December 29, 2003
Another year has almost come and gone, and what a year it was. We are now at WAR, and Mad Cow Disease has come to the US. Sure glad that we were able to find out that Mad Cow came from Canada. Those darn cannucks anyway.
From all outward appearances, the economy is on the rebound, and all is well in the USA and the world. The markets should be up at year end, interest rates are still low, and the housing and employment statistics are doing well. All we have to do is keep it up. We must keep spending. That is the ticket, and we can have fun at the same time. What is a little debt when money is so cheap?
So what is the downside? Well, there are two things happening that could change things in the next year.
The dollar is continuing to fall, and this does not bode well for several reasons. Those goods from overseas will now become more expensive. If you have been thinking about that trip to Europe or another country, now is the time to go. If the dollar keeps falling, it will only become more expensive to make that trip. Can we live with higher priced foreign goods? I guess that we will have to do that. How can we change what is occurring? All we have to do is raise interest rates here in this country in order to make the dollar stronger. At this time, that is not an option. Interest rates must go up, but now is not the time. If you want to know what could happen if we increase interest rates, just go here:
The second downside that may occur is inflation. I know, I know, we are constantly flooded with the now inflation scenario, but in actual fact, it may return. For more info go here:
Both of the above happen to reside on the CNN website, so word is starting to become better know among the regular press. Of course, it is only been covered on the internet. I have not heard the dreaded words of inflation or stagflation voiced on the TV. The big news on the TV is Michael Jackson and Scott Peterson. Only the important issues are covered on the regular television channels.
If inflation takes hold (and you all know my feelings on that issue), or if the dollar continues to fall, it will not be good for the economy. When will this occur? As I have said before, we must hold off any problems until after the next election. I guess that Bush did learn something from the former president.
Well, I am going to cut this short. I have been having computer problems, and my computer is starting to act up again. I will return in the New Year. I hope that all of you had a very Merry Christmas, and will have a wonderful New Year.
Terence R. Wilken
Editor in Chief, RWWNL
October 30, 2003
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
September 17, 2003
Will We Change?
Well, I last left you with a thought. Are we going to have to change our life style in order to allow our economy and the world the ability to gain some breathing space? I for one think that we need to do that; but we have all become used to the good life. As an example do you realize that there are now more registered cars in America than there are licensed drivers? There is certainly something wrong with this picture. We have turned into a society that has learned to over indulge.
What can we do? Well the first thing that must be done is to look at ways to save on the need for automobiles and energy. The first place to start is right here in my home state. Let me explain.
A study has been done in the Oklahoma City area where Interstate 35 has been under construction for what seems like forever. They have determined that there are more people that are involved in accidents (some of them fatal) than on other sections of I-35 that are not under construction. They also determined that the construction also added to drive times and gasoline consumption. I do not know how much they spent on this survey, but I could have told them that this would be the case without their having to do all that research and analysis. But then those in California had over 100 candidates for governor. Go figure!
Another study was conducted on all of Interstate 35 between Oklahoma City and Dallas Texas. Major construction is currently underway on many miles of this highway system. It was determined that the busiest weekend of the year for this stretch of Highway occurred during the Oklahoma Texas football game held each year. The contractor is trying very hard to have all lanes open for this occasion. In order to insure that this occurs, the state built into the contract a penalty clause. They will fine the contractor $5,000 per lane mile that is not open by the time that the game is held. Now for those who think that this is not enough to pay by the money hungry contractor, one must add the final part to the contract agreement. The fine will be assessed for each hour of the weekend. Now that is an incentive.
The reason for this analysis is to present my idea of dealing with the energy crisis as well as saving our economy hundreds of millions of dollars and lives as well. We need to shutdown all football stadiums. Oh, the games could still be played: but they would just not have to be held in stadiums anymore. Everyone could watch them on television. Can you imagine the savings that would be involved? It would even save all our cities the costs of having to build new stadiums. The games could be played on any patch of grass that would allow enough room for the TV cameras. Most of us have to watch it on TV anyway, so this idea would only inconvenience the minority. That has always been the fair way to do things in our society, and it feels good, so it must be a good idea.
All of this is to show what our country has become. We had a huge bubble in the 90’s building a technology back bone for all of us to enjoy. The only problem is that not enough of us bought into it. Some of us made the decision that the lifestyle that we were used to was OK with us. We were happy with what we had. We did not need more. The bubble broke in our stock portfolio, Companies are having to contract, and now more of us will be in a position of living with what we currently have. Our lifestyle will remain static. Is this a bad thing? I leave it to my readers to answer that question.
Terence R. Wilken
Editor in Chief RWWNL
August 25, 2003
So Much to Worry About
Well Alan may not have had enough money, but Europe and Asia certainly did. The dollar is recovering nicely. All of those dollars must be able to buy something, but not at the expense of their own markets. Now if only the American populace can continue to buy their goods. That is certainly the question of the day. The foreign countries are buying dollars as fast as Alan can print them. Can they buy bonds at the same time? There is certainly been a lot of market manipulation occurring, and now it has spread to other countries. We must all protect our own.
The stock markets are certainly having their ups and downs. Can anyone truly predict where they will end up? It would be like picking numbers for the lottery. The equity experts are telling us that the markets are coming back, and will be up big time by the end of the year, and that will only be the beginning. One wonders where all the growth is going to come from. There is only so much that we can spend our money on. The money necessary to heat and cool our homes, and to drive our automobiles is going to take priority over all other expenses if the price of energy continues to rise. And remember we must still put a roof over our heads, and have enough left over to feed and clothe ourselves. Will we have to quit buying all those other products from overseas?
Some Thoughts on Energy
A large gasoline delivery line failed in Phoenix, and the price went ballistic if one could even find enough to fill their car. The line that failed only provided 30 percent of the needs of the city. The lights got turned off in New York and parts west, and you would have thought it was the end of the World. We must find the party to blame, and fix it immediately. We have not and will not learn to conserve energy. If it is hot, turn on the air conditioner. If it is dark, turn on the light. And if you go into another room, turn on that light too. If you need a pack of gum, than drive to the nearest grocery store (five miles away) and get it immediately. Your children need their own vehicle, and have the right to go any where they would like. We have the right to use all the energy that we want to use. What will happen when we start to run on empty? We will just have to invent some other way. There should be no reason that we do not have the energy we need to do whatever we want. If there is a problem, than we shall just find the guilty party and make them pay for it. There ought to be a law!
Of course all of this is to be blamed on deregulation. If we had not given the energy market over to private enterprise, all would still be OK. Those greedy people did not build us enough power plants, and did not upgrade the power distribution system. They just wanted to make more profit. We need someone’s head. What we should have done was to have let the government do the regulation for us. Then the incident in New York would never have happened. That way the government could have made the money off of issuing the permits, and getting the land to install what was required. They could have even been involved in the building of the plants. Cost would have been no object, as I am sure that they could have printed enough for a few power plants. Of course we cannot have nuclear or coal fired plants, as they would be too dirty. The government could make all the right decisions for us. We need to get the government involved, and it will be all right again. That is the ticket.
As a kid, I remember growing up without air conditioning. We did not have a TV, and only one car and telephone. We did not know the difference. Will we have to go back to that? Let us think on that one.
Terence R. Wilken
Editor in Chief RWWNL
August 7, 2003
Troubled Times Ahead
So what is going on in the bond markets? Is there something wrong with the money policies that we know and love? We are in for some interesting times. The government is trying to borrow money to help pay off the deficits, and the bond markets are telling them that if they wish to have more to finance their follies, that they will have to pay for the privilege. Does that not sound like the banker that you know?
The only problem is that this will also affect the long term borrowing of everyone else. It is already becoming harder to obtain good financing to buy a home, and this will mean that fewer home seekers will be looking at homes for sale. If you have to sell your home in a hurry, the only choice will be to lower the price in order to attract buyers. Home values may start to trend down. How will this affect your neighbor? He does not want to sell his home, but would like to borrow on it in order to install that new swimming pool. He finds out that not only has the value of his home has gone down, but now it will cost him more to obtain financing. What a tangled web we weave. Things do affect each other.
The markets also appear in trouble. Could they be affected by the same malady? It would not surprise me. Let us just put another log on the fire, and sit back for a long winters snooze. That would fit right in because by this winter we may not be able to pay for the gas to heat our homes. We may not even be able to go to the gas station to get the fuel to power our chain saw in order to cut the log to put on the fire. The price of oil and natural gas is starting to increase at a time that we can least afford it. What are we to do?
What is happening in the markets could impact all of us. It could even impact the two biggest sources of money that fueled the housing boom. These two sources are Fannie Mae, and Freddie Mac. I have been asked several times why I am so interested in these two institutions. Well now I will answer that question. In their own way they were following the policies of Enron before Enron thought it was the right thing to do. They were given the task of making housing affordable to everyone, even those who did not have a sound financial footing. This meant that they took big risks with their money. Of course they did not worry as they were backed and supported by the faith and credit of the federal government. They did however hedge their risk in several ways. Not only to protect themselves in the case of default, but also in the situation of rising long term interest rates. The method of hedging took the form of establishing derivative positions in the markets. Where have we heard that word before? The only problem is that it is hard to protect yourself in the case of a rapidly falling bond market. The situation occurring now could bode ill for them and for all of us.
Now for the real reason! My son is a professed democrat. I am not affiliated with either political party, but I will say in his defense that we certainly agree on a lot more that we disagree on. About two years ago he was telling me about the evils of the free market system. I told him that we had not seen anything yet to match what our own government policies could do to us. I told him that within the next three years that Freddie Mac, and Fannie Mae would make the private markets look like kindergarten children. I still believe that. There were certainly a lot of people that were hurt by Enron, WorldComm, and many other free market Companies. The sad part is that if these two financial powerhouses go down, it will be all of us that get to pay for their errors. I wonder who is auditing these two Companies. That could certainly give us some advance warning.
Well I certainly hope that Alan can print enough money to bring down long term interest rates, make the dollar strong again, create another bubble in the equity markets, and take care of all the other ills that are currently affecting us. After all is it not the government that is supposed to take care of all of us? We have almost forgotten how to do things for ourselves.
Terence R. Wilken
Editor in Chief RWWNL
There is a new sheriff in town, and the rules have changed. The policies of Clinton and Rubin are no longer in vogue. The dollar must go down. It is now time for America’s companies to be the providers for the World. We must stop the massive purchases of products from the foreign markets. Mr. Greenspan has spoken, and we all know that when Alan speaks, the markets listen. He has reduced rates again, and his Fed has told us that he is prepared to take interest rates to 0% if necessary in order to get the economy moving. Remember that when a country reduces interest rates, it makes its currency weaker. You raise rates to make your currency stronger. For proof of this, just check out the strength of South Africa’s currency, the Rand. South Aftica’s version of the “Fed” has raised their interest rates to over 10%, and the Rand has increased in value by over fifty percent. The result has not been good for their economy, but then they do have a strong currency. Being king of the hill certainly makes you feel good.
Remember that I told you that the Chinese have pegged their currency to ours in order to be in a good position to continue to sell to us no matter what we did to stifle the trade deficit. Most of the rest of the currencies trade free, and rise and fall is based on the strength or weakness of the local economy. We are currently doing everything in our power to get the Chinese to revalue their currency, and the way we want it to go is UP. We must get them to play fair.
The only problem with trying to devalue our currency is that it has created a new environment for all currencies. As you can imagine, the foreign economies do not want to have the dollar get weaker. That would make their goods more expensive to the American consumer. Their Companies sales would be reduced. The battle lines have been drawn. We will not have a War to see which Country can have the cheapest interest rates. Before you know it, the Fed will be paying us to borrow money. The Japanese have even taken to purchasing the dollar to keep it strong. There is one twist to all this. The longer term rates have been rising as the short term rates have been reduced. They have been running counter to each other, and will probably continue to be contrarian.
What does all of this bode for the equities markets? This all depends on who wins the currency race. If the American economy is successful in devaluing the dollar, the foreign markets will not pursue the dollar as the currency of choice. The money that we provide them will not buy as much, and they will exchange it for another currency. They want to exchange the dollar for their own currency so that they can purchase material and labor in their local economy. This makes their currency stronger. These transactions make their goods more expensive to the American consumer. Less is bought. They now do not have the dollar to invest in the American economy. This does not bode well for the markets or the bonds that are needed to fund a growing economy. What is a Fed to do?
Remember when it used to take one income to provide housing and food for a family? This no longer applies. It is now required that both parents work in order to have a comfortable lifestyle. Will we ever return to the good old days? It is doubtful.
Terence R. Wilken
Editor in Chief RWWNL
July 21, 2003
More Thoughts on the Markets
Well, the markets are going up, and the dollar is holding its own, so everything is all right with the world again. Alan has lowered rates one more time, and we are awash in money. So why then are the treasury bonds falling and their long term interest rates going up? It must be that the bond players do not think that interest rate reduction at the short end is the best solution. We will have to see how this plays out. Remember that if the long rates go up, that interest rates on new homes, and refinancing will also go up. If this occurs, we will have a harder time to borrow in order to keep the economy going, and home ownership will be harder for those looking for new homes. That would not be a good thing!
Our homes are one of the last bastions of wealth available. As some of the talking heads told us, our 401K’s turned into 201K’s, and a significant part of our wealth left us. We can not afford for our homes to do the same thing to us. Is it possible that the housing bubble could break? Well if history is any lesson, yes it could. If long term rates continue to rise, it could happen again.
The readers of the RWWNL should know what is happening with our lending institutions. Freddie Mac, and Fannie Mae were in the headlines recently. They are publicly traded Companies that are supported by the Federal government. Their mission is to provide low cost loans to those who are in need of a new home.
Surprise! It was determined that they were cooking the books. At least that is what they would have us believe. They even got rid of the culprits that did the dastardly deed. Apparently, their revenues were simply mis-stated in years past. This led to a lot of consternation on Wall Street for a few days. Then it was announced that their revenues were actually under reported. They actually made more money than what they had announced. Everything is now all right in the markets again.
The truth of the matter is that the revenues were purposely reported in this manner. If they can borrow long term money at 5 percent, and loan it to you at 6 percent, than they can make money. What if they loan it to you at 5 percent and have to borrow at 6 percent in order to lend you the money? Then they lose the interest rate bet. They must hedge their bet. They have to deal in derivatives. I know you have heard about derivatives before. These two companies actually made money on these transactions. Rather than report it, they stashed it away on the balance sheet to have a cushion in case they lost their bets in the future. Now thanks to the regulators, they have no cushion. Rather than stop them from “gambling”, they just made them report the winnings. What will happen if interest rates increase significantly? Well I for one would not like to be holding these stocks. We must keep long term interest rates low. The only problem is that no federal agency can do anything about long term rates. They can try to buy all the long term treasuries, but that would create even more troubles down the road. Oh well, I guess Alan can bail us out again. He could purchase more presses for the making of money. That is certainly the solution for all our ills.
Have you seen the projections for this year’s U.S. trade deficit? It is expected to be ~$494 billion. This is in addition to the newly announced federal deficit of $455 billion. … But of course if you listen to the right talking heads, you will understand that it is nothing to be concerned about. After all, we are the world’s strongest country, and it is not a problem for us. Even being the biggest and best, how many Ω trillion hits can any country take? I guess time will tell. One thing that we know for sure is that the economy should perform well until next year. It must be in good shape for the election.
Until next time.
Terence R. Wilken
Editor in Chief RWWNL
May 26, 2003
Loving the Dollar
Have you hugged your dollar today? It is certainly in need of one.
A very important question to ask is why did we establish a strong dollar policy. The answer to that question is directly related to the election cycle, and how it became possible for Bill Clinton to win two elections. It is the economy stupid! That became the mantra that would gain him the votes necessary to win a second term. How did he make this happen? How did he make the economy appear as if we were in the 1920’s again? As I have explained before he installed Robert Rubin to be in charge of our economy. Mr. Rubin took the position that what the US needed was a strong dollar policy. To most of us, that sounded like a very good idea. Everything in America should be strong.
What did this policy have to offer if we could establish it? The first thing that occurred was that it kept inflation in check. With a strong dollar, foreign goods were cheap. How many remember the dock workers strike in California this last fall? I can remember many of the newscasters telling us that it would be a hard Christmas for our children, as their favorite toys would not make it to the stores. I guess that Santa has moved to Asia.
The second affect of the policy was that interest rates could be kept low. Without inflation, there was no reason to raise rates. This allowed us the ability to spend. We had a source of cheap money. We could have whatever we wanted. You can have your cake and eat it too.
The third affect was that it made the stock market go up. All the dollars that we were sending overseas had to find a home. The easiest place they had to send that money was to the American markets. Money was invested in our treasuries, which continued to keep interest rates down, and in our stock market to generate the bubble that occurred in the 90’s. The ironic part is that when vast sums of money are thrown at anything, they have a tendency to become very inefficient. For an example of this, just look at our congress!
Now it is time for us to reap what we have sowed. The go-go years have passed us by. It made Bill Clinton a two-term president. Are we happy now? Remember the surpluses of our government that would go on for as far as the eye could see? Now we have budget deficits that will do the same. Truth be known: We never had surpluses, and if by chance if we had, I am sure that the government would have found a way to spend whatever additional capital that they could find. They have never found a spending program that they did not like. What is the amazing feat, is that many have been told and actually believe that if we had kept Bill Clinton for a third term, that we would still be in surpluses. It is only because George Bush is President that we now have deficits. It is amazing what our politicians can talk us into.
Was the strong dollar policy a sound policy? I guess I will leave that to the historians to let us know. Any policy that has to be coerced in order to exist is not one that will survive for long. It now appears that we will have to live with a weak dollar policy. A lot of talking heads are trying to put the correct spin on the change. One thing for sure is that if the dollar continues to weaken, our goods will become cheaper for the foreign markets. Maybe we can see if we can get our manufacturing plants back. That might be good for the employment situation. Let us hope that the foreign economies can find enough of their own capital to buy from us.
Until next time …
Terence R. Wilken
Editor in Chief RWWNL
Editor’s Note: As the Iraq war winds down, our attention returns to the state of the economy. The American government is spending enormous amounts of money outside the United States, despite the fact that its stock market is falling and unemployment growing. How is this possible?
It is a MAGIC trick made possible by The Federal Reserve. If you don’t know how the Federal Reserve works, you won’t understand the forces that are presently controlling our lives. This 40 minute film from the Von Mises Institute explains it very well. It is an 80 megabyte file so if you have a slow connection, you might want to download it first, and watch it later.
April 18, 2003
War, Markets and the American DollarDid you notice how the markets followed the War? Whenever we advanced another 20 miles, the markets went up. When a firefight or a sandstorm stalled us, the markets went down. Amazing how that worked. Well, I guess now we will have to go back to the old fashioned way of checking the markets. We will have to see if the Companies represented are actually making money. That will certainly be a lot more work.
Now that the War is over, the dollar should be heading up. The Iraqi oil will now be sold in dollars again. It can return to reserve currency status. Did you notice that millions of dollars were sent to Iraq in order to pay the locals for cleaning up, providing markets, and getting the utilities turned on. Of course the cost to furnish all this money did not really cost very much. After all the Fed can print as much as it will take to repair the Iraq economy and get it going again.
The only problem is that the dollar has started down. It is now below par with the Euro. Will it continue to fall? Only the Fed, the ESF, and the PPT really know the answer to this one. Did we win the war, only to lose the dollar battle? It now appears that Indonesia has decided to start pricing oil in Euros. Will the rest of Asia follow? They do not think that the dollar is a stable currency, and they wish to use another to buy their products. This would not bode well for the dollar.
ìAccording to news reports, the pension plans of America´s 100 largest corporations are in deficit to the tune of $157 billion after showing a $183 billion surplus in 2000. That information is according to Milliman USA, a benefits consulting firm. This would not be serious, except for the fact that these same corporations will now have to take cash out of their earnings to insure that these benefits will be available to their employees. What do you think this will do to their price/earnings ratio?
Unemployment is up. Companies are not in a position to hire. Again to repeat myself, there is no inflation. That is of course if you remove food and energy, which are too volatile to be in the basket of goods that the government uses to gage inflation. Have you been reading the news about American Airlines? All three unions voted to cut their wages by up to 20%. If we have fewer workers making less money, than how are we going to continue to be the economic engine of the world. I guess that we can go and buy another car, as they now have 0% interest for 5 years. The only catch to that is that Ford has had almost 30% of their sales returned because the buyers could not make the payments. I guess that they will have to borrow from the fed. They always seem to have plenty of money. The only thing that continues to go up is housing. I guess, that we can slap on another mortgage, and head to the malls.
That is what I intend to do.
Terence R. Wilken
Editor in Chief RWWNL
Download Money, Banking, and the Federal Reserve (40 minute video from the Von Mises Institute). Visit the Von Mises Institute.
March 16, 2003
The War is Over!
The markets have spoken. Thursday the markets told us that all is OK in the world. Dow UP. Nasdaq UP. S&P UP. Dollar UP. Gold Down. Oil Down. The War must be over. All the talking heads have been telling us the only reason the markets have been going down is because of the Iraq pending War. When the War has begun and is over which will be very quickly, the markets will return to their normal upward trend. Did you not hear that once the War begins, that the Iraq military would all surrender? We have completed our work behind the scenes.
Of course if all this changes on Monday, than we will have to start over. We will have to get back to taking the markets where we want them. The American economy has been the engine that has kept the rest of the World in production. We established the strong dollar policy. We have been buying the World’s goods. As long as the markets were going strong, it allowed the American people to feel that they had enough money in reserve to buy all that they wanted.
As you now know, once it was determined that most of the stocks that were going up were no more that a house of cards, the markets headed south. It now became necessary to lower interest rates in an attempt to reverse this trend. It did not work in the markets. It had another affect though. It made it possible for us to refinance our homes. This could now be done at much lower interest rates. It has allowed us once more to continue being the economic engine for the World. We are doing in on the equity that we have built in our homes. Is it not heart warming to know that we have all this economic power?
Normally with the reduction in interest rates, this would have reduced the value of the dollar. Luckily for America, the rest of the world is also in an economic mess. Japan has interest rates close to 0%. Their banks are close to insolvency. They have non performing loans on their books, but they keep holding out the hope that they will receive a payment some day, so they are not reporting them. Several of the European economies are also going through a financial quagmire.
China is also having some growing problems of their own. They have become the producer of the world. Their labor rates are among the cheapest in the World, so they can produce the goods for the World. As their economy grows, this will lead to higher pay for their people. They also need low interest rates in order to finance their growing economy. They will need more energy in order to continue being the production arm of the World. With all that they are doing, their currency should become stronger to the dollar. This would be the normal financial result to one way trade. We are sending them dollars for goods, and they are not buying from us. They have to use our dollars in order to buy the energy they need to maintain production. So why is this not happening? The reason is that China has pegged their currency to the dollar. If the dollar goes up, so does their currency. If the dollar goes down, so does their currency. They have built in the best for their continued trade with the US economy. They do not let their currency float like most of the rest of the currencies of the World.
We must keep the dollar strong above all else. That is the current economic policy. Since it has now being bantered around that the Fed is now going to lower interest rates even more in order to keep the American engine going, it will be interesting how this all plays out in the “World of Ought to be“. Now where did I hear that before?
Remember that it is important that you all keep spending. It is important to the World. It will be interesting to see how this all plays out in the current World situation.
Until next time,
Terence R. Wilken
Editor in Chief RWWNL
March 08, 2003
What about the Euro?
Now that you have learned how to keep the dollar strong, it is important to see how this fits in with the rest of the world. The strong dollar made Japan, China, and many other Asian countries very happy. They were able to build up their country by having companies that could easily sell into the American economy. It helped them weather a potential downturn in their economies. They shipped goods to America in exchange for American dollars. The problem they had was what to do with the dollars that they were accumulating? The best choice at the time was to invest those dollars in the American stock market. After all, it was on its way to new highs, and there was no end in sight. This of course was thanks to the Fed cranking up the printing presses and creating more dollars to keep this scheme going.
It also became smart for American companies to send their factories overseas. That way they could take advantage of the weaker foreign currencies in the manufacturer of their goods. This was especially true of the horrible energy business. We could send our refineries overseas so that we did not pollute here in the USA. We would just allow the pollution occur in other countries so that we did not have to see it. That way gasoline could just magically appear in our gas tanks when we wanted to go somewhere.
As Yakov Smirnov would say: WHAT A COUNTRY!
How many of you remember the Canadian lumber industry? The strong dollar policy made their products cheap to us, but our products expensive to them. This is the curse of the strong dollar policy. Remember when Canada started shipping its pulpwood into the US at a price much less expensive than we could supply it here? This created a major fuss. How dare they do that to our pulpwood industry. Well the government heard the cry and came to the rescue. They slapped a tariff on the Canadian suppliers of wood, and now it was ok. Of course the only thing that actually occurred was that the homes being built were now more costly here in the US. Of course that is all right because housing prices always go up.
Alan Greenspan saw what was going on and decided that he could do something about it. Remember his irrational exuberance speech? Well he decided that the answer was to raise interest rates in order to bring the stock market back to a more rational level. This would normally work, but remember what raising interest rates do to the dollar? It makes it stronger. This made foreign goods even less expensive. The response in the stock market was to keep going up. So like applying anti-lock brakes, he kept pushing down harder. It finally worked. In fact it worked so well, that the stock market started down in a big way. When the market started down, investors actually started looking at the markets to see if the stocks were really worth the value. Then selling started in earnest. Alan got his wish.
When Alan saw what he had accomplished, he had second thoughts. He looked at what he had done, and was not happy. He then decided to start pushing on the gas pedal. He now wishes for irrational exuberance to come back. After all it kept the citizens of the US spending. With a full portfolio, they felt safe to continue buying. He decided that lower interest rates would boost the markets, and make things all right again. The only problem is that is has not worked yet. Remember what happens to the dollar when you lower interest rates? Its value to other currencies goes down. This leads to the importance of keeping inflation low, and productivity up. It is also important to get the other economies of the world to lower their interest rates, as this will help to keep their currency in par with the dollar. We must make the markets strong, and still keep the dollar strong. Oh what a tangled web we weave. Happy printing.
The strong dollar also creates another benefit for the US economy. It becomes the reserve currency for world trade. This means that if you live in a foreign country and want to buy certain commodities then you have to purchase these items with dollars. Oil and gold are two of these items. How do you get dollars in order to buy these items? You either have to sell to the US, or you have to exchange your currency for the dollar. This helps to create a demand for the dollar in world trade. The interesting part of this is that if the dollar continues to strengthen, it actually makes oil cheaper to buy in America. Of course the opposite is also true. If the dollar weakens, it will make oil cheaper to buy in other countries.
What happens if the oil producing countries start selling their product in a different currency? Well, we may just find out. Over two years ago, Iraq started selling their oil in exchange for the European euro. There is a rumor that several of the other Opec nations are considering the same thing. This was done by Iraq in order to rid them of the evil empire. The interesting part is that the Euro is taking on strength against the dollar, and the decision Iraq made is turning out to become a good financial decision. If other oil producing nations do the same thing, it will really hit hard at the strength of the dollar, and make the Euro take on strength. This we cannot allow. Need I say more?
Until next time.
Terence R. Wilken
Editor in Chief RWWNL
February 28, 2003
Keeping the Dollar Strong
I have been on a sabbatical for the past few months for both personal and business reasons. Now I am back in the saddle. It is important to come back in order to bring you up to date on the latest financial dealings that we are confronting today.
Have you got your free money yet? If not, it should be in the mail shortly. Currently anything that you want to buy can now be obtained with no money down, 0 % financing, and no payments for three to six months. Now it gets even better. Your credit card will provide you with free money for the next three months. Yes, it is true. I recently took advantage of it. Money is so cheap that now it is free! The only catch is that if you do not pay it off in three months that it starts accruing interest at your current rate.
This issue will deal with the strength of the dollar. How many of you remember Bill Clinton, Alan Greenspan, and Robert Rubin? They ran the universe of the monetary world through two presidential cycles. Rubin’s view of the world is if you created enough money, and turned the American economy into the World’s largest buyer, that all would be well with the USA. That involved creating a situation that would make American goods expensive to other nations, and their products cheap to us. He performed this magic in many ways.
The first order of business is to raise interest rates. This creates demand for the dollar, and thus makes it more valuable than other currencies. This makes the other currencies weaker which makes the products that they want to sell a better buy than the same products made here in America. This starts the American engine to create an economy that is one that will keep the other economies of the world producing.
The second order of business is to create an economy that creates jobs. It does not matter what kind of jobs, as long as they pay well. You do not want to create anything tangible as you can no longer sell it. Remember that foreign goods are cheaper for us to buy. So you create the dotcoms. Everyone will want a computer, and it will revolutionize the world. No one ever thought that people would tire of spam and popups, and just go back to playing solitaire and hearts on their computers.
Third, we needed to lower interest rates in order to make it more valuable for the investors of the country to put their money into these ventures. They needed a lot of cash to build a vast network to provide this dream to the American economy. Alan Greenspan comes in on his white horse and accommodates Mr. Rubin. After all he is in charge of the total money supply, and can print as much as is needed.
Now comes the balancing act. Remember that if you lower interest rates, that it has the effect of making your currency less valuable. In 2002, we sent close to 450 billion dollars to foreign nations to buy goods, almost 1/3 of that to China. How do we get them to want to send it back to us. We must get them to invest in our economy. In order to do that we must show that we have no inflation, and that we are more productive. Remember that it is the government that tells us what the inflation rate is, and they can change the basket of goods to “remove” the volatile goods. If it is food and fuel that has gone up in price, than let us just remove it from the formula.
To show that we are more productive we have two options. If we can ship some of our manufacturing overseas where the labor is cheaper, we can produce more widgets at the same cost. If we can make a computer faster at the same price, it is now more productive. Remember that it is the government that tells us what the increase in productivity is.
That is enough for now. I will be back again soon. Just remember to keep your powder dry. You may have a need for it.
Terence R. Wilken
Editor in Chief RWWNL