Beware the bear-market rally in fiat currencies, led by the US Dollar...
MIGHT IT BE TIME to buy the US Dollar?
We only ask because right there in the latest issue of The Economist magazine is a quote from our own Bill Bonner at The Daily Reckoning.
"The long run value of all paper currencies is zero," the august journal quotes Bill in an article titled 'Losing faith in the greenback'.
And now that public sentiment confirms the Dollar's bearish prospects, surely it must be the bottom. Right?
Surely it must be the time to buy financial stocks and load up for the long haul, too. We wonder if Bill is embarrassed to be quoted in such a respectable financial publication.
But we aren't going long the greenback – not just yet. Because we suspect the Dollar bear market is just an epi-bear market.
That is, the bear market in the US Dollar is only one cycle amid an even larger cycle, the bear market in all fiat currencies.
Money printed by governments and not backed by anything of tangible value – such as, say, Gold Bullion Bars – can be created at will. Genuinely valuable assets, on the other hand, cannot.
As it is, governments can print money and promise it's worth something because they can tax their citizens. This makes a sovereign state like, say, the United States, unlikely to default. Governments both in Europe and in America, however, have now made so many promises to pay, investors are starting to wonder if there isn't a catch.
Will the governments fulfill those promises by magically cranking out more money again?
If so, the inflation that results means the lender (the buyer of government bonds) is paid back in a diminished currency. He gets his hundred bucks. But now it's worth only ninety in terms of purchasing power.
Paper money en masse is entering a serious bear market, we believe. That's bad for the US Dollar...and good for Gold Investments. It's probably bad for the British Pound Sterling, too (there is a lot of debt in the UK), and it's especially bad for the Euro, which has just as many fundamental problems as the Dollar, albeit of a different hue.
It's less bad for "commodity currencies" in New Zealand, Canada, and here in Australia. But even they are struggling to hold value against crude oil and Gold Prices.
Will fiat money bounce in 2008? It's certainly possible, not least with The Economist putting the decline of the Dollar on its front-cover. But bear market rallies always prove the most costly.
Beware the fiat currency bear.