People Flee Back to the U.S. Dollar

Investors are wondering if the forecasters know what they are talking about.

“Stock markets disoriented by the uncertainties of the recovery…” says an awkward headline in today’s French financial news.

The Dow itself lost 212 points yesterday. Oil fell to $66. Even gold dropped $10 as people fled back to the only asset they know they can count on – the U.S. dollar. Or more precisely, U.S. debt denominated in U.S. dollars.

Come Hell or high water, the Treasury will come through. When it’s time to pay the coupons, they’ll have the cash. You can count on it.

But what you can’t count on is how much that cash will really be worth. And there lies the great trap for the lumpen investoriat. The lumpen, as you know, get their investment ideas from TV and the newspapers. The poor rubes are the last to buy in a boom and the last to sell in a bust. A day late and a dollar short, they always get the worst deals. When the papers tell them there’s a recovery – they believe it. When the Fed chief tells them to use adjustable rate mortgages…the silly clumps do it. When a governor of a Federal Reserve banks urges them to “go out and buy an SUV” they head for the dealers.

But thank God for these patsies. Without them, where would we get candy? And where would the U.S. government get its trillions?

The lumpen – along with the sophisticated fund managers who pretend to know what they are doing – are financing the biggest government- borrowing spree in the history of mankind. You don’t have to dig too deeply to figure out why that won’t work. Financing a little spree of borrowing may turn out well; financing a big one is asking for trouble. Each dollar you lend weakens the borrower’s balance sheet. By the time he has gotten to the 12 trillionth dollar…you might as well be throwing the money down a well.

And thank God for Arnold Schwarzenegger. What an entertainer! He had it all. Money. A good wife from a bad family. A nice hairdo. And what did he do? He gave up a promising career in the motion picture business to launch himself into the slimy world of politics.

And now the poor man is groveling. Begging. Imploring the banks to take his state’s IOUs. He says they are “rock solid.” California is the world’s 6th largest economy. But it was a world-beater when it came to debt-based bubble illusions. And now its economy is falling apart. Economists can lie about the inflation rate. They can fudge the GDP. They can torture the unemployment numbers. But when the revenues come in, all they can do is count them up. And revenues are falling. Especially tax revenues.

The feds and the states are losing income. When businesses lose revenue they cut back expenses. But governments – at least those that are modern popular democracies – find that they need to increase spending. They have more people asking for help. And they have programs that become automatically more expensive – such as unemployment benefits – when the economy softens.

Let’s see. Expenses down, income up = happiness.

Expenses up, income down = misery.

See how simple it is?

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

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