Investment Forecast for 2010: The Dollar’s Demise
January 6, 2010 by John Myers
The air was stifling. It was thick with dust and hung in clouds through the sweltering corridors. I was 7,000 feet deep in a Transvaal gold mine.
Worse than the heat was the noise. I had to yell to my guide, the chief economist for JCI Mines.
I cupped my hands to make a horn, and over the roar of tractor engines and jackhammer drills I yelled: “What do you see for gold next year?”
My Afrikaner escort shouted over the din: “You tell me what the dollar does and I will tell you what gold does!”
It just so happened that the year was 1990 and the U.S. greenback was about to make one of its biggest bull runs ever. The result was a bear market in bullion that took the price of gold all the way down to $252 per ounce.
Today, with the price of gold about $900 higher than it was then, the same question regarding gold in 2010 cuts to the wick: What is the dollar going to do?
An Avalanche of Money
One thing is certain. This is not your father’s Federal Reserve.
The Fed that existed 30 years ago was chaired by Paul Volcker. Volcker was brought in to curb soaring inflation. To do that he decided his first priority was to protect the dollar, recession be damned. At the same time Ronald Reagan was coming into office. He was trying to curb government spending.
As the chart below shows, Volcker jacked the Fed funds rate up to almost 20 percent. In the process the United States endured a great rolling recession that devastated the commodity markets and farmers. Yet for the next two decades the dollar would be the world’s kingpin currency.
With the exception of The Crash of 1987 the U.S. economy was on firm ground, and prosperity was growing.
Then came a speculative stock bubble, 9/11 and runaway deficits.
In the wake of all this are President Obama and Fed Chairman Ben Bernanke who are not squeezing a single thing! Instead they are creating a tsunami of money. It amounts to throwing gasoline on a fire.
In just over a year the Fed has increased our monetary base by a whopping 120 percent! That is more than double the previous highest annual increase over the past 50 years. The Fed has made huge loans to private lenders and bought more than $1 trillion of mortgage securities and hundreds of billions of dollars of long-term Treasury bonds. It has succeeded in lowering the federal funds rate below 1 percent—and even, for most of the time, to less than half that.
Washington is trying to jump-start the economy with unprecedented amounts of money. Yet the old economist adage holds, “It’s like pushing on a string.”
Unless there is demand for money by willing lenders and borrowers the economy is not going to improve. What is going to happen is a train-wreck for the dollar.
The dollar is more than 14 percent off its March peak, and some worry that additional losses could prompt foreign investors to start selling dollar-denominated assets.
But while a sluggish U.S. recovery and low interest rates mean the dollar may have further to fall in the year ahead, very low inflation means a crisis is far from imminent, said Henry Kaufman, president of Henry Kaufman & Company, Inc.
"There has been no dollar crisis," Kaufman said. "The retreat of the dollar has been gradual, it has been orderly and it has not had an impact on the securities market."
January 6, 2010 by John Myers
Worse than the heat was the noise. I had to yell to my guide, the chief economist for JCI Mines.
I cupped my hands to make a horn, and over the roar of tractor engines and jackhammer drills I yelled: “What do you see for gold next year?”
My Afrikaner escort shouted over the din: “You tell me what the dollar does and I will tell you what gold does!”
It just so happened that the year was 1990 and the U.S. greenback was about to make one of its biggest bull runs ever. The result was a bear market in bullion that took the price of gold all the way down to $252 per ounce.
Today, with the price of gold about $900 higher than it was then, the same question regarding gold in 2010 cuts to the wick: What is the dollar going to do?
An Avalanche of Money
One thing is certain. This is not your father’s Federal Reserve.
The Fed that existed 30 years ago was chaired by Paul Volcker. Volcker was brought in to curb soaring inflation. To do that he decided his first priority was to protect the dollar, recession be damned. At the same time Ronald Reagan was coming into office. He was trying to curb government spending.
As the chart below shows, Volcker jacked the Fed funds rate up to almost 20 percent. In the process the United States endured a great rolling recession that devastated the commodity markets and farmers. Yet for the next two decades the dollar would be the world’s kingpin currency.
With the exception of The Crash of 1987 the U.S. economy was on firm ground, and prosperity was growing.
Then came a speculative stock bubble, 9/11 and runaway deficits.
In the wake of all this are President Obama and Fed Chairman Ben Bernanke who are not squeezing a single thing! Instead they are creating a tsunami of money. It amounts to throwing gasoline on a fire.
In just over a year the Fed has increased our monetary base by a whopping 120 percent! That is more than double the previous highest annual increase over the past 50 years. The Fed has made huge loans to private lenders and bought more than $1 trillion of mortgage securities and hundreds of billions of dollars of long-term Treasury bonds. It has succeeded in lowering the federal funds rate below 1 percent—and even, for most of the time, to less than half that.
Washington is trying to jump-start the economy with unprecedented amounts of money. Yet the old economist adage holds, “It’s like pushing on a string.”
Unless there is demand for money by willing lenders and borrowers the economy is not going to improve. What is going to happen is a train-wreck for the dollar.
The dollar is more than 14 percent off its March peak, and some worry that additional losses could prompt foreign investors to start selling dollar-denominated assets.
But while a sluggish U.S. recovery and low interest rates mean the dollar may have further to fall in the year ahead, very low inflation means a crisis is far from imminent, said Henry Kaufman, president of Henry Kaufman & Company, Inc.
"There has been no dollar crisis," Kaufman said. "The retreat of the dollar has been gradual, it has been orderly and it has not had an impact on the securities market."
. 
Now I am banking on you Al 
. Points for adding humor to gloom.