The Dropping Knife

By: Alex Wallenwein | Sat, Dec 27, 2003
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One thing is beyond dispute: The US economy seems to be booming - while the dollar keeps falling. The obvious question is: how long can this go on before the falling dollar will kill the economic recovery?

The answer: It doesn't matter.

What kind of an "answer" is that??

It's the only truthful one. The only thing that matters is to realize that the dollar will not stop falling. The rug is out from under it. The support structure is simply gone. If there ever was a reason in the ordinary investor's mind to buy back into the dollar, it would be the current run-up in economic figures here in the US.

Instead, they are selling.

If there was ever a reason for investors to get out of a brand new- largely untested designer currency like the euro, it would be the recent double-fiasco of a breakdown of the euro area's growth and stability pact, and the euro nations' dismal failure to procure ratification of their much ballyhooed constitution.

Instead, they are buying the euro.

But this is not an article about why the dollar will keep falling. That subject has been dealt with at length in virtually every other 'euro vs dollar' article published online, and in even more detail in every issue of the Euro vs Dollar Currency War Monitor. This article is about what to do once you realize that this drop won't stop.

If you realize that, you immediately know that, at some point, the falling dollar will kill the recovery - which really is the only thing worth knowing. How long it takes, time-wise, before that happens is rather irrelevant.

What's the difference whether it will happen tomorrow, three months from now, or maybe in a year? The only diffference that makes is that it determines how much time you have left to prepare for that event - if you are wise enough to prepare!

Too many Americans have no idea whatsoever that this threat even exists.

Well, actually it's even worse than that.

They know of the threat. They see it with their very eyes. The see the dollar dropping daily, to almost daily new record lows, while the economy is said to be recovering. But they just sit there and say to themselves: "Bah, humbug! It won't be that bad. The dollar will stabilize. Not to worry."

Have you ever accidentally dropped razor-sharp kitchen knife and saw it falling in the direction of your foot, with its point downward? What did you do? Before you could even think, you instinctively dropped everything and made damn sure your foot wasn't there anymore when the knife hit the ground - didn't you?

Well, it seriously looks like the "American investor" has lost all survival instincts, all sense of self-preservation.

Our investing friend sees the knife dropping, point forward toward his foot, and he just keeps his foot in place, saying to himself: "Ah, so what! Not to worry. The knife will stop dropping. It won't hit my foot. Al Greenspan isn't going to let that happen. The government will surely do something about that."

Better hope you got a first-rate first-aid kit very close by, my friend, 'cuz that ol' foot a' your'n gonna be nailed to the ground in just a fraction of a second.

It all seems insane, but one can perhaps understand the motivation behind such self-mutilating lethargy. Most US investors are baby- boomers. They have lived it up and spent their way all throughout the eighties, never saving a dime.

Then came the nineties. They suddenly realized they are getting older, despite being the "hip" generation, seeing their retirement age approaching in ten or twenty years, knowing they have nothing to fall back on. So they shoved whatever they had into the ballooning stock market, even going into hock to pump up that old 401k.

Since they were "hip" they all invested into the hippest stocks around, which were - of course - the Nasdaq's tech stocks. Then they got burned, and burned bad. Nasdaq dropped from 5000 all the way down to 2000, and beyond.

They complained.

Then 9-11 happened, and the Dow dropped 700 points in a day, only to pop right back up in a matter of a few weeks and months, then slowly subsiding again until late 2002 when the recently deceased stock-bubble slowly began to reincarnate. Of course, the fact was lost on many Americans that this was more of a botched-up Frankenstein-job than a true reincarnation, but that's beside the point.

This second coming of the stock-messiah, the savior of their retirement portfolios, was greeted with great enthusiasm for, after all, how else were they going to get their 401ks back on target?

So they threw their last shirt at the market, and even borrowed more shirts to throw at it. The re-fi boom meanwhile had gotten into full swing, thanks to Uncle Al's cranking of the printing presses and the resulting 50-year low interest rates - and here we are.

Americans feel they've simply got to invest - or they will greet their retirement years like Jimmy the Cricket: out in the snow, with no more shirts to wear.


If only our investing friends could realize that the dollar-rug has long been pulled out from under this stock-market miracle on Wall Street. If only they could understand that the very foundation of the American miracle-economy, the unbacked fiat dollar, was a all but a trap-door from the very beginning - and that this trap-door has now swung wide-open.

If only they could see that the only thing that is now preventing this American "body economic" from falling through the trap-door and hitting the ground underneath is the international reserve-dollar noose that's tightly slung around the economy's neck.

If only they could get themselves to comprehend that Al "Robin Hood" Greenspan isn't going to come riding in on a horse to shoot a magic arrow through that paper-rope so that a soon to be free-falling paper economy at least won't hang by its neck until death.

If only our retirement-conscious compatriots could realize that it is not stocks and paper-assets that will save their asse(t)s for their golden years, but gold itself - the very thing they have learned so thoroughly to disdain during their investing lifetimes.

But wishful thinking isn't going to make things happen. It's just like Rudyard Kipling wrote in his poem "The Gods of the Copybook Headings":

As it will be in the future, it was at the birth of Man

-- There are only four things certain since Social Progress began

-- That the Dog returns to his Vomit

and the Sow returns to her Mire,

And the burnt Fool's bandaged finger

goes wobbling back to the Fire.

The American Investor is about to stick his finger right back into the flame that scorched it only four years ago.

The lure of easy money, a misguided trust in government bureaucrats, and a failure to remember lessons past are inviting another catastrophe. The problem is that catastrophes have a tendency to come our way even if we don't invite them. How much more likely they will be to come with our invitation surely is a frightening prospect to entertain.

The knife has yet to complete its downward trajectory. If you are fully invested in paper-assets, this would be a most opportune moment to consider moving your lower extremity.

Just don't "consider" for too long!

Got gold?


Author: Alex Wallenwein

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

Just like driving your car, investing only makes sense if you can see where you are going. The Euro vs Dollar Monitor is your golden windshield wiper that removes the media's greasy film of financial misinformation from your investment outlook. Don't drive your investment vehicle without it!

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