Zaphod for President

Death of the Dollar is a popular headline nowadays. One only needs to look at the number of Dollars required to purchase a Euro, Canadian Dollar, British Pound, Barrel of Oil, Ounce of Gold or Gallon of Milk at Wal-Mart.

In each scenario the answer is more Dollars are necessary to purchase the same quantity of each than was needed before. This is a reduction of purchasing power and is real inflation. Government statistics are irrelevant. The fact it takes more to buy the same is relevant. For those that still don’t understand, the same amount of money will get you less stuff.

Why all of a sudden is the Dollar declining? The answer isn’t as simple as the National Debt or the Federal Budget Deficit. The reason is because our National Debt as a percentage of our Gross Domestic Product isn’t all that high. Our Budget Deficit while large isn’t so big as compared to the overall size of our economy.

Granted, a National Debt of $0.00 and a Federal Deficit of $0.00 would be preferable to our current state of affairs. Again, why the decline in the Dollar? It isn’t so much that the Dollar is weak, it’s so much that other commodities and currencies are simply stronger.

Canada and the European Union for example aren’t directly at War in Iraq or with Terror or Islam. War makes investors very nervous. Financial institutions like secure stable safe harbors to deposit their money. Such safe harbors that have a proven track record are of keen interest to money managers.

Certainly, the United States has a proven track record far greater than most of Europe, almost all of Asia and Latin America. After all, France was an occupied country as little as 65 years ago, Poland was a Soviet Satellite until recently, Spain had a Dictatorship less than two generations ago and Italy had a vicious series of wars at its doorstep in the 1990’s.

All during this time Americans made Trillions and Trillions of Dollars without much domestic bloodshed or tumult. We had no dictatorship, no civil war and no occupying power. Europe has sought to emulate the harmony enjoyed by the 50 States of the great Union. The recipe of America’s success has been consistency.

Now that Europe has stabilized itself in part with American assistance, it too now competes openly for the same resources the United States does. The merger of generally weak currencies like the Peseta, the Franc, the Lira and Drachma have created a counterweight to the Dollar.

Non-Europeans now have a choice if they run into problems with the Dollar. Europeans themselves no longer need to rely upon the Dollar to do business with their neighbor. The result has been a reduction in the demand for Dollars. Coupled with the increased demand for resources worldwide has led to serious pressures on the greenback.

The emergence of China has brought yet another player onto the field. Armed with over $1Trillion in American bonds, currency and securities, the People’s Republic can now afford more than ever before. It’s own reliance upon the Dollar is fast fading as the Yuan will one day be fully convertible against other currencies much like the Euro is today.

Unlike the Euro, the Yuan will always have the cloud of a Communist State apparatus behind it. Remember, investors like safe and fairly accountable regimes to store their value. Enter the run up in Gold.
Smart money knows the Euro is overvalued. Millions of Europeans live under the thumb of Socialist regimes and millions more from the former Soviet bloc will be joining them. Countries from Belgium to the United Kingdom have serious political schisms that could literally tear those nations apart.

The National Debts and Budget Deficits of many European Nations make Washington appear restraint. At the time of this writing Italy’s Debt as a Percentage of GDP is well over 100.00% and Belgium is approaching the 90.00% mark. America isn’t even close to 70.00% by comparison. Logically, one would assume interest rates and the relative value of their currencies would be lower than America’s.

Italy had a Fascist Dictatorship not too long ago. Belgium has a hostile Islamic 5th column and major secession problems which could split the Kingdom into two or three parts. These are reasons among many that the Euro is considered overvalued and risky.

Even Switzerland has a Debt to GDP ratio at 51. While not as bad as neighboring countries or the United States, it is still sizable. Tiny Liechtenstein which has no Debt but uses the Swiss Franc is in an optimal position although vulnerable to Switzerland’s Debt.

One must remember Switzerland is not at War. Switzerland very recently joined the United Nations and has little intention of joining either the North Atlantic Treaty Organization [NATO] or the European Union. Ethnic conflicts aren’t of great concern as each of Switzerland’s major nationalities enjoy a large degree of autonomy. Investors feel better about parking funds in Geneva, Switzerland than they do Geneva, New York.

This in part explains the decline of the Dollar. Capital flight to better quality financial vehicles is part of the problem. Psychologically, many with money prefer diversification and with an apparent alternative to the Dollar in the form of the Euro, it is small wonder that some are hedging their bets.

Previously, most of the World was dependent upon the whims of Washington. A President or Chairman of the Federal Reserve could cough at a press conference and a portfolio held in Austria could lose millions. Today, the same portfolio denominated in local Euros would actually gain millions.

At some point, those Euros will find their way to America. However, we will have to pay a premium for them. The reason is simple if a Euro can earn 5% at home, it will need to earn more abroad. Otherwise, it will stay home instead of being converted to Dollars. Again, the demand for Dollars is the problem.

The whole issue of supply and the Federal Reserve printing up Billions and Trillions of new notes has been well articulated by others. This is a separate matter altogether that only exaggerates the existing problem at hand.

Yes, Congress and the President need to stop spending so much. Yes, the Chairman of the Federal Reserve needs to be put in an equivalent to “Alcoholics Anonymous” for Central Bankers, but the other side of the equation that is lost in the general discourse is the demand side.

After all, the major problem that has been overlooked is the fact that Dollars just aren’t needed to conduct many transactions any more. Our catalog or inventory of goods and services isn’t as diverse as it use to be. Think about it, do you really need Dollars to buy an economy or luxury car? How about a barrel of Oil? A new DVD player? It isn’t unreasonable to suggest that each of these could be purchased without using a single Dollar. A Yuan or Euro or Yen or Franc could easily be substituted.
The inherent need to convert into Dollars has diminished. We cannot ignore the downward demand on the Dollar. Increased monetary supply and even deficit spending can be afforded by economies of scale that produce a wide array of appealing goods.

China runs up huge internal debts because it can for now afford to do so. Fiscal restraint isn’t as necessary in an economy that grows. Banks loan money to entities and individuals that are making more and more money. It’s real simple.

One of the obstacles which has taken a back seat is regulation and red tape. We all know now that taxes can be hurtful to growth. High taxes are the dominion of well established industrial countries. For nations that seek industrialization high taxes are simply out of the question. Why eat any of the pie while it’s still in the oven?

This isn’t to ever justify taxation at any stage of economic development. Only, the disservice such impositions can make upon a young fledgling economy. Mandates of all stripes dictated by the State can cost in ways as vicious as taxes or seignorage. [The dilution of purchasing power through increased monetary supply uncorroborated by increased economic output]

Ingenuity and entrepreneurialism are essential components of increasing economic output. It is precisely why the economies of Western Europe haven’t sunk to Sub-Saharan African levels. Raw intellectual capacity can sustain a welfare state for a period of time. A case in point is the old Soviet Union, but once coupled with an advanced military-industrial complex the burdens upon the economy become too enormous. Hence, the great concern of many international investors with respect to the Dollar.

America has embraced a butter and bullets philosophy. The Western Europeans have embraced butter over bullets. The Africans still select bullets. The Latin Americans are converting to butter and the East Asians are grappling with both. Luckily, with such tremendous reservoirs of people the developing nations can afford to do it all. Not without consequences and leaving some behind, but endowed with resources, it isn’t impossible.

Longer term, the Europeans will suffer once their limited natural resources have been exhausted and their populations have aged like the wine they will import from Chile. Europe will be a continent of black and brown young people with old natives in nursing homes. The tax burden will remain relatively high.

At some point mid-century America will have more citizens than the entire European Union combined. America’s citizens will be younger, more able to earn money and although saddled with high taxes to support an aging population the dynamics won’t be as terrible as the EU.

The Euro will suffer in the same manner as the Dollar is suffering today. The best prospects by far in this World will be found in the nations of Latin America. They are young, vibrant, filled with natural resources and are open to entrepeneurial immigration.

The great stigma that Latin America must emerge from is the wrath of Fidel and Hugo Chavez. In order to best position itself as the new America of the 21st Century, the lands south of the Rio Grande have to adopt the policies found in Costa Rica & Panama today.

Unlike East Asia, Latin America doesn’t have the same kinds of security concerns. There is no rampant terrorism, there are no megalithic nations with unstable regimes or nuclear armed dictatorships. Africa could be as well off as Latin America today, but lacks home grown leadership to make it happen.

The importance of all this pontification is to put in perspective the shocking decline of the world’s reserve currency, the Dollar. Europe’s resurgence is the last set of hiccups before it fades into the sunset of greater marginalization on the global stage.

America as a unified entity has been around far longer than the European Union. It is bound by a common language with some exceptions. Of all the great nations of the world with immense amounts of land, America is blessed with the best. Canada is mostly covered by permafrost, Australia is mostly covered by dessert, Brazil by rain forests and Russia by tundras.

Simply by default the United States wins and will continue to win. Let us never lose sight of this salient fact. America is still roughly 5% of the world’s population and will most likely stay at such a ratio. The wars of the future will be demographic and to a lesser degree geographic in nature. The struggle for resources is real. Whether peak oil exists or not, there is a very real effort on the part of nations to secure for themselves the greatest possible quantities.

As more and more people from Beijing to Buenos Aires demand the lifestyle teenagers in southern California enjoy, the demand for resources will continue to skyrocket. This isn’t to say the Dollar is inherently weak, but rather that she has competition for attention. Will schools in Italy or France need Dollars to purchase “Kennedy Milk?” The answer is no and has been no since the late 1960’s when Western Europe no longer imported much Milk from the United States.

Such domestic production like Milk in Western Europe isn’t a sign of Dollar weakness but rather a decline in demand for the Dollar. No longer does the Ministry of Education for France or Italy need to trade Francs or Lira for Dollars to buy Milk. Today, they call up their Treasury Department for the latest haul taken in by taxes for a few Euros to buy up Milk from local producers or in low cost areas of production like Poland or Slovakia.

Arguably, Milk producers in Western Europe that were wiped out in World War II but are now fully back online, should have money where they had little before. The problem is they too aren’t needing Dollars to buy farm equipment. When they purchase retirement accounts from their local collectives, they buy annuities or insurance in Euros.

Few old timers in Europe are squirreling away Dollars under mattresses. Even in Russia which has been ruled by the Dollar, babushkas are beginning to hoard Euros. After all, the luxury goods available in Germany or Spain are denominated in Euros.

Europe no longer wishes to be taxed by the Federal Reserve. Instead they have selected a new Master, the European Central Bank. Once the retirement crisis and racial riots reoccur on the Continent, we will see a resurrection of the Dollar. Unless, babushkas will be hoarding Yuans or Swiss Francs. This is assuming they even exist, given that Russia’s population in particular might slip below under 100million mid-Century.

In conclusion, yes the Federal Reserve should restrict the supply of Dollars. But at the same time the Federal Government should encourage increased economic output and most of all exports. Then we will witness a stabilization of our purchasing power. Until then a roller coaster ride like the Brooklyn Cyclone seems inevitable.

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