PARABLE OF THE PATRIARCH
by Jennifer Barry
July 8, 2005
Imagine you are part of a large, extended family, with an elderly patriarch. He was quite a hard worker in his youth, and he amassed a large pile of money. However, you have recently become concerned about his financial habits. Although he works a lot less, he spends a lot more than in his youth. It's not simply that he spends excessively, it's that he squanders it on useless trinkets. He's also started to sell off assets and take out loans to cover his living expenses. You worry that he will go bankrupt in a few years if he doesn't change his behavior.
Whenever his younger siblings or children confront him on his spendthrift ways, he becomes very angry. He claims that he would have a lot more cash if he didn't have to help other family members so often. Sometimes he even reminds the family of all his efforts to support them in his younger days. His siblings feel guilty, and stop scolding the patriarch about his spending habits. The richest ones give him a little extra cash when he loses his temper. Besides, it could really drag the family down if he ended the scholarships to the poor kids, or had to liquidate the family estate.
The truth is, the most successful family members have been covertly propping up the patriarch for years. They've taken over loan payments, and paid bills here and there, and the patriarch pretends not to notice. These siblings believe it’s worth the effort to keep the family together, but it's gotten more expensive. The patriarch owes more every year, and he doesn't reinvest in the estate to keep it in good shape. Sure, he has the kids paint and decorate it so it looks nice, but that doesn't fix the deep, structural problems. The patriarch ignores these flaws, or when confronted, blames them on the family's misuse of the property.
As you may have guessed, the "patriarch" in this story is the U.S. America used to be a creditor nation; now it has a huge trade deficit. The U.S. imported $56.96 billion more in goods in April than it exported. Our "siblings," including China, Japan, and Korea, warn us to narrow the deficit, but the U.S. government blames unfair trade and currency policies for our inability to compete in the global marketplace.
To compensate for our trade deficit, and balance the national checkbook, the U.S. needs foreign countries to buy assets and debt. The latest U.S. Treasury International Capital Report, or TIC, noted that "foreign purchases of domestic securities reached $53.6 billion on a net basis." This number was lower than the trade deficit for the second month in a row, indicating that America's "siblings" are losing their desire for dollar-denominated assets, especially Treasury securities.
Eventually, the costs of supporting the patriarch's outrageous spending habits will outweigh the benefits. The siblings have started to prepare for the future by forming trade agreements and other financial arrangements that don't involve the patriarch. However, the siblings may decide to run the family sooner than we think. They may have signaled their intentions with two negative months of TIC data. If we see a third consecutive month, Jim Sinclair (of www.jsmineset.com) believes that "the dollar will hit the skids." America may be dumped in the nursing home, losing the spotlight on the global stage. To add insult to injury, the inevitable dollar crash and yuan revaluation by our "sister" China will spark rapid price inflation in consumer goods.
How can you protect yourself from further dollar depreciation and accelerating inflation? Stocks are not secure, since companies can become bankrupt and their shares will lose all value. Bonds can be downgraded to junk status, as happened to GM bonds recently. Housing is overvalued in many regions of the U.S. and will eventually suffer a correction. As the dollar resumes its unavoidable descent, global investors will lose faith in this fiat currency, and the financial stability of America. People will dump paper promises, and flee to hard assets like silver and gold. It happened in the 1970's, and the commodity boom didn't end until interest rates passed 20%.
© 2005 Jennifer Barry