American Dollar Continues Heading South

Oct 12th, 2007 | By Christopher Hancock | Category: Investing Strategies

On Aug. 1, 2007, every child’s worst nightmare actually came true.

The I-35W Mississippi River bridge collapsed in Minneapolis…killing 13 and injuring 100 motorists.

“This is a catastrophe of historic proportions,” said Minnesota Gov. Tim Pawlenty.

For decades, federal inspectors knew that a flaw in the structure of the eight-lane bridge could easily take down the entire bridge. But year after year, the government let the bridge pass inspection.

Today, as Minneapolis workers continue removing the hundreds of tons of steel lining the Mississippi riverbed…the government has plans to build a new bridge, with costs for rebuilding projected in the $250-million range.

According to the U.S. Department of Transportation, 756 steel deck truss bridges span America’s waterways, just like the one in Minnesota.

Built in the 1950s and 1960s…approximately 11% of these steel bridges have weaknesses much like the one that caused the I-35W bridge’s collapse.

80+ bridges at $250 million a pop?

But it gets even scarier, when you realize America’s infrastructure crisis involves roads, schools, dams, power grids, and water pipes too…

The American society of Civil Engineers now warns that the United States has fallen so far behind in maintaining its public infrastructure — roads, bridges, schools, dams — that it would take more than a trillion and a half dollars over five years just to bring it back up to standard.

So dear reader, Uncle Sam now needs $1.5 trillion just to sprinkle Band-Aids across America’s degenerate body.

For a quick perspective, consider this:

The Iraq war has cost the United States $458 billion to date.

Meaning, patching potholes and solid waste will cost roughly three times as much as the full-fledged war.

How will John Q. Public pay for all that, we ask?

We’re not sure. But it seems to us that he will pay for it with dollars…and that’s the heart of the problem.

Every imaginable rescue mission for the overly indebted American consumer, not to mention the overly indebted American government, leads to increasing quantities of dollars and credit, which can only mean one thing:

Dollar-holders beware.

Strong economies need strong infrastructure.

Strong infrastructure needs strong spending.

More spending means more government contracts. More contracts mean more campaign donations.

It gets better.

Every elected official represents a district with a broken bridge. A new bridge needs a new ribbon and a new name. Hence, the more bridges they build, the more votes they receive.

And here’s the best part. They accomplished this benevolent feat without losing lives or raising taxes!

Better yet, everyone in Washington can play along.

Unfortunately, more spending means more debt. The U.S. Congress will turn to the U.S. Treasury. The Treasury wants to balk. But they turned on CNN and another bridge collapsed over the mighty Mississippi.

So they shrugged.

The U.S. Treasury will turn to foreign buyers. Foreign buyers should (will) require a higher rate of return for holding a depreciating fiat currency. Interest rates should (will) rise. The race to sell U.S. assets to foreign hands keeps flowing south like the mighty Mississippi.

To make matters worse, analysts forecast future rate cuts. The latest Federal Reserve Meetings on Oct. 9 show a consensus supporting a 50 basis point cut…maybe so, maybe not. We really don’t care. We have no idea what direction interest rates are heading. But we do know this.

The American dollar should (will) continue heading south.

Eurozone finance ministers quiver. On Oct. 8, the day before the U.S. leaked a forthcoming rate cut, the Europeans announced their intentions to actively depreciate the euro against the Chinese renminbi, the U.S. dollar and the Japanese yen. They claim a weaker euro will ease pressure on the European economy.

Europe, in a sense, showed its hand. And the Fed quickly trumped it one day later. Go, Fed!

This dubious policy is finance-speak for this: The sovereign nations of the world are engaged in a perpetual sprint to boast the least valuable currency. They’re in a race to the bottom, so to speak…a race to become, well, in a sense, worthless.

The reason: Currency depreciation makes domestic goods less expensive to foreign buyers. Consequently, a perceived re-emergence in a nation’s domestic manufacturing may take place, as foreigners demand cheap “Made in the Most Worthless Currency” widgets.

You see, it’s a win-win for Washington.

Washington’s charitable handouts (debts) bought the bridges that bought the votes. Those charitable handouts (debts) also undermined the dollar-denominated debt.

The cheap dollar creates cheap exports. More exports create more jobs. More jobs…more votes. The cycle continues.

But here’s the real kicker: Devaluing the greenback devalues the foreign debt that started this whole mess to begin with. So in the long run, we don’t owe as much as we borrowed, inflation adjusted.

It’s a win-win for Wall Street, too. The municipal underwriting business takes off. Banks now repackage municipal debt like mortgage debt. The fees keep rolling. Seven figure bonus days are here once again.

However, this game has one or two setbacks.

First, higher spending sans higher taxes works only when foreigners demand our debt. But that may not be the case much longer. The Chinese have eased their appetite for American IOUs.

Second, more debt means we print more money. More M3 means more inflation. You haven’t noticed the effect yet, dear reader, because Chinese imports have delayed the hangover. But the days of importing Chinese deflation are coming to an end, as well.

Despite what others may think, Alan Greenspan is no dummy. He knew when to jump ship.

Greenspan said that over the long run, the biggest problem facing the U.S. economy is “the re-emergence of inflation,” and rising interest rates.

We concur with Mr. Greenspan.

Unfortunately, high inflation combined with high interest rates kill the middle class. That’s the real long-term problem of fiat currencies. A fiat money system prompts legislative profligacy and inevitably produces inflation. The system stimulates the growing gap between the haves and the have-nots.

Consequently, the have-nots will turn to their elected saviors in Washington. They’ll demand a change.

Washington will listen with empathetic ears. They’ll yell at the rich while they tax the poor (municipal bonds financed on taxpayer revenue). Like Alan, they’re no dummies. They know who really puts them in office.

So in the end, they’ll assuage their disgruntled voters with more contracts for more new bridges. Which, in turn, will most likely precipitate further inflation. Remember, personal taxes can go only so high before even the rich revolt. Most studies project that watermark near 50%. So tax hikes can go only so far.

As Bill Bonner points out: “The goal here — as with all government programs — is to produce the desired benefits while pushing the costs onto someone else. That’s how politics work. You promise something…and you force someone else to pay for it. You rob one Peter voter…and spread the loot among the Pauls.”

And so we’ll beat on, dear reader…like boats against the current.

Sincerely,
Christopher Hancock
October 12, 2007

P.S.: On the infrastructure front, there is only one expert I would go to for investments, Chris Mayer. He has already picked some enormous triple-digit winners that play strategic rolls in the wave of infrastructure repairs.

Christopher Hancock

Christopher Hancock lives and breathes emerging markets. He travels extensively and utilizes his contacts across the globe to recommend the best international investments in the world. After working with Citigroup in Hong Kong on the challenges and opportunities associated with the forthcoming RBM flotation reform, Christopher left many of his friends behind and decided to return to the States to pursue a career in equity research.

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