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
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 R. Gillespie(www.gillespieresearch.com)
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
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.
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
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 is coming!
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