A Simple
Explanation of
"The Coming
Currency Crisis"
A Simple
Explanation of
"The Coming
Currency Crisis"
by James Dines
The Dines Letter
It
is remarkable that the decline in the Canadian dollar had, until recently,
escaped the notice of the world's press, nonetheless it has dropped a dismaying
8% since March 27th, and the currencies of other leading natural resource
countries (South Africa, Russia) have plunged much more deeply. The fact
that the Canadian dollar is in a Downtrend should be a cause for concern
to Americans because our northern neighbor is our largest trading partner
and a crash in their currency could result in serious repercussions in the
U.S.
Canadian
economists have been surprised by the recent slowdown in their Gross Domestic
Product, a decline in shipments of manufactured goods, and the number of
jobs having declined in June for two consecutive months. the Asian currency
crisis is already affecting Canada, having ravaged its west-coast timber
industry, although the demise of the Canadian currency has been slowed by
their ability to export into the United States, so the lower their dollar
goes the more of their exports will flood into America. A similar factor
is at work in Mexico, which has been able to export into the U.S. as the
peso has declined. No such luxury has been available to Asian countries
because Japan is in a deepening depression, for example. The inescapable
fact is that the Canadian dollar and Mexican peso are in Downtrends, indicating
that the currency crisis will eventually flare up in North America, which
might undermine the U.S. dollar itself. The Dines Letter (TDL) therefore
predicts that Governor Gordon Thiessen of the Bank of Canada will raise
interests rates to buoy the Canadian dollar, which a recessionary Canada
needs like a moose needs a hat rack. Not in the press yet, we predict that
Mexican interest rates are likewise headed higher, so Mexican TDLrs are
advised to act immediately. The reason that these currencies remain in Downtrends
rests on the fact that the international currency crisis is not understood
for what it is.
Canadian
Prime Minister Jean Chrétien has been mistakenly predicting since
January that the Canadian dollar's slide would not last, and blamed "currency
speculators in red suspenders" for having caused the declines in the
exchange rate. U.S. Treasury Secretary Robert Rubin, a former currency trader,
says he doesn't blame speculators for the Asian financial crisis, but did
blame corporations that needed hard currency for their foreign-exchange
obligations. Indonesian government officials blamed their crisis on a "conspiracy."
The blaming goes on and on, yet nobody in power seems to comprehend that
the spreading currency crisis is simply the printing of too much paper
money. It is thus an interesting exercise to wonder why this situation
should be, and how it might be cured.
The
dismaying truth is that governments worldwide are very deliberately and
knowingly printing too much paper money because they unabashedly want their
currencies to decline in world marketplaces in order to give their exporters
an advantage over those in other countries. In TDL's view, this is nothing
less than an updated, sophisticated version of the infamous Smoot-Hawley
Act of 1930 that aggravated what we call the First Great Depression,
which sought to block imports and boost exports. Further back, it is like
Voltaire's absurd village that thought to support itself with each household
taking in its neighbor's laundry. Deliberate devaluation of a country's
currency is a fool's game that has always ended in disaster, as Indonesia
has learned to its sorrow, and many others will also unless something is
done urgently. All TDL can do is to continue sounding the alarm.
America
is rich now, times are booming, and we are not so upset when nations devalue
their currencies against the U.S. dollar, although it is quietly strangling
our exporters who find it increasingly difficult to compete with countries
sporting ever-cheaper currenciessuch that U.S. trade deficits will soon
soar. Besides, currencies are such a tedious and boring topic, the dollars
in our pockets seem stable enough, and in this summer of glorious sunshine,
life is a beach.
But
tectonic forces are at work that very seriously threaten world stability,
as the world mindlessly repeats the errors of the 1920s. Every country in
the world is devaluing its currency against the U.S. dollar, the English
pound, and the Chinese renmimbi. President Clinton panders to Chinese pride
by describing its refusal to devalue having made it an "island of stability"
in the region, but China's exports are plunging as their neighbors continue
to devalue, and the question is how long China will tolerate its exports
disappearing before they too yield to devaluation. Optimists insist that
China has "ample reserves with which to defend its currency,"
but few grasp that much of such reserves are in a plunging yen. And what
happens when the U.S. dollar itself gets taken out? And when will China
at last turn to gold? Until then, one of our predictions is that not only
must the Chinese currency fail, but it is only a matter of time before the
English pound and the U.S. dollar go the way of all paper currencies. Down.
It
is not easy for booming America to think how the world looks to an Indonesian,
for example, amidst crashes in stocks, bonds, currencies, businesses and
real estate, but who sees that anything imported has gone through the
roof in terms of local currencies. Thus, medicines imported from America
into Indonesia, or raw materials such as copper, have gone way upwhich is
difficult for us to imagine because in U.S. dollars medicines are relatively
stable, while copper has dropped. Accordingly, the Asian currency crash
has also been a source of the decline in raw materials prices (such as aluminum,
petroleum, and even precious metals) not only from a reduction in poverty-stricken
Asian demand, but because in their currencies natural resources have gone
through the roof.
Another
aspect of this crisis is that frightened capital in Asia has fled to what
they perceive as safety into the U.S. dollar, bonds and utilities, which
is why such American investment areas have been so strong. Wealthy Asians
have also purchased our liquid blue-chips, especially names with which they
are familiar, such as Coca-Cola, Disney, McDonalds, General Electric and
other comparably high-quality stocks, which explains why such blue-chips
have risen so distantly above what traditional Security Analysis would have
normally dictated. The Mass Psychology book carefully delineated
the elements of Mass Fear and Mass Contagion (which recently has been adopted
as the current buzzword "Asian Contagion") that has, in fact,
been driving America's bull market with scant regard to traditional value
analysis, and why so many otherwise outstanding market observers have missed
this bull market entirely as it moved to the dictates of Mass Psychology
rather than traditional Graham & Dodd, and why it could therefore go
higher yet in what we have been calling "The Mother of All Bull Markets."
But our prediction has long been that a bear market would arrive because
of a currency crisis, so we wonder whether or not this is "it."
So
far, governments have been reduced to a single remedy, raising interest
rates far above even mafia-high levels, an immoral bribe to innocents to
hold depreciating paper currencies. We have been bitterly against the idea
of raising interest rates in the midst of these crises, because the last
thing Asians need at such a dire moment is having their credit card debt
or corporate debt balloon to unpayable levels; interest rates at 15% mean
that such debt doubles every fifth year, and Russia recently raised its
interest rates to 150%. This cannot possibly be the correct remedy, which
is why the International Monetary Fund has yet to achieve a success in its
attempt to cure the Asian currency crisis. What then is the cure that TDL
recommends?
The
reason TDL was the only financial newsletter in the world to have specifically
predicted a "currency crisis that would begin in Asia" over two
years agoon television, radio, in the press and in this newsletterwas because
we recognized the significance of Asian governments' having printed 20%
more paper money each year, which made it a literal impossibility for their
currencies to have maintained their value. By the simple and inexorable
law of supply and demand of paper. It is thus remarkable that Asia's currency
crashes have been blamed on virtually everything else. Clearly, if the
true cause is for the first time finally understood as an excess printing
of paper money, then there can be no doubt by any sane and reasonable human
being on Earth that the only solution that could conceivably work must be
one that limits the creation of that paper money. One possible solution
would be governments voluntarily refraining from printing more, like Nancy
Reagan's unsuccessful "Just say no to drugs." Or, it might be
a "currency board" linking the creation of any nation's money
to the amount of U.S. dollars they have in reserves, which is certainly
better than anything Asians have going now, although the problem there is
that the U.S. currency itself is being printed at a rate of perhaps 10%
annually.
Few
things upset people more these days than the idea of linking paper money
to gold, immediately relegating any such suggestion to the "kook"
category, yet currencies worldwide keep collapsing. In June it was scarcely
noted that the United States rushed to buy South African rands in order
to prevent an all-out crash there, and we are apparently the only member
of the world's press wondering when bureaucrats were given the right to
speculate with tax money in the currencies futures markets, an area in which
government employees tend to be inexperienced. Actually, fools.
Indeed,
it is precisely central bankers (including Canada's) having ostentatiously
and obstreperously flaunted the sale of the gold backing behind their currencies
that was a direct cause of current currency implosions, because the function
of gold is specifically the inhibition of printing too much paper money.
This is undeniably an extremely unpopular position, but even if we are
virtually alone in the world iterating it, that is where the truth resides;
sooner or later, whether before a crash or after it, it is a positon that
will have to be confronted rather than brushed off by the Washington Economic
Establishment (WEE) as beneath its consideration.
The
Genoa Convention of 1922 is almost never discussed in history books, but
as outlined in your editor's second book, The Invisible Crash, that
was when the world went off the gold standard and onto an Orwellian "gold-exchange
standard" that created enough money to have paid for World War I, and
paved the way for the unlimited printing of paper money that flushed into
the stock and real-estate markets that ended in the 1929 crashits true cause.
Today, surplus paper money is flushing into the U.S. stock and real-estate
markets, and once again we are headed for what we will call "The Father
of All Bear Markets" unless the steps laid out in the Mass Psychology
book are followed beginning immediately.
The
first thing that needs to be done is getting honest about the word "inflation,"
semantically misused as a synonym by everybody as meaning "higher prices."
In fact, the strict truth is that the dictionary defines inflation as
an increase in the money supply. Inflation is usually followed by higher
prices, but not always, such as during war-time price controls, or when
there is excessive competition. Let's say the United States is creating
10% more money each year, then in truthful terms inflation is running at
10% annually, so the current unanimous opinion that "there is no inflation"
is mistaken. Inflation's resulting higher prices will show up wherever there
is no suppressing competition, such as by the U.S. Post Office monopoly,
or soaring rents in New York, San Francisco and elsewhere, where monthly
rentals for a one-bedroom apartment are now going as high as $5,000 to $20,000
a month. Asians desperate for non-devalued currencies to pay off
their ballooned debts now sell computer products at any price, even below
cost, which results in declining prices for personal computers and a boon
to companies such as Dell. Government officials see computer prices plunging
and erroneously worry about "deflation." TDL's contrary prediction
is that not only will inflation burst out at the 10% or higher level, but
(as noted earlier) that dreaded hyperinflation is about to erupt in the
world, probably to begin with Indonesia, and that prediction is based on
the fact that they are creating money at a rate of over 50% per annum. It
is remarkable that not one other publication in the world has printed any
information concerning the money supply of Asian nations.
The
Dines Letter has been bearish on
Japan since 1989, looking for a collapse in its banking system, and since
1993 in the Chinese banking system. However, now TDL predicts crashes
in the Canadian and Mexican currencies, and we find it difficult to
believe that the U.S. dollar could possibly withstand plunges in our only
two contiguous neighbors and among our largest trading partners. It would
take a Mass Psychological event to trigger a Major bear market, but once
the U.S. dollar goes down, it is difficult to conjecture what could sustain
the world's paper house of cards. The world is skating on thin ice.
TDL's
specific and unhedged prediction is that, unless currencies are linked to
gold again, American stock markets will continue to rise as terrified foreign
capital pours into the refuge of Wall Street, spearheaded by Internet stocks
that, for the last few years, we have been describing as "the greatest
invention since the wheel, that will redefine every business on earth."
But, that it would all end in an historic currency crash and an historic
bull market for gold when central bankers rush to repurchase it in the final
flight to safety. What we call, "The Coming Gold Crisis." About
which we have actually written little, so far.
Editor's
Note: James Dines is editor of The Dines
Letter, P.O. Box 22, Belvedere, CA 94920, 1 year, 20 issues, $195. Published
continuously since 1960, The Dines Letter is one of the oldest and most
respected stock market newsletters of its type in the world. The Dines Letter's
excitingly literate writing style is only matched by its willingness to
take definite positions from "Buy" to "Sell" and it
includes many other unique features. TDL Offers explicit advice advice on
stocks, currencies, precious metals, bonds, interest rates, put & call
options, commodities, market timing, the economy and the overall international
outlook. Mr. Dines, "The Original Gold Bug", is often referred
to as "The Original Netbug" being very bullish on the internet
group for several years. Recommendations have rewarded his subscribers with
blistering gains. His 3rd book, How Investors Can Make Money Using Mass
Psychology, 378 pages, $59 is highly recommended by the Bull & Bear.
A "Look-See" trial, 3 issue trial to The Dines Letter is available
for $49. Or 6 months, 10 issues, $115. A full one-year subscription, 20
issues, is $195. Write to the above address or phone 1-800-84-LUCKY.
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