by Addison Wiggin & Ian Mathias
- First Russia, then China, now U.N.? Powers of the world move to ditch the dollar
- Puru Saxena on why the Fed secretly wants inflation… the more the better
- The 5 examines the future of energy… from deep-water drilling to “polywell fusion”
- Another government biz on the verge of collapse… one that will affect us all
- Plus, some good housing news, maybe… home prices retreat to historic range
"A new global reserve system,” a panel of United Nations economists declared yesterday, “could contribute to global stability, economic strength and global equity.”
We begin with this today not because the U.N. is saying anything revolutionary, but because the global chorus to ditch the dollar is quickly becoming deafening. The Kremlin last week, China’s central bank earlier this week, Tim Geithner yesterday and now this… a U.N. panel led by an American no less.
There is "a growing consensus that there are problems with the dollar reserve system,” said Joseph Stiglitz, a Nobel economics laureate and leader of the U.N. panel. The current system is “relatively volatile, deflationary, unstable and [had] inequity associated with it.
"Developing countries are lending the United States trillions dollars at almost zero interest rates when they have huge needs themselves," Stiglitz said. "It’s indicative of the nature of the problem. It’s a net transfer, in a sense, to the United States, a form of foreign aid."
"The discussion about a new [global reserve] currency is absolutely legitimate,” added Dominique Strauss-Kahn, head of the IMF. The IMF would likely be tapped to create such a common reserve… its “Special Drawing Rights” could berth a currency based on a basket of worldy monies. Strauss-Kahn said such a discussion could come to a head “in the coming months.”
So how does the U.S. Congress cope with this development? Heh, typical…
Rep. Michele Bachmann introduced a resolution yesterday that “would bar the dollar from being replaced by any foreign currency.” You can read it for yourself, here.
We’re not sure if Bachmann simply doesn’t understand the issue — that foreign governments are proposing a new RESERVE currency and not suggesting the U.S. abandon the dollar — or if she really thinks she can legislate the decisions of foreign nations. But either way, better to write the bill first and ask questions later.
Bachmann: Embarrassing Minnesotans everywhere
“The Federal Reserve wants to debase the U.S. dollar,” writes Puru Saxena in the latest Daily Reckoning. “The total debt in the United States now exceeds $60 trillion, and its economy is around $14 trillion. So the United States is already bankrupt, and the only way it can ever hope to repay this gigantic sum is through monetary inflation and debasement.
“Allow me to explain:
“Suppose your grandparents borrowed $100,000 from their friends roughly 50 years ago. Back then, $100,000 was a lot of money, and the chances of your grandparents ever repaying this loan were slim at best. However, thanks to monetary inflation and the debasement of the U.S. dollar, today, $100,000 isn’t a very large sum of money. Therefore, your grandparents would find it much easier to repay their debt.
“Turning to the present situation, the United States owes its creditors a gigantic amount of money and a debt so large that it can never hope to repay it in today’s dollars. So the United States has two options:
a. Default or bankruptcy
b. Monetary inflation
“Given the fact that the United States is still the world’s largest economy, owns the world’s reserve currency and has a democratically elected government, I think we can pretty much rule out the possibility of sovereign default. Therefore, you can bet your bottom dollar that the United States will try its best to inflate its way out of trouble. Remember, politicians borrow money when it buys them a loaf of bread and they repay it when the same money is worth only a slice of bread!”
Never mind the news above, the dollar is actually booming today. The eurozone unleashed two worse-than-expected data points this morning, causing a rush into the greenback. The British pound got shellacked after the U.K. government revised its fourth-quarter GDP down to a 1.6% contraction. And the euro is looking no more stable. Its member nations saw a 34% plunge in industrial orders during January. According to the EU statistics office today, that’s the biggest monthly decline on the books.
Thus, the dollar, despite all its faults, is the currency du jour. The dollar index soared about a point and a half this morning, to just over 85.
The U.S. stock market enjoyed a nice rally yesterday. Traders had some respectable reasons to dive into yesterday’s market… like better-than-expected earnings from consumer brands like Best Buy, Snapple and Dr Pepper. Plus, the U.S. Treasury’s latest auction — $24 billion in 7-year notes — was met with more typical demand, soothing fears brought about Wednesday.
The Dow and S&P 500 climbed 2.3% while the Nasdaq soared 3.8%. That actually puts the Nasdaq at break-even for the year. Hooray!
Thus, we’re seeing some profit taking today. Most indexes are up about 20% in the last three weeks alone — reason enough for a decent sell-off. As we write, the Dow and S&P are down over 1%.
“Polywell fusion technology could be the biggest monkey wrench in the history of markets,” writes our technology adviser Patrick Cox. If you’re unfamiliar (we certainly were), fusion is often tagged as one potential “fuel of the future.” Instead of splitting atoms, like the nuclear fission we use today, it fuses them.
“Polywell,” explains Patrick, “is a different approach to fusion energy that’s generating huge buzz in tech circles. If, as proponents claim, commercial polywell fusion is only four or five years away, it would be the biggest monkey wrench in the history of markets. It would be both good and bad, however.
“It promises energy so cheap as to be virtually free. Some scientists believe that power would be driven down to 1% or less of its current cost. Even if it were 5% or 10%, though, the impact would be staggering.
“The economic roots of global poverty would disappear. Within a decade, desalinized water, food, transportation and most physical goods would plummet in price. The Third World would achieve a higher standard of living than the First World enjoys today. The First World would have options that are almost inconceivable. Whole sectors would collapse, but new ones would rise and more than compensate for the lost equity values.”
It almost goes without saying: This technology still has many hurdles to clear. “But he chance that polywell is what the scientists say it is, however, requires that we watch this very, very closely,” says Patrick.
Commodities are retreating today, along with stocks. Gold is backing down after a nice run-up to $945 yesterday. As we write, the spot price is around $925.
Ditto with oil. Crude rose back up to recent highs of $54 a barrel yesterday, but has since been sold down to $52.
“The world’s oil exploration and production is migrating offshore into deep water,” notes Byron King. “There are a lot fewer onshore opportunities now than there used to be. It’s fair to say that the biggest onshore oil and gas prospects are either already drilled (hey, North America has been drilled like a pin cushion), or locked up for political and environmental reasons.
“Thus, exploration has moved offshore. The shallow coastal areas have been good bets over the past few decades, yielding immense volumes of oil and natural gas. In the U.S., oil companies have been drilling in the shallow waters of the Gulf of Mexico since the 1940s. They even drilled offshore Southern California in the 1960s. But those shallow offshore prospects are pretty much drilled by now, or they’re off-limits due to environmental restrictions. So the industry is moving further offshore into deep water, defined as more than 1,000 feet.
“Today, deep water is a key focus of the international majors. The energy industry has new geological models and better geophysical technology and data. There have been vast improvements in signal processing and data crunching. And we are living through a time of absolutely revolutionary advances in drilling capability. What used to be just trackless, wave-tossed ocean is now prime oil patch real estate. It follows that today we are seeing phenomenal success rates for exploration, with super-high output wells.
“I strongly believe that a lot more deep-water holes are going to get drilled. There’s almost no doubt about it. The world’s deep-water rig fleet is destined to grow dramatically in the next few years, despite the worldwide recession. From 213 rigs afloat in 2008, the construction and commissioning schedule forecast is for well over 300 rigs available by 2012. Most of these new vessels and platforms are fifth generation, designed for deep water and harsh conditions. The drawings are complete, the keels are laid, the steel is being welded. These new ships will cut water.”
If you seek to profit from the latest and greatest energy trends, Byron is your man. We’re currently offering 50% off his elite Energy & Scarcity Investor… if you’re in the market, now’s the time to check it out. Do so, here.
The U.S. Postal Service is in deep trouble.
“We are facing losses of historic proportion,” Postmaster General John Potter said yesterday. “Our situation is critical.”
Indeed, the USPS is almost guaranteed to run out of money this year. The government-sponsored postmen lost $2.8 billion last year and this year — with mail volume expected to drop by as much as 15 billion pieces — the group’s losses will be “much larger,” says The Associated Press.
Plans are already in place to increase rates in May, and the USPS is mulling other options — like reducing mail delivery to five days a week, closing offices and/or cutting retiree health benefits. And if gas prices pop? Fugghetaboutit… the USPS claims that every cent up in gas prices “costs the post office $8 million,” reports the AP
401(k)s and 403(b)s beware… 29% of employers plan to reduce or eliminate contributions toward "defined-contribution retirement plans" for their employees, says a survey released this week by Spectrem Group, a business consulting group.
On the housing front, a ray of hope. According to this chart, the precipitous fall in home prices might start to ease up soon.
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The current crisis has finally wiped out the bubble in home prices. Adjusted for inflation, the median price of a single-family home has plunged 33% from its 2005 high. Now at pre-mania levels, an average of $165,000, home prices have a reason to at least slow down their rapid decay.
Ouch… sorry if you bought your home during the height of the housing boom in the 1979. The median, inflation adjusted return over the last 30 years is negative 1.6%.
“I am opposed to giving green cards for housing market stability,” writes a reader in response to yesterday’s 5, “but not for xenophobic reasons. Instead, for reasons that I thought The 5 would extol. The whole idea is just another scheme devised to keep the market from expressing itself by letting prices fall to equilibrium, where prudent people can buy them at sensible prices. Why do you want to subsidize the market with foreign money? It’s too complicated, will have unintended consequences and penalizes prudent Americans who would like to buy a house at sensible prices.”
“I’ll chime in,” writes another in a similar fold, “regarding Richard LeFrak and Gary Shilling’s recent editorial. I think their idea stinks. I may be different than most of your readers, but I don’t want to arrest the housing crash. I want lower house prices. I want to be able to buy a house for $85,000. I’m sure a lot of other people would too.”
“Not all foreign home buyers would be looking for a job,” writes the last. “There are also those looking to start a business elsewhere but find it difficult to open a business in the U.S. The prospect of higher corporate taxes, liability issues, higher personal income taxes, etc., certainly don’t make it more enticing. There are only 65,000 slots for an H-1 visa, and in both 2007 and 2008, they ran out of them within minutes of opening the applications (usually, midnight, April 1). Immigration ended up doing a lottery.
“So what’s, say, a Microsoft to do? It opened up a shop in Vancouver. Focusing on the job an American loses to a foreigner doesn’t cover all the ancillary benefits of having a company grow (more sales, more services required — hey: more taxes paid!). I know because I tried to get an H-1 for the company I founded in the U.S. and got tired of spending money on lawyers and may just take my business to a duty-free zone in Panama, instead.”
Have a nice weekend,
Ian Mathias
The 5 Min. Forecast