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Tomorrow's Dollar

Goodbye Gatsby, hello Grapes of Wrath...

"It is mortifying in the extreme to find how instantly the credit edifice which we have built up for generations could tumble to pieces in a night."
   - Gaspard Farrer, partner at Barings Brothers, on the day England declared war on Germany, August 1914.

THE DECADE of The Great Gatsby set up the decade of The Grapes of Wrath, writes Chris Mayer for the Rude Awakening.

Boom times are for dancing and drinking. The bust means sweeping up the floor and taking out the trash.

But the Fed and Treasury officials and politicians – and, well, just about everybody else – want to party all night without ever cleaning up their messes. And the most accepted way to do this is to have the government print and spend and print lots of money.

That's what's happening now as the Fed buys Treasury securities directly, while the Federal government looks to run a deficit of nearly $2 trillion and to toss any sense of financial orthodoxy out the old window. Unfortunately, this tactic only makes the mess a bigger mess. There are a few ways, though, in which you can protect your hard-earned dough.

Before we get to them, we need to back up and see what happened here. One of the things that always amazes me is how much wiser we were about these things long ago. Economics seems to have taken several steps back in the last century.

For instance, way back in 1904, an economist named Frank Albert Fetter published a treatise called The Principles of Economics. Fetter was an American economist who taught at Cornell. He rose to the top of his profession and his book was an economic standard in America. This was a mainstream guy, not some radical on the fringe.

In this book, he talks simply and logically about how markets work:

"The value of everything that lasts for more than a moment is built in part upon rents that are not actual, but expectative, whose amount, therefore, is a matter of guesswork, or 'speculation.'"

Think of stock market capitalizations – what the market says a company is worth. That value is a guess, based on what a company may earn in the future. And those guesses will often turn out to be wrong – sometimes very wrong.

But when nearly everyone guesses wrong for nearly everything, we have the setup for a crisis. Fetter called the crisis a "forcible and sudden movement of readjustment" in the "mistaken capitalization of productive agents." Basically, a crisis brings everybody back to earth, so to speak. The old values were wrong and inflated. The crisis is the process of hammering away at them and bringing them in line with reality again. Certainly, this is the case with the banking system, which had as its foundation lots of paper that turned out to be worth not very much.

The use of credit, or leverage, makes the swings even greater, and the process of readjustment even more painful. As Fetter writes: "A credit system, highly developed, is a house of cards at a time of financial stress."

Once this house of cards finally collapses, the game of 52-Card Pick-Up is always protracted and excruciating...always. But this historical fact does not dissuade central bankers and politicians from trying to engineer painless solutions.

In our age, when the government can create dollars out of thin air, painless solutions also seem like free solutions. Just ramp up the money supply and, voila, crisis disappears. But that's not how things actually work. Not now; not ever.

Fetter considered a crisis to be a painful, but necessary and therapeutic process. A crisis removes financial excesses, he believed, and sets the economy back on sustainable foundations.

But very few modern economists share Fetter's perspective. Instead of appreciating the work of a crisis, the Fed and everyone else wants to avoid it entirely...AT ANY COST. The Federal Reserve is attempting to prevent the current crisis from deepening by ramping up the money supply and extending various forms of new credit to financial intermediaries. But this entire process distills down to nothing more than dollar debasement.

Thus, the consequence of the Fed's economic anesthesia is that the dollar will lose its value mightily against the world of things. The Dollar will buy less. Tomorrow's Dollar will resemble today's penny.

So what to do?

Buy things. In a world in which paper depreciates, tangible assets will hold their value better. Unlike paper, we can't create oil reserves or gold bars by pressing a few buttons at the Fed. Tangible assets take time and labor to create. So the first thing you do is favor commodities. The biggest gains in commodities could still be ahead of us.

In particular, Buy Gold. Gold is a commodity, but it is unique in its monetary heritage. It was money – in the sense that you could buy groceries with it – not that long ago, in the grand scheme of things. People are again flocking back to Gold Investment as the Dollar's prospects turn uglier. This move has a long way to go.

Also buy the stronger currencies. All paper currencies are on the long road to zero. But some are on a faster road than others. For example, the Norwegian Krone is starting look like a safe-haven currency. Indeed, David Bloom, an analyst at HSBC, recently called the Krone, "The ultimate safe-haven currency." He said it was "probably the best currency in the world." Why?

The Krone is one of the few currencies outperforming the Dollar this year. Despite all the actions of the Fed to destroy the Dollar, it has rallied in the face of an economic crisis and a strong desire to hold cash. But this is temporary. Those dollars are like kindling. They will ignite soon enough. In the meantime, the Krone's strength is particularly noteworthy.

The Krone is strong because its central bank is not printing nearly as much of it as everyone else is printing of their own currencies. The Norwegian economy is still growing, while the United States is on the ropes. Norway also has lots of oil. You can see the market's confidence in the Krone by looking at the cost to insure Norwegian debt. It is cheaper than trying to insure US debt. In fact, among the 10 most-traded currencies, insuring Norway's debt is the cheapest insurance out there.

So don't forget to buy a basket of commodities, starting with gold, and strong currencies...while you're taking out the trash.

After a decade in corporate banking, Chris Mayer used his deep analytic approach towards stockpicking to beat the market 3-to-1 between 2004 and 2014 at newsletter publishers Agora Financial. Now moved to Bill Bonner's Bonner & Partners, his Chris Mayer's Focus service seeks shares with the possibility of returning 100-to-1.
See the full archive of Chris Mayer articles here.


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