A banker asked a Native American for collateral for a loan of $500, and the Native American said he had no idea what collateral was. Asked if he had any property, the Native American said, "No, only 20 horses." The banker accepted the horses as collateral. Some months later the borrower returned with a $10,000 check and as he cashed it to pay off his original loan the banker said, "We'd be happy to keep the balance on deposit for you." Whereupon the Native American asked, "And how many horses do you have?" Central bankers raise interest rates, and Asian markets plunge. Viagra bursts into the headlines, and Frank Sinatra dies. Currencies crash in Thailand, and in Indonesia you can now get three pounds of sugar, one pound of coffee, one bottle of wine and a wife for only ten US dollars (But it's a dreadful wine!). The Viagra pill that sells for $10 each in the US is going for $80 a pill in Saudi Arabia, and Pfizer considers adopting as its motto, "Viagra is a pill men can stand up for!" Coincidences? Perhaps not.*
* Consumers of Saudi oil who thought that they were getting screwed by high fuel prices had better really brace themselves now!
With currencies plunging again, from Australia to Japan, to Russia, our warnings of "The Coming Competing Currency Devaluations" are fulfilling into high gear, in what we call "The Coming Currency Race to the Bottom."
The reason TDL was first to have predicted an Asian crash, on TV, in media and print was that we were watching numbers that nobody else recognized: countries such as Indonesia were increasing their money supply by 20% each year, and it is not possible to link that to a less-unstable currency such as the US dollar. You cannot add 20% more water to a one-gallon bucket each year and yet keep it at one gallon. Everybody blamed the banks, politicians, or speculators except the true culprit, the money supply. The financial press is devoid of information about foreign money supplies, much less Indonesia's, and they scarcely understand America's. Money needs a relation to reality, a link to gold and silver, and without it the result is a race to the bottom because that paper money has no intrinsic value and taxpigs running governments who seek more power will print as much of it as they can get away with. So why has the US dollar been relatively stable? Of the $450-billion in US bills and coins, two-thirds ($300 billion) is abroad and has been growing by $15 billion to $20 billion a year for the past five years, an amount that is like an interest-free loan to America. As long as that paper money stays overseas, it does not increase our domestic money supply and add to inflation. The Fed estimates the annual savings at $15 billion to $20 billion that taxpayers would otherwise have had to have paid in interest payments. But what happens when the dreaded "Millennium Bug" disrupts commerce at the end of this decade? And what happens when the euro comes along on 1 January 2002? And, above all, what happens if the confidence in the US dollar is shaken by the unanticipated, now that many countries worldwide demand payment in American cash, from Liberia to Cuba to Russia to Vietnam? It's a question nobody else seems to be asking, even as nearly every currency in the world is devaluing against the US dollar. This is a worldwide "time bomb," as laid out in coruscating detail in our book The Invisible Crash. It will not end well.
1. Fit enough to avoid nasty case of `Asian Flu.' The outlook remains positive given the strong performance of the US economy, Canada's primary export market. The IMF still expects Canada to lead G7 nations with 3.2% growth this year and 2.8% in 1999. The Bank of Canada has helped restore confidence by keeping inflation at the low end of its 1-3% target band. There are concerns Canada is vulnerable to external shocks, such as a deepening or widening crisis in Asia, or even-weaker commodities prices, as well as a stock-market correction or an interest-rate increase in the US. At the same time, the weakness of the Canadian dollar is a problem. The Bank of Canada raised its key bank rate to 5% early this year after the currency set a record low of US68.2 cents. While a weaker dollar makes exports more competitive, economists are concerned that the Bank of Canada might raise its rate in a bid to buoy the currency or in response to a move by the US Federal Reserve Bank. That would hit hard at consumers who are highly indebted, and some fear that higher Canadian rates would squeeze domestic demand and business investment just as the economy is hitting full stride. Scott Morrison, FINANCIAL TIMES (London), 12 May 98 Ed: Yes, "weakness of the Canadian dollar is a problem." Canadian TDLrs be aware that our bullishness toward the Canadian economy is diminished after having deducted inflation. Look for higher markets, a lower Canadian dollar, rising interest rates, pay off debts and, above all, make your money before the Asian currency crisis Mass Contagions to Canada.
2. India is a major buyer of silver. Both the sanctions and the fall of the Indian currency, the rupee, are expected to cut into demand. The weaker rupee makes silver, which is priced in dollars, more expensive. Jonathan Fuerbringer, NEW YORK TIMES, 19 May 98 Ed: Granted that silver is more expensive for new buyers, but it is moving up exponentially against the rupee for those who already hold silver. Reporter does not mention this element of Mass Psychology: Indians who remember that their silver holdings had protected them from their declining paper currency should later spark a massive "flight to safety" into even more silver. Silver investors should purchase a copy of the latest booklet from The Silver Institute reporting that 1997 was the ninth consecutive year that conventional supply failed to equal fabrication demand. This fundamental silver under-supply has reduced identifiable aboveground bullion stocks drastically, paving the way for what we see as an inevitable bull market based on Fundamentals. Silver Institute's phone: 202-835-0185. Fax: 202-835-0155.
3. Greenspan cautioned that there remained a "small but not negligible probability that the upset in East Asia could have unexpectedly large negative effects on Japan, Latin America, and eastern and central Europe that, in turn, could have repercussions elsewhere, including the United States. Clearly, those economies are not out of the woods, as recent events attest," Greenspan said. ASSOCIATED PRESS, 21 May 98
Ed: Translated (yawn) he says anything is possible. No kidding Dick Tracy.
WHY THE IMF SHOULD BE ABOLISHED
"When it's closed." Yogi Berra, when asked what he liked most about school when he was young.
As we predicted, the "solutions" that the International Monetary Fund (IMF) foisted on Indonesia, such as sky-high interest rates, were so wrong that a revolution began boiling and it was almost impossible to get a seat on an airplane out of the country because roads were blocked and cars getting hijacked. We are delighted to report to you that even the shamed IMF staff had to fearfully flee Indonesia's vengeful mobs, secretly, in a chartered aircraft, skulking, before dawn, proving yet again that God exists.
The two following excerpts from a past TDL were our calls for abolishing the IMF. In the third of the following excerpts it was thus gratifying to see that George Shultz came out against the IMF only two months afterwards. Also Fortune Magazine in Excerpt #4.
Nowhere in the media or press will you discover that Indonesia printed 20% more paper currency in recent years, now running over 50% a year(!), guaranteeing a currency collapse. It's not a secret. Know-nothing reporters just don't think it's important, and so do not report it. Financial newsletters exist to provide what the press and media do not. The IMF's quack "remedies" of high interest rates hark back to the leeches used by doctors in previous centuries that so outraged Voltaire.
And the whole idea of the IMF "lending" money to "developing" nations is a fraud because, at some future date, when nobody is looking, the debts will simply be "forgiven," so IMF loans are simply a form of charity - which is okay, provided it's called charity in the first place and the American public is not lied to about it.
But none of these politicians yet grasp that the true problem is the inherent corruption resulting from unlimited printing of paper currencies that has been the root cause of so much of the world's grief this century, which is why TDL founded The Hard Money Movement in 1960 as the greatest contribution of which we could conceive. And why your editor's second book The Invisible Crash will someday be a blueprint for a sound currency, one might at least hope.
Many more unnecessary tears will be shed before paper currencies are linked to gold and silver at prices much higher than anybody would now believe. Those who admire a rascal do not live in his town.
1. Because there is still no link between paper money and gold, the [American contribution to the IMF of] $18 billion will be wasted, so we are against it. A "market-clearing sellout" [in Asia] would attract private capital, obviating the need for the IMF fools to insist on the higher taxes that would further ruin Asian finances. Now Mexico is running the printing presses, so TDLrs need to prepare for yet another currency smash there. The International Monetary Fund needs to be horsewhipped on television, worldwide, for raising taxes instead of having correctly linked paper currencies to gold. THE DINES LETTER, 6 Mar 98, page 7
2. Abolish the IMF and try free-enterprise capitalism. It works, you know. THE DINES LETTER, 10 Apr 98, page 13
3. Former Secretary of Treasury and State George Shultz laid out the intellectual case against funding the International Monetary Fund. Mr Shultz disparaged what he called "a pattern of escalation of ambitions of the IMF," which will only grow if the US approves an additional $18 billion in funding. When matched by contributions from other countries, the IMF will receive an additional $65 billion in useable reserves. The world financial system would work better without the IMF, he argued at a hearing of the Joint Economic Committee. Creditors would learn certain lessons, he said. "Don't lend money when there are questionable risks," he said. "Realize you'll be held accountable for your mistakes." Former Federal Reserve Chairman Paul Volcker said he disagreed with Mr Shultz's diagnosis and conclusions. A US refusal to contribute to the latest replenishment "would represent a retreat," and would be considered "an aggressive move" by US allies, he said. But according to Mr Shultz, the IMF worsens crises because market participants realize it will bail out foolish investors and borrowers. He says, however, that pumping money into troubled nations reduces pressure to work out a deal. "When people commit these sins, they need to pay for them," he argues. Mr Shultz is pushing for radical changes. He again called for abolishing the IMF, and also urged Congress to withhold money until the fund makes public its operations and secret analyses. While the Administration has been prodding the IMF to release more data and analyses, it balks at such confrontation. Bob Davis, WALL STREET JOURNAL, 6 May 98
4. Kill the IMF. The IMF has long impeded economic growth in poorer countries, and its new penchant for bailouts is likely to further slow reform while putting US taxpayers at risk. The real test of any aid agency is whether its clients move from dependency to self-sufficiency. More than half of the IMF's borrowers between 1965 and 1995 were no better off than when they started. A third were actually poorer. Almost all were deeper in debt. FORTUNE, 25 May 98
17 June 1998
(The Dines Letter (TDL) offers regular features such as TDL's Latest on Gold, and the above report is our Latest on Gold feature and a special writeup excerpted from our Letter dated 20 March 98. In addition to other features covered regularly: TDL's Current Market Analysis, TDL's Latest on Currencies, TDL's Seasonalities, TDL's Newly Recommended, TDL's Supervised Investment Lists -- The Dines Letter also offers timely articles and special writeups as market conditions warrant).