Moneyization Part Twenty-one

By: Ned W. Schmidt | Thu, Mar 2, 2006
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Moneyization: The global financial phenomenon of individuals and businesses moving their funds to monies in which they have the highest confidence, or money in which they have a higher store of faith.

Or, Good Part Still Awaits Us

So far the ride in Gold and Silver has been enjoyable. What needs to be remembered, though, is that the good part is still out there in the future. The global shift away from paper assets to real assets is in infancy. Puberty has barely arrived. Denial is still too widespread among the majority of investors. Individuals remain doubters that the Real Paradigm will reign investment supreme in the years ahead. Simply consider the facts in the first graph. Which was correct, the purveyors of paper or the Gold Bugs? As they are now starting to say, "better a bug than broke." And by the way, which group has been paying fees to the mutual fund advisor for those five year stock returns?

From the beginning of money time, sovereigns first and then later fiat governments created national moneys. The purpose of those monetary creations was economic power. Those earliest moneys were often of precious metals. Greed being a basic characteristic of government, the value of those moneys was clipped and shaved away. Ultimately, the wealth confiscating power of fiat money was discovered by governments. Those acts denied the citizens the full value of their money. However, only for a time were they fooled. Individuals learned that naive reliance on the face value of any government money was not a wealth-wise act. The concept of money's purchasing power became part of common understanding. Individuals learned, and moved to moneys in which they had higher faith, the moneyization process.

Mexicans rushed from pesos. Russians ran from rubles, becoming the largest holders of U.S. currency outside of North America. Argentinians got trapped, confiscated and converted to government paper. The entire history of paper money is of ultimate disintegration. Paper just does not have staying power. It rots, mildews, burns, and can simply fall apart. The simple rule of government, or fiat, money needs to be remember. Governments influence the value of national monies to benefit the existing political power structure. In doing so, they transfer wealth from individuals to the government.

Individuals are increasingly moving to the only viable and liquid real alternative to fiat money. Gold's price is where it is today due to individuals selling government money and buying Gold, the natural money. Each individual investor must evaluate the relative merits of their national money. Some situations are more urgent the others. New Zealand, for example, has recently demonstrated that urgency can develop rapidly. Complacency is not rewarded by foreign exchange markets. Getting out needs to be done before the problems develop.

For U.S. and Canadian investors the heart of the matter is the future for the U.S. dollar. The second graph shows the manifestation of the fundamental problem for both dollars. That statement has been carefully worded. The U.S. trade deficit, or current account deficit if you prefer, is not the problem. Rather, it is measurement of the consequences of the problem. The problem is the structural changes that have taken place in the nature of the U.S. economy. In China, roads and factories are being built. In the U.S., billions are squandered on chasing the stock of an internet search engine. Around the world, workers are going in the doors of factories each day. In the U.S., workers are busy designing way to download rap music to cell phones. Which activity will generate the most future national income and the more valuable national money?

For several years we have listened to economists and analysts talk about how the U.S. trade deficit would "self correct" as the dollar declined in value. Well, the Canadian dollar, the Euro and others have risen in value versus the U.S. dollar. Has the slope of the trade def icit line in that graph improved? No, in fact it has worsened. The problem is structural. The rest of the world is working in factories. U.S. workers are playing on the internet and designing world changing mortgage software.

The small box in the graph is when the European central bankers identified the crisis, and instituted the agreement on Gold sales. Since then, the dollar price of Gold has more than doubled. Those central bankers, led by the German central bank, saw the problem coming. Yet, nothing tangible to remedy the situation has been done. As longs as those receiving the green paper are willing to relend to the consumer addicts in exchange for jobs nothing will be done. Those same conditions that gave $Gold the first double, will give it the next double.

As the U.S. swaps green paper for computers and cars and oil, excess dollars are disposed of in the foreign exchange market. Recycling of dollars back into U.S. debt is not complete. As a consequence of that ongoing surplus of dollars, the value of those dollars falls. That depreciation of the dollar's value pushes up the dollar price of Gold. As written before, what is happening is that the Gold price of the dollar is declining. Two factors suggest that the dollar price of Gold will continue higher, though not every day or week or month.

First at the national level in the U.S., denial and shifting of blame are the policy norms. The new chairman of the Federal Reserve, and other misguided analysts, contend the U.S. trade deficit is the fault of the rest of the world. Economic policies in other countries are the reasons for U.S. consumers spending more than their income. Greenspan was motivated to please Wall Street. Bernanke is motivated to please the Washington politicians. Such a motivation is the prime reason for holding forth with Bernanke's Delusion. Such views suggest future Federal Reserve policy is likely to be supportive of the value of your precious metals.

Second, the trade deficit of the U.S. is structural, and long-term in nature. As a way of understanding this consider the third graph. Plotted in this chart is the number of U.S. workers, in millions, employed in real work. That means they are making real goods. As is readily apparent from this graph, U.S. employment in jobs producing real stuff is no higher than it was at the end of the 1960s.

Six economic recoveries are shown in the graph. That is when employment expands off of a trough. The latest experience is minuscule when compared to the others. Current economic expansion in the U.S. has not brought a recovery in jobs doing real work. Rather, U.S. goods producing industries have been aggressively liquidated over past years. Chairman Greenspan oversaw the liquidation of a whole list of businesses. For example, textiles and furniture manufacturing are now largely nonexistent in the U.S. The domestic auto business is moving that way. Hey, that is ok. Everyone is going to be so rich off their GOOG and hedge fund investments no real work will be necessary.

The U.S. economic expansion is built on consuming foreign made goods paid for by money received from converting home equity into debt. U.S. workers that do go to day jobs are involved in creating mortgage debt, servicing mortgage debt, construction financed by mortgage debt, or moving goods purchased by the cash from mortgage debt. This structural trade problem is not to be reversed. The factories are not coming back even if the yen goes to 50 or the Euro to $5. Chinese renminbi might go to 2 to the buck, and the factories will not move back. The consumers of tomorrow are in that big swath of land from Poland to the Pacific Ocean.

The U.S. has turned to services as the savior, selling "insurance" to each other and writing blogs. Services are nice businesses, but cannot be easily exported. Most services are primarily a local activity. Certain financial and insurance activities may be well done in the U.S. However, the demand for such services is limited. Until the world decides that mortgage banking services are the equivalent of oil, clothing, computers and food, the U.S. economy will be mired in a structural goods deficit.

The structural nature of the U.S. trade deficit and denial by U.S. policy makers, in the form of Bernanke's Delusion, mean that the U.S. dollar is going down in value over time. With the housing bubble now deflating, the Federal Reserve policy will move to further destroy the value of the dollar in an attempt to prevent a financial calamity in the mortgage debt markets. Pressure will increase on domestic prices, regardless of how the government statisticians attempt to cover up the problem. Rates are going higher and a Mega-Recession is on the way. Only twice before has a major economy faced a collapse in demand, the U.S. in 1929 and Japan in 1990.

Ramifications for many economies around the world of such a development could be severe. Recessions are a problem for two reasons, people lose jobs and debts are not repaid. That latter problem is the biggest concern. Debts will be liquidated, and not by repayment. Gold, as the only money not a debt, will obviously benefit from such a situation. For the neighbor on the southern border of the U.S., the unemployment problem will exacerbate the shift to the left in Latin American politics. "Chavesism" will have a fertile soil in which to breed discontent. Each nation that has gained from the U.S. consumer boom will have to face the consequences of their biggest customer unable to borrow money for purchases.

The neighbor to the north has related issues that need to be remembered. The fourth graph looks at the balance of trade for Canada at the end of 2004 and 2005. Canada has benefitted tremendously from a consumer gone mad in the U.S. The Canadian trade balance has improved dramatically over recent years. That improvement, along with the hostile nature of U.S. banking regulators, has caused the Canadian dollar to enjoy an improvement few would have expected.

Remember, though, to look behind the headline numbers. Two other sets of bars are shown. One set shows the Canadian trade balance without the benefits of the trade surplus with the U.S. In the coming recession all will not be lost, but vulnerability of the Canadian economy to a slump in U.S. consumption is high. Canadian dollar could sink dramat ically when the U.S. enters the coming recession, especially given the depth and duration of it. Imploding asset price bubbles in Japan sent that country into a recession that lasted well over ten years.

The final set of bars is the trade situation if the energy surplus is removed. Yes energy is a good business, and likely will continue to be so. High energy exports alone are not enough for a strong currency. No Swiss banker has ever complained of depositors shifting from francs to nairas or dinars.

Regrettably more often than not the bounties produced by natural resources are spent by the government rather than long-term investment. How long will it take the new government in Ottawa to discover the cash cornucopia of western Canada? Republicans practiced fiscal responsibility right up to the next election.

The trade deficit of the U.S. is both structural and long-term in nature. The spewing forth to the rest of the world of green pieces of paper is not about to abate soon. Analytical delusion on the part of the Federal Reserve has prevented and will prevent actions before a dollar crisis is in full bloom. With the U.S. housing market already showing the first signs of implosion, the Federal Reserve will "toss dollars from helicopters" in a vain attempt to stop the collapse of mortgage debt. As the U.S. economy plunges into a policy created economic abyss Canada will be dragged along, like the roped mountain climbers plunging to their death.

Dollar denominated investors, both of them, should be using all buying opportunities to add to their Gold positions. As shown in the last two charts on US$Gold, above, and CN$Gold, below, those opportunities present themselves on a regular basis. US$1,300 Gold and CN$2,000 Gold are both no longer fantasies about which Gold Bugs write. They are real possibilities!



Author: Ned W. Schmidt

Ned W. Schmidt,CFA,CEBS
The Value View Gold Report

Ned W. Schmidt,CFA,CEBS is publisher of THE VALUE VIEW GOLD REPORT and author of "$1,265 GOLD", published in 2003. A weekly message, TRADING THOUGHTS, is also available to electronic subscribers. You can obtain a copy of the last issue of THE VALUE VIEW GOLD REPORT at The Value View Gold Report. Ned welcomes your comments and questions, and tries to answer most all. His mission in life is to rescue investors from the abyss of financial assets and the coming collapse of the U.S. dollar. He can be contacted at

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