FSO Editorials

Best Quotes of May 2006

by John Rubino, Dollar Collapse, June 5, 2006

Richard Benson, Benson's Economic & Market Trends
In order to fully understand what is really happening on the central bank front, Larry Summers is worth listening to, now that he is free of all the politics at Harvard. Mr. Summers who served in a series of senior policy positions - most notably as the secretary of the treasury of the United States - specialized in the currency markets. Indeed, he was "the man" who successfully engineered foreign central bank gold sales to help hold the price of gold down and make the dollar look strong!

Mr. Summers is now urging the poorer, smaller countries with excess dollar reserves, "to do something with them". Perhaps his advice is to sanction foreign aid, but I suspect he may be encouraging these smaller central banks to swap out of dollars early before the big banks do. This would preserve the real value of their foreign exchange reserves, and save the IMF a lot of money down the road for not having to bail them out.

Just remember, when someone yells fire in the movie theatre, you want to be sitting in the back row near the exit door, so you can get out before it's too late. Larry Summers has just yelled "fire".

Ted Butler, Investment Rarities
The very act of an institutional investor buying shares of SLV (because it causes the automatic purchase and removal of real silver from the market) has the singular and unique impact of making the fundamentals of the real silver market better. Normally, the purchase of a common stock may temporarily impact the price of any stock upward, but does nothing to improve the underlying company�s condition. With an ETF that buys the actual metal, the underlying condition of the metal is improved, in addition to the normal and temporary upward impact. As more institutions comprehend this important distinction and act on it, the effect could be profound.

Bob Chapman, The International Forecaster
We are already seeing a gravitational pull from the big producers toward and into the exploration stocks. It is far harder for a major to double in price from $30 to $60 than it is far an exploration play to run from $1.00 to $2.00. This is where the action will be from here on out.

Richard Daughty, the Mogambo Guru
And I am sure, absolutely sure, more sure than anything I have ever been sure of, and in fact, this is probably the single-most thing that I have been the most sure of in my whole horrible, wasted life, and that is that the decline of the dollar will NOT be "orderly." It will be abrupt and ugly. A quote that comes to mind, although uttered as a comment on people's lives, is "Nasty, brutish and short."

My Infallible Mogambo Reasoning (IMR) is along the lines of "Suppose I told you that your money would gradually and continuously lose a lot of its value. Maybe half. Or more. My intuition tells me that you would not be happy."

I pause to gauge your reaction, which ranges between homicidal anger and paralyzing fear. Exactly so! Then I go on to say "But that same intuition tells me that you WOULD be happy, very happy, if I told you that I knew of a way to let you keep all your wealth, and you would not lose anything!" Ha! I can see by that smile on your face that I was right!

So how to achieve this miracle of wealth-preservation? All you have to do is sell all your dollars and dollar-denominated assets today, before the dollar is devalued further! Then you'd like to stick someone else with the whole loss!

Dr Marc Faber, Gloom Boom & Doom Report
Mr Bernanke at the Fed has clearly said that the danger for the economy would be to have not deflation in the price of a fax machine or PC, but deflation in asset prices. And so I believe that he is a money printer. If I had been a university professor, I would not have let him pass his exams to become an economist. I would have said, "Learn an apprenticeship as a money printer."

John Law, WordPress
The spontaneous remonetization of the precious metals is a Nash equilibrium. What this means in English is that an ideal financial strategy for everyone on Earth is to buy as much gold and silver as they can, as soon as possible. The closest relative of remonetization is hyperinflation. But traditional hyperinflation is a relatively slow process. Remonetization, like any bank or currency run, is a panic. With modern financial networks to move money and the Internet to move dangerous ideas, a remonetization event can be almost instantaneous.

Chris Laird, PrudentSquirrel.com
A combination of unwinding the Yen carry trade and a serious drop in the value of the USD will just simply pull the rug out from under every major financial market that has benefited from the cheap USD and Yen.

I'm going to go out on a small limb and say we are looking right now at a gigantic world stock collapse. I don't like writing this, I get no fun out of writing gloomy financial analyses. It is still possible that these world market drops will be forestalled, but the end is nearing now for a world financial mania that started in Japan in the early 1990s with their ridiculous zero interest rates. As a matter of fact, the whole financial mania we are about to see collapse began in Japan in the 1980�s when they created their own stock and real estate bubbles that collapsed in the early 1990s.

It is going to be interesting to see what happens should there be a simultaneous precipitous drop in world stock markets of the order of 50%. I wonder if the USD is going to survive that. The last time there was a great world depression the USD was a flight to safety. This time, it could be just the opposite.

Clive Maund, CliveMaund.com
We are in the midst of the largest FIAT money experiment ever witnessed by an entire order of magnitude, and the first FIAT money exercise to be put to the test on a truly global scale. Hitherto, the political, economic and technological environment was not conducive to enabling such an incredible scheme to be successfully put into effect. To enable this required the presence of one hyper-economic power that also controlled a global currency and the velocity of capital movements made possible through modern communications technology. Another critical factor essential to enabling FIAT to be expanded without control was the destruction of the gold standard on which the value of all issued paper money was formerly based, and the strict financial discipline this exerted throughout the global financial system. It was, therefore, vital to the promulgators of FIAT that gold was no longer seen as a monetary instrument by the general public or, indeed, governments.

Doug Noland, PrudentBear
Marketplace perceptions dictate "The Moneyness of Credit" - or the faith in the underlying safety and liquidity of Credit instruments. For a list of reasons, I suggest that it is today basically impractical to identify, aggregate, or model contemporary "money" dynamics. There is no definitive "money supply." Credit instruments change and the nature of Credit intermediation changes. Perceptions change - and do so subtly over time, as well as abruptly in real time. Importantly, during periods of rapid Credit growth and asset inflation, it will be the nature of the ebullient marketplace to accept an ever broadening scope (and risk profile) of Credit instruments and intermediation as "money-like." "Repos" and asset-backed securities are these days some of the most coveted "money" in a way unthinkable just a decade ago.

Ron Paul, Texas Congressman
Remember, gold is static. Gold isn't going up, the dollar is going down. And it's going to continue until the American people demand an end to deficit spending by Congress and unrestrained creation of new dollars by the Federal Reserve and Treasury department.

Few Americans realize the extent to which their own government has sold out American sovereignty by borrowing money overseas.

The Federal Reserve may have no choice but to raise interest rates to maintain foreign enthusiasm for our dollar. It's a serious problem that new Fed Chair Benjamin Bernanke must address sooner or later: propping up the dollar with higher interest rates without killing the U.S. economy in the process.

Jim Puplava, FinancialSense
TEN REASONS FOR HYPERINFLATION
1. Global oil production will peak between 2005-2008. Economic growth ceases to exist as global economies and markets are thrown into chaos and turmoil.
2. The War on Terror escalates into a resource war over oil pitting the great powers the US, China, and Russia in a replay of "The Great Game."
3. Debt creation and monetization hyperinflates as the government�s deficit spirals out of control with a war and a depression.
4. Foreigners begin to bail out of the dollar setting off a dollar crash.
5. The US puts in place capital controls to corral US and domestic money. The War on Terror will be given as the reason.
6. The government takes over GSEs owning most American mortgages.
7. A national mortgage bailout bill is passed lengthening mortgage payments in an effort to forestall debt defaults. A new restructuring agency will be set up to repurchase impaired mortgages from the banking system and renegotiate terms of the debt to avoid default. The 100-year mortgage is born.
8. A national retirement security act is passed forcing private pensions to buy long-dated zero-coupon government bonds that will be inflated away. The reason given will be for plan protection against bear markets.
9. As the US economy goes into a hyperinflationary depression the rest of the world's economies follow suit. Money printing on a grand scale occurs in western and Asian economies as governments wrestle and try to satisfy the demands of a social welfare state and an angry, aging populace.
10. As governments hyperinflate and debase their currencies, gold will take on its true role as money rising in value against all currencies. The world will move towards a global currency backed by gold.
I have a few more, but these first ten should do for now.

MY ARGUMENTS FOR DEFLATION:
1. Elimination of the Federal Reserve
2. Gold backing of the U.S. dollar
3. Honesty returns as a virtue in Washington
4. World peace

Need I say more?

Stephen Roach, Morgan Stanley
Given the hollowing out of US manufacturing, it is hard to envision a currency correction that would enable America to export its way back to a trade balance and/or miraculously replace foreign sourcing by a rebirth of domestic production. The only realistic cure for this mismatch, in my opinion, is a post-housing bubble shakeout of the excesses of wealth-dependent consumption -- aided and abetted by a meaningful back-up in real long-term US interest rates. Those adjustments may just be getting under way.

If mounting global imbalances are not in China�s or America's best interests, it is only a matter of time before something pops -- and the sustainable disequilibrium quickly becomes unsustainable. Given the overhang of excess dollar holdings by poor countries, the flight out of dollars could be fast and furious. That could trigger the dreaded dollar-crash scenario and a related spike in real long-term US interest rates.

Richard Russell, Dow Theory Letters
There's no way all this debt can ever be paid off or even carried by stable economic systems. Forget that. This debt must be carried, handled, by ever increasing amounts of paper. That alone is a basis for perma-inflation. Maybe we've got a new word here -- "permaflation."

Mike Shedlock, Mish's Global Economic Trend Analysis
Given that this Fed created the housing bubble in the wake of a stock market bubble the Fed also helped create, why anyone thinks the Fed has any clue what they are doing is simply beyond me. Past bubbles and those minutes clearly prove the Fed is guessing. Then again, given that the greatest liquidity experiment in the history of mankind was openly undertaken by numerous central banks over the last few years (most notably the Fed and the BOJ) it should not be too surprising that the Fed is guessing.

Martin D. Weiss, Safe Money Report
You don't have to assume a crisis to invest in this situation. Even if Iran and the West kiss and make up, oil is being driven higher by surging demand:

American drivers are complaining loudly about pain at the pump, but they're doing next to nothing to cut back on their gas-guzzling driving. China and India are choking on the smog, but they're not lifting a finger to hold back their industrial juggernauts. So the only way oil prices are going to come down is if they go up sharply first. Dramatically higher oil is the only force capable of curtailing demand. And therein lies the irony of oil.

That irony, however, is your profit opportunity. It gives you the relative certainty you need to help reduce downside risk ... plus the relatively good probability of blowout success. This kind of heads-you-win-tails-they-lose situation is the holy grail of investing.

John Rubino is the author of The Coming Collapse of the Dollar (co-written with James Turk), How to Profit From the Coming Real Estate Bust (Rodale, 2003), and Main Street, Not Wall Street (William Morrow, 1998). A former Wall Street financial analyst and columnist with theStreet.com, he currently writes for Fidelity Magazine, CFA Magazine, Kiplinger's Personal Finance, and Merrill Lynch Advisor. He lives in Moscow, Idaho. Contact by Email.