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Greece, The Canary in the Coal Mine!

Market View March 12, 2010

I’ve written many times about the dollar and how Washington’s full assault on the taxpayer will continue to devalue the dollar, crumbling the finances of unsuspecting and/or unprepared citizens.  Without the “healthcare” bill which should put a final nail in the dollar’s coffin, the national debt is estimated by the Congressional Budget Office (CBO) to double from the beginning of 2009 thru 2014.  In itself, that should cripple the dollar – now add trillions more with a rushed and largely unknown healthcare bill, we will certainly be staring at much higher interest rates and a falling dollar.

Just a little more than a year ago we, as a nation, held a staggering $9 Trillion in debt.  It is now over $12.5 Trillion and multiplying.  With interest rates so low, we are only paying an average of about 1.6% or $200 Billion dollars this year in interest.  If interest rates rise to just a 5% average, the United States will use almost 1/3 of current tax revenues on interest alone.  Add in Medicare, Social Security, and Defense, and we will run about $1 Trillion a year deficits without spending a dime on healthcare or any other project.

I say that “Greece is the Canary in the Coal Mine” because it is the first of the developed economies to suffer a sovereign debt crisis.  We’ve seen it in post World War I Germany, in Latin America and even in Asia, but Greece is the first of the developed nations.  It is spreading to Madrid, Lisbon, and Dublin, Great Britain has already lost their AAA debt-rating and Italy is in much worse shape, but in no way must this contagion be limited to the weaker euro zone countries.   At least for now, America’s day of reckoning still seems reassuringly distant, but this is a currency crisis of the entire western world.  All have overspent and must make amends and it would behoove us if our government would recognize the problem and do something about it now!  The longer these “D.C. Good-time Charlies” party, the more painful the day of reckoning (see Greece today).

Two Choices:

Most pundits say there are only two choices: One choice is for our government to continue with the excuse du jour spending and watch our currency and the American way of life disintegrate.  The second choice is for the government to slash spending to the bone (not likely unless we become Greece), paired with much higher taxes.

In the case of the choice ‘A’, we can invest in hard asset companies whether they own minerals, farmland, or other; and we can invest in companies selling goods to thriving markets like China, while we avoid holding too much cash.  This is our current position and I expect that it will insulate us from the devastation that our friends and neighbors might endure, but the nation’s living standard would be lowered significantly.

As for choice ‘B’, it must come from less spending – you cannot raise taxes to solve the problem.  Today’s society is too mobile.  Just as New Yorkers fled the state when taxes were raised and California businesses relocated to Texas to escape higher taxes, today we have attractive choices around the globe.  Wealthy individuals and job-providing companies will simply choose to live elsewhere if taxes are raised.

But those two paths are not all; there are answers…

First, we should effectively roll-back Bretton Woods.  After WWII, nations came together to establish currency pegs to the dollar at a conference at Bretton Woods.  That lasted until Pres. Nixon was essentially forced by France’s hoarding of gold at the United States expense, to end the convertibility of the dollar to gold.  With that event, the western world no longer had anything restraining them from printing as much of their own currency as the world would tolerate and since the world was in a 20-year expansion (1981 to 2000), no one complained.  Governments became use to running deficits and debt accumulated.  Bretton Woods favored developing countries, but that was okay since they should be allowed to grow and prosper and ultimately it would be better for all – except now things must be tweaked again.

Not only must our governments quit expanding, but we should revalue currencies.  The dollar should no longer equal 6.8 Chinese yuan.  Probably 3.4 is a more appropriate ratio today.  Rather than our standard of living dropping enough to compete with Chinese manufacturers, let’s make the Chinese citizens richer overnight.  Other countries’ currencies should be adjusted as well.  We can adjust our currency in a coordinated manner with other western countries, or unilaterally.  We could do it in a number of steps or adjust overnight (probably the favored way if our government doesn’t double the cost and number of programs).  Social Security would rise thru its inflation adjustment, and those not already receiving it could wait a few more years.  Using myself as the example, people my age should not be eligible until age 70 rather than today’s age 66.

The currency adjustment would solve our real estate problem thru the corresponding inflation caused by a devalued dollar.  However, in the absence of a currency adjustment, there is still a simple solution to solving our real estate problem.  Allow foreigners to gain citizenship if they buy a piece of property here.  Let 3 million have fast-track citizenship if they buy a home or office.  Oversupply would evaporate in no time and both residential and commercial real estate would appreciate, virtually eliminating foreclosures and creating hundreds of thousands of jobs in the construction related fields.  With the new taxpayers, higher home values with the property taxes that go with them, and all the new jobs, the economy would take care of itself – and at no cost to the taxpayer! We could offer the same program to foreigners wishing to become citizens, at the rate of one million per year, from now on.  The construction business would have a floor and home ownership would provide the additional retirement savings that people have enjoyed for decades.  Caveat: banks may not be allowed to make “sub-prime” loans – there must be down payments and proof of the ability to pay.

The U.S. should immediately switch our vehicles to natural gas.  We are the Saudi Arabia of gas.  A gasoline gallon equivalent  of natural gas costs about 65 cents today.  The $2 savings versus every gallon of gasoline would make everyone richer, paying down debt and buying things here rather than sending those dollars overseas, much of which finds its way to people we must defend ourselves against.   The extra dollars circulating here, would have a multiplier of 5 to 10 times (hundreds of billions of dollars per year), creating all sorts of new opportunities, not to mention the jobs created in building the natural gas infrastructure.  Add the benefit of our trade deficit dropping to near zero if we use our own oil and natural gas, of which we have plenty – especially after auto conversions.

I could go on and on and perhaps you are thinking that I already have (real healthcare solutions, reinstitution of Sarbanes-Oxley).  Bottom line, I have given many scenarios an immense amount of thought and want to assure you that along with the many paths that I or others have postulated, I have developed and continue to refine investment scenarios for each.  I am not predicting the path, rather I am just preparing for the one that comes our way.  We will invest according to what unfolds.

I believe by taking profits on our longer-term bonds, we have both captured large gains and insulated ourselves from too many dollars exposed to devaluation.  Our infrastructure investments have paid handsomely, as have our other, more obvious hard-asset investments.  We are invested in companies selling to China and the Chinese middle class – the largest and fastest growing demographic in the history of the world.  Though I believe this will be the best course until the November elections near, I will watch for significant changes and adapt accordingly.

I hope you get out and enjoy these beautiful spring days (or fall days for those of you in the southern hemisphere).

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