In followup to his last few columns on bonds and the weakening American dollar, contributing editor Terence R. Wilken writes:

Who Are We to Believe?

Well time once again to return to the world of finance.  The markets have been holding their own, and we are being told that it is only a matter of time before we will hit Dow 10,000.  Of course we did have a “healthy” correction this last week.  We have been told that is the case.  From some though there is a WATCH OUT BELOW warning.  Who are we to believe?  Maybe this next week will give us an indication.

Bonds have been holding up nicely, and you can feel comfortable with lower interest rates.  I know that rates are the lowest in years because I am still getting about 40 E-Mails a day telling me that they are at an all time low, and it is the opportune time to refinance my home.  Of course the dollar is falling, but then who pays attention to that.  You can rest assured that the government does even if it is not a big factor in the normal scheme of things.  Because of the falling dollar, the cheap goods that we have gotten used to will start becoming more expensive.

Now how can that come about?  To those regular readers it is understood that we currently buy most of our goods from China, and the Chinese have pegged their money to the dollar.  In that way they can continue to sell us cheap products no matter what happens to our currency.  This is about to change.  It has been deemed to not be fair.  Anything that is not fair has to be changed.

The government is currently using every thing in their magic bag of tricks in order to talk the Chinese government into allowing their currency to float free in the hopes that it will become stronger.  This will allow the price of their goods to go up in cost to the American consumer.  Maybe then we will buy products made in our country and help out our manufacturing sector.  The Chinese government is not paying any attention.  I guess that it is time to use a bigger hammer.  The hammer will be Congress.  They are now talking about posting tarrifs on Chinese manufactured goods in order to make trade fair.  That is the American way.  For those interested in another view point on this issue, you can go here to read what Morgan Stanley has to say about what is occurring.

There are some facts in this article that bear re-reading.  The American economy is in a very precarious position.  Interest rates are currently remaining at a very low rate.  They must remain low in order for the US to continue to spend to keep the economy moving.  We have learned to buy now rather than save for the things that we would like to have.  As a Country we have learned to have everything now.  This is true from both a personal and a government perspective.  If what Morgan Stanley is saying is going to happen, one indicator will occur when the Fed loses control of the ability to control interest rates.  You will know this is happening when the bond rates start going up and can not be brought down.  Long term interest rates are not something that the Fed can control.  Actually this is something that should have already occurred.  The economy should have been stymied prior to the big bubble.  Since this was not done, if it happens now, it will be much harsher on the economy.

One very significant reason that short term interest rates can be artificially held down is that we have been convinced that there is no inflation.  Money can remain cheap as long as this concept is instilled into the public thinking.

I want to finish with another person’s ideas.  He is Warren Buffet.  The Sage of Omaha.  His ideas are on a Yahoo thread.  For those not familiar with these type of threads, it is in six parts, so once you have finished one part, you will have to hit next for the continuation.  One persons ideas entered the thread, so you must continue to hit next in order to read the entire concept.  There are those who will not like his analogies, but I find them interesting. To read his thoughts go here:

I will return, so until next time.

Terence R. Wilken
Editor in Chief, RWWNL