Friday, March 28, 2008

Richard Russell's warning

I really enjoy Richard Russell's editorials, thanks to for this recent update.

March 25, 2008

The US has put itself in the
incredible position of fighting an expensive war with borrowed money. Even
without the war, the US is living on borrowed money. Our national debt is in the
process of surging well past the $9 trillion mark. The wonder is that the dollar
is viable at all.I note that none of the presidential candidates are even
talking about the debt -- or the $53 trillion in unfunded liabilities that we
are facing. In fact, I believe we have gone so far in our debt and deficit
situation that I just don't see how we're going to navigate out of it.

The dollar, it seems to me, is ultimately doomed. The only question is
timing, and here we're talking the impossible. It brings to mind Keynes' thesis
-- "The market can stay irrational longer than you can stay solvent." In other
words, even though the US dollar appears doomed, if you short the dollar, you
can very easily go broke before the dollar finally succumbs (in fact, the
oversold dollar may be in the process of advancing now).So what do we do? I've
been thinking about this for a long time, and I realize that there is no perfect
answer, no ideal defense.

For the first time in modern history there are
grave doubts about the very viability of our money. Even during the Great
Depression, nobody doubted the value of a dollar. The dollar was "as good as
gold." The only problem was -- nobody had dollars. Everybody was broke.
Deflation swept the land, and money was scarce. I could give you a list a yard
long of things I could buy in those days for a nickel. Talk about nickels, I
would use nickels to take the subway to school, and I would use seven nickels to
buy lunch. A movie cost three nickels. Nickels were useful, dimes were scarce
and dollars were treasures.

Today it's a different story. Today there
are too many dollars around -- but the world is questioning the viability of the
US dollar. I understand there are places (China, for instance) where people do
not want dollars. If they do receive dollars, they exchange them for another
currency as quickly as possible. The US has two sources of power besides our
exports. One is our huge military. And the second is the reserve status of our
dollar. If the dollar begins to lose its reserve status, we're in trouble. It
would mean that we couldn't borrow, or if we could continue to borrow, we'd have
to pay much higher interest rates. At some point, even higher interest rates
wouldn't do it. Once our creditors were afraid of taking in dollars, no level of
interest rates would convince them to lend to the US.OK, that's the longer term

The question I ask is -- what do you and I do about it? Here's
what I suggest. Divide your assets into three sectors. One third of the total
can be in a home preferably owned for cash, no mortgage. That means that you
really OWN your home. Another third of your assets can be in gold. The final
third should be in cash, and it can be in dollars or even partly in a foreign
currency. But frankly, over the longer-term I'm tempted to lump all fiat
currencies together, treat them all as a kind of junk. Because there's nothing
behind any fiat currency but the full faith and credit of the respective nation.

The viability of all fiat currencies is suspect. Nations will lie about
the worth of their money as long as they can get away with it. The US repeats
its "strong dollar" policy even while allowing the dollar to go down the drain.
My guess is that the trouble will start when the oil-producing nations start
quietly unloading their dollars. China will likely do the same. Gradually, the
word will emerge -- "the dollar is a doomed currency." Diversify as far as you
can, and get out of dollars as quietly as you can. In the meantime, I'm watching
the stock market carefully.

So far, following the initial rally from the
January lows, the Transports have acted well, and the rest of the markets and
averages have either been sinking or just "hanging on." Few investors have made
any money since the January lows. The best you could have done was to minimize
losses. It will be fascinating to see how the markets act over the coming weeks.

Personally, I'm out of the stock market, so my main interest is
academic. Well, that and I watch the markets for hints of things to come. I'll
breathe easier as long as one or both D-J Averages (Industrials or Transports)
hold above those blessed January lows. But if both the Industrials and the
Transports violate their January lows, I'll prepare for the worst -- and by the
"worst" I mean hard times.

A house is a place for you and your
family to live in. Gold is eternal wealth. Dollars are units of exchange. With a
few of those lowly dollars, you can buy a loaf of bread. I like to keep it
simple. A house, gold, cash -- what could be simpler?

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