Congress Debates Coin Clipping, Oil at Another Record High, Consumers Spending Extra, and More!

by Addison Wiggin & Ian Mathias

  • Pennies and nickels no longer worth smelting value… dollar’s demise tempts government to begin clipping coins
  • Eric Fry on the U.S. money supply and why its abundance means oil’s price “must increase over time”
  • Consumer spending jumps to holiday highs… before stimulus checks hit mailboxes
  • Hank Paulson says worst of credit crisis behind us… did the market buy it?
  • Doug Casey on why “The bull market in gold is not over”

How odd is this? The melt value of pennies and nickels exceeds their purchasing power.

“If we continue minting coins with the current metal content,” Rep. Luis Gutierrez, D-Ill., said this week, “with each new penny and nickel we issue, we will also be contributing to our national debt by almost as much as the coin is worth.” Gutierrez, who oversees the U.S. Mint in Congress, says minting these coins above their material value cost the U.S. Mint an extra $100 million last year.

In late 2007, the U.S. government paid 1.67 cents for every new penny and nearly 10 cents to mint a new nickel. Despite a correction in the global price for copper, zinc and nickel, the U.S. government is still paying more to produce pennies and nickels than their “worth.”

Today, a penny costs 1.26 cents, and a nickel 7.7 cents.

Could it be the U.S. will start doing what all empires in history have done at one time or another… and clip their coins?

Sure enough… Congress is debating a bill this morning that would direct the Treasury to suggest to the U.S. Mint a more economical way to mint the coins. Namely, to start adding steel to the mix. The last time we had to do something this drastic was during World War II, when we were melting down bombshell casings left over from operations in the South Pacific and Europe.

Oh, brother. We wonder… what will happen when a steel penny costs more than one cent? Maybe we could mint them out of glued-up sawdust… or tightly pressed garbage. Or maybe start shaving edges off the sides… make mini pennies. The economists of ancient Rome must be spinning in their dusty tombs.

We covered the age-old practice of coin clipping in a chapter of The Demise of the Dollar we gleefully titled “Short, Unhappy Episodes in Monetary History.” “I remember reading the clipping stories in your book,” “Extreme” Ian commented this morning. “They’re great… such an easy-to-understand, tangible demonstration of a desperate government unable to handle inflation.”

Pick up a copy of The Demise of the Dollar, fully revised and updated, here. Please, before it’s too late.

If you’re not going to shell out for the book… as inexpensive and priceless as it is… our investment director Eric Fry helps explain one of the factors leading to the dollar’s untimely demise.

“The chart below,” explains Mr. Fry, “paints a picture of the largely unfettered global growth in U.S. money supply since the early 1970s, plotted against industrial production — a proxy for ‘goods’ in their many varieties.

“As we Americans may continue to operate the big machines in big rooms that splash special ink onto special paper, we might be able to forestall a day of reckoning. But we probably will not be able to forestall an era of soaring commodity prices.

“America’s grand monetary experiment is beginning to return some undesirable results — like a slumping U.S. dollar and a troubling uptick in inflation. These related trends manifest themselves in the form of $900 gold and $120 crude oil.

“In other words, the skyrocketing oil price is as much a monetary phenomenon as a geophysical one. Paper currencies and debts proliferate rapidly. Natural resources do not. That’s why the prices of natural resources like crude oil MUST increase over time.” (For more from Eric, check out this morning’s Rude Awakening.)

The dollar reignited itself yesterday anyway. The dollar index teased 74 briefly. But the puny surge had little to do with dollar strength. Rather, jitters surrounding this morning’s Bank of England and European Central Bank interest rate announcements helped kick their respective currencies to the curb. Both banks chose to leave rates unchanged.

Thus, at $1.52, the euro is at a two-month low against the greenback. The pound found itself at a two-month low, as well, at $1.95. The steady yen remains at 104.

“I think we’re closer to the end of this than the beginning,” suggested Treasury Secretary Hank Paulson regarding the “credit crisis” plaguing the U.S. “We will get some help from the stimulus [package]. Later this year, I expect growth will pick up.”

Terrific.

U.S. consumers apparently didn’t want to wait for the stimulus. In fact, they dug themselves way deeper in debt than usual in March. According to yesterday’s Federal Reserve consumer credit report, consumers heaped over $15 billion — that’s billion with a “B” — in personal debt onto their already stressed balance sheets during that month. That’s more than double Wall Street estimates and the biggest monthly increase since November, peak holiday buying season.

Total U.S. consumer credit – what the Fed categorizes as basically all debt except mortgages — is now $2.6 trillion. Yikes…

“The rise in consumer borrowing,” some dingbat on CNN said afterward, “could be a good sign for the economy in the short term, since people are still spending money,” Sure, let’s continue to try to spend our way to wealth. It’s been working so well for us thus far.

Investors cleared the funk out of their heads yesterday. After buying up shares of the worst-reporting financials all week — Fannie Mae, Countrywide, Wachovia — traders reversed course and sold all kinds of stuff. The Dow had its worst day in over a month… falling 1.6%.

The S&P 500 and Nasdaq fared even worse. Both were down 1.8% on the day.

After rebounding earlier this week, gold is lazing about at $875 this morning.

“We are confident the bull market in gold is not over,” writes our friend and perennial Vancouver favorite Doug Casey. “There is simply too much pressure for higher inflation and a weaker dollar for gold not to rise.

“A dreadful day (week, month or even a season) for gold doesn’t drain out the bad stuff that’s been simmering in the economic cauldron. The Federal Reserve hasn’t stopped printing money (in fact, it’s picked up the pace); the U.S. government hasn’t balanced its budget (in fact, the ‘stimulus package’ is making the deficit worse); and the dollar’s foreign exchange value hasn’t fallen nearly enough to cure the U.S. economy’s enormous trade deficit.

“In short, we don’t share the sentiment that all is better in the U.S. economic and financial systems.

“It’s our opinion that gold’s downturn and the corresponding easing of worries about the financial system are temporary. How long ‘temporary’ will continue is unknown, but events always trump psychology at some point. First, we will see investors return to gold — and then we’ll see newcomers fleeing toward it.”

Oil set another record high in yesterday’s session. If you wanted to buy a barrel of the carbon-based goo, the light sweet stuff would have cost you $123 this morning.

The record is particularly significant because traders refused to factor in a far-better-than-expected U.S. crude inventory report. Oil supply rose 5.7 million barrels last week, claimed the Energy Department yesterday. Supply in the U.S. doesn’t appear to be a part of the price equation this week.

“Our buddy Matt Simmons told the crowd yesterday,” reports Byron King from the Offshore Technology Conference, “that it will cost $100 trillion over the next seven years to fund the energy projects the world needs.” The annual retreat attracts over 75,000 oil and energy geeks to Texas each year.

“$100 trillion,” Byron then comments. “That’s more than the entire GDP of the United States, for all seven years, just to pay for energy projects. That’s before the U.S. spends any money on anything else, like food or health care or Social Security or national defense.

“So can the world afford $100 trillion on energy projects? Can the world afford not to spend whatever it takes? You may as well get invested in this treasure chest, too. Because if you look at what is going on at the OTC, you know where a lot of that money is going to get spent.”

Byron spilt some of his beans on CNN Headline News’ Glenn Beck Program last night. “He destroyed it,” our media guru Mia White told us this morning. “He rocked… really sharp.” You can check out Mr. King’s handiwork right here.

“I’d like to suggest that you do a chart of oil prices and inflation going back 30 years,” writes a reader. “When you do that, you will notice that, basically, oil and inflation have been parallel for almost that entire 30-year period. That is until 2002, when oil began to break away and head to the moon.

“Any idea what happened just a few months before that break? Dick Cheney held his Energy Summit with all the heads of Big Oil. You might remember that they were so freaked when those meeting records were requested they went all the way to his hunting buddy in the Supreme Court to keep them secret. So much for ‘open government’!

“I’m not sure if this is an Enron-like conspiracy, but I think you are right when you suggest that oil will be coming down in the near future. I’d like to suggest that oil might just come down in the three-four months going into the next election. So much for supply and demand. Incidentally, much the same thing happened in the months before the 2004 election. I’ve got a feeling that some really good investigative journalist is going to get to the bottom of this increase in oil prices (and possibly earn a Nobel for their investigative reporting) soon after the current administration leaves office.”

The 5: Ask and you shall receive… sort of. We were going to add the following chart of light sweet crude to a graph of the dollar index. But for whatever reason, we’re all moving a little slow this morning. Still, given Eric and Byron’s comments above… it’s no secret why oil is going through the roof:

“Your reader who talked about the eight Reagan budgets submitted to Democrat-controlled Congresses is wrong,” writes another. “The Republicans controlled the Senate from 1980-86.

“The Republicans picked up a higher-than-expected number of seats to control the Senate for the first time since 1954.

“As for the Laffer curve, I’d suggest reading David Stockman’s book The Triumph of Politics. In a budgetary world of ‘phantom’ tax revenues and ‘magic asterisks,’ Stockman himself admits that Reagan ‘had been misled by a crew of overzealous — and ultimately incompetent — advisers. The original budget plan I had devised for him had been fatally flawed.’

“He goes on to say, ‘Reagan had one real option: to retreat and give back part of the huge tax cut we couldn’t afford. But he wouldn’t. Ronald Reagan chose not to be a leader, but a politician.’

“I realize that it’s heresy to criticize Ronald Reagan, but he was in over his head. It’s also easy to blame the Democrats for tax-and-spend, when it’s actually both parties making budgetary decisions based on political, rather than economic, principles.”

The 5 responds: Yeah, politicians, for the most part, suck. Feels like a Friday, doesn’t it?

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. We elected to cap our enrollment in Resource Trader Alert for the time being. If you’re thinking of collecting your “guess pass” to the world’s “Millionaire’s Market,” better do so right here
before Monday. Thanks for reading.

rspertzel

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