belief that the world is not prepared
for a shift from one monetary hegemon, the U.S., to
another, perhaps the Euro. A smooth transition may not
be possible. The inability of the U.S. to adequately
exercise its rights and responsibilities as the new
monetary hegemon in the 1920s and 1930s contributed
to the coming of the Great Depression. That immaturity
as a monetary hegemon certainly exacerbated the situation.
face a shift from one monetary hegemon to another.
The French and Dutch votes may suggest that the EU does
not yet have the unity needed to exercise effectively
the new monetary role for the Euro. In short
and as Gray points out, no world entity stands ready
to manage the situation. The world is not preparing
for the problems associated with the failing of the
monetary hegemon. Gray suggests that the impact
on global economic activity of the U.S. financial situation
may be a serious matter. Is Great Depression II just
around the monetary corner?
Many investors have discovered the future
role for Gold in the world's monetary system. They are
using price weakness to gain early entry into the future
monetary paradigm. The last graph shows that timely
purchases of Gold, created periodically by rallies in
paper money, can be identified. While Gold is over bought
on the EU vote, another opportunity will arrive. Investors
should be positioning themselves to buy Gold on the
next, and any future, periods of price weakness. Think
$1,300 Gold, not which piece of paper buy.
And, a final note to Silver investors.
Technology will allow Gold to substitute for national
monies in the future. Gold will be the most prevalent
"denomination" of world money. However, that
will be true only for electronic transactions and large
real transactions. Silver coins were originally created
so that the most typical daily transaction could be
completed. Even a coin worth only a tenth of an ounce
of Gold is too large to be practical for purchasing
normal stuff, like a case of beer. Silver coins will
again be necessary in the future. With Silver approaching
an over sold condition, investors should be adding Silver
to their portfolios. And do not forget, the Silver ETF
Ned W. Schmidt,CFA,CEBS
is publisher of THE VALUE VIEW GOLD REPORT. That report
now includes a weekly message, TRADING THOUGHTS, to
help investors identify timely points for buying Gold
and Silver. You can join him for the Gold Super Cycle
His monumental report, "$1,265 GOLD", which
has now been read in 12 countries, has 255 pages and
98 graphs, is available at www.amazon.com
or from the author. Ned welcomes your comments and questions.
His mission in life is to rescue investors from the
abyss of financial assets and the coming collapse of
the U.S. dollar. He can be contacted at firstname.lastname@example.org.