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“Outlier” Scenarios

April 19, 2007 by  


By Bob Wood, Muslim Media News Service (MMNS)

Whether you adhere to the analysis of the economy or markets coming from the Bulls or the Bears, you would be wise to hear both sides as they prophesy the future — and be prepared for either scenario. Seldom do we take the time to consider the least likely possibilities and what they could mean for us. Such “outlier scenarios” happen more frequently than we think, and when they do, those with money at stake stand to gain — or lose — much.

One currently debated outlier scenario that is more than likely to occur is the bleak outlook for the value of the U.S. dollar. Personally, I wonder how anyone can argue with the very long-term, negative track record of its purchasing power. U.S. currency has steadily lost value since the inception of the Federal Reserve in 1913, and that looks like a rather strong and durable trend to me!

What is now hotly debated is the severity of the continuation of this trend. Numerous ‘dollar bears’ seem quite sure that “we haven’t seen anything yet” regarding the sinking value of the dollar. Several weighed in this past week with their prognostications. And while their outlooks portend very nasty results for our dollar-based economy, you can do much to prepare yourself for the worst case possibility, if you choose to believe their views.

One warning about today’s high rates of inflation, which, essentially, is today’s topic for discussion, comes from the highly regarded John Williams, who oversees the shadowstats.com web site. Williams has gained a large following based on his ability to read government-supplied economic reports and decipher the truth in them. Such details are not widely publicized in a financial media intent on covering only the headlines of each report.

Using statistical methods for calculating the true rate of inflation (those actually used by the government in the 1980s), Williams calculates the 2007 true rate of inflation at close to 10%. He believes that if the government continued to provide information on the growth of the money supply, we would be shocked at how fast the printing presses are running. One estimate shows as much as $3 trillion in new money added to the U.S. financial system in the past 12 months, in an effort to flood the system with liquidity and keep credit widely available.

For comparison, doing a web search on what is happening now in Zimbabwe or Venezuela due to high rates of inflation is enlightening. A recent article in the Financial Times reports that inflation in Venezuela has been running close to 20%/year for the past eight years. And this actually represents an improvement over the preceding period!

“The scarcity {of consumer products} and inflation mean that as soon as you drive a car off the lot, it immediately goes up in value,” the article relates.

Imagine that, which, of course, has much to do with how rapidly the currency is losing its value.

Meanwhile, Williams continues:

“My fairly crude definition of hyperinflation is a circumstance where, due to rising prices, the largest pre-hyperinflation bank note becomes worth more as toilet paper/tissue than as currency. With limited physical cash in the system, existing currency would disappear quickly as hyperinflation broke.

“With standard currency and electronic payment systems non-functional, commerce quickly would devolve into black markets for goods and services and a barter system. Unlike Zimbabwe, the United States does not have widely available, for circulation, a back up currency for use in place of a highly-inflated domestic currency. The alternative here is in traditional monetary precious metals. Gold and silver both are likely to retain real value and would be exchangeable for goods and services. Silver would help provide smaller change for less costly transactions.

“Other items that would be highly barterable would include bottles of good wine or canned goods, for example. Similar items that have a long shelf life can be stocked in advance of the problem, and otherwise would be consumable if the terrible inflation never came.

“A note of caution was raised once by one of my old economics professors who had spent part of his childhood living in a barter economy. He told a story of how his father had traded a shirt for a can of sardines. The father decided to open the can and eat the sardines, but he found the sardines had gone bad. Nonetheless, the canned sardines had taken on a monetary value.”

These viewpoints present good cases for holding precious metals — rather than canned fish. Gold and silver have held value for centuries, regardless of changing economic circumstances.

Yet another view comes from Mike Whitney, and was posted on several web sites. His article begins with these sobering words:

“The American people are in La-la land. If they had any idea of what the Federal Reserve was up to they’d be out on the streets waving fists and pitchforks. Instead, we go our business like nothing is wrong.

“Are we really that stupid?

“What is it that people don’t understand about the trade deficit? It’s not rocket science. The Current Account Deficit is over $800 billion a year. That means that we are spending more than we are making and savaging the dollar in the process. Presently, we need more than $2 billion of foreign investment per day just to keep the wheels from coming off the cart.

“Everyone agrees that the current trade imbalances are unsustainable and will probably trigger major economic disruptions that will thrust us towards a global recession. Still, Washington and the Fed stubbornly resist any change in policy that might reduce over-consumption or reverse present trends.

“It’s madness.

“The investor class loves big deficits because they provide cheap credit for Bush’s lavish tax cuts and war. The recycling of dollars into US Treasuries and dollar-based securities is a neat way of covering government expenses and propping up the stock market with foreign cash. It’s a ‘win-win’ situation for political elites and Wall Street. For the rest of us it’s a dead-loss.

“The trade deficit puts downward pressure on the dollar and acts as a hidden tax. In fact, that’s what it is–a tax! Every day the deficit grows, more money is stolen from the retirements and life savings of working class Americans. It’s an inflation bombshell obscured by the bland rhetoric of ‘free markets’ and deregulation.

“Consider this: In 2002 the euro was $.87 on the dollar. Last Friday (4-6-07) it closed at $1.34– a better than 50% gain for the euro in just 4 years. The same is true of gold. In April 2000, gold was selling for $279 per ounce. Last Friday, at the close of the market it skyrocketed to $679.50—more than double the price.

“Gold isn’t going up; it’s simply a meter on the waning value of the dollar. The reality is that the dollar is tanking big-time, and the main culprit is the widening trade deficit.

“The demolition of the dollar isn’t accidental. It’s part of a plan to shift wealth from one class to another and concentrate political power in the hands of a permanent ruling elite. There’s nothing particularly new about this and Bush and Greenspan have done nothing to conceal what they are doing. The massive expansion of the Federal government, the unfunded tax cuts, the low interest rates and the steep increases in the money supply have all been carried out in full-view of the American people. Nothing has been hidden. Neither the administration nor the Fed seem to care whether or not we know that we’re getting screwed — it’s just our tough luck. What they care about is the $3 trillion in wealth that has been transferred from wage slaves and pensioners to brandy-drooling plutocrats like Greenspan and his ne’er-do-well friend, Bush.

“These policies have had a devastating effect on the dollar which has been slumping since Bush took office in 2000. Now that foreign purchases of US debt are dropping off, the greenback could plunge to even greater depths. There’s really no way of knowing how far the dollar will fall.”

And let me remind you that the same team of people who oversees our economy also runs the war in Iraq! How does that make you feel about the preceding commentary?

Yes, these views are extreme and will be enthusiastically rebutted by a long line of promoters in government and the financial media. These folks will, no doubt, assure us that the Fed and the Bush team are doing a great job on fiscal policy. And why would they lie, right?

Here’s my investment tip of the week: add precious metals to your investment portfolios, and consider holding some of the metals in their physical forms of small coins and bars — just in case. The worst that can happen — if inflation reverses back to more manageable rates – is that you will own some assets with an unparalleled track record for maintaining value and which are redeemable around the world.

But if the thinking presented here is right, acting now could make a big difference in your ability to cope with massive devaluation of the dollar, which, I believe, is as sure as any other scenario out there. The only questions involve the timing and speed of the decline.

So it goes.
Have a great week
Bob

Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., invest@muslimobserver.com.

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