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The
U.S. Federal Reserve has aggressively inflated our money supply during the
past dozen years. It has performed this act in its effort to stimulate our
economy and forestall a potentially damaging period of economic weakness.
Prior to this time, and in ever increasing amounts as the years passed,
dollar credits have hemorrhaged from our nation. This was largely the result
of our unending and expanding balance of payments deficits that were
primarily caused by three events: 1. the increased liquidity in our banking
system that was generated by the issuance of inflationary purchasing media,
2. the wide-spread availability of enticing, cheap goods offered by our
trading partners, and 3.the dollar has depreciated against other currencies
which raised the dollar cost of their offered items.
The expatriated U.S. dollars resulting from this massive dollar outflow
entered and swelled the central bank coffers of our trading partners. This
circumstance has systematically forced foreign countries to increase their
own monetary aggregates and threatens to spread inflation around the globe.
The transfer of dollars from the U.S. to other countries resulted in the
temporary exportation of inflation from the U.S. to those lands receiving our
dollars. If this did not occur and the dollars remained within our monetary
system, the U.S. would have already seriously suffered from inflation.
Remember, inflation is essentially caused by the over-issuance of purchasing
media, in this case dollars. In effect, as the amount of circulating money
increases while the quantity of available goods and services remains
essentially constant, too many dollars are chasing the same goods, and
nominal prices are bid up by supply and demand.
Through a series of banking system transactions, much of the foreign money
acquired by a business or individual ultimately winds up in the vaults of
their country's central bank. When a central bank receives another nation's
money they generate a bookkeeping credit to the domestic depositor's account
in the local currency. Further, the central bank normally uses the acquired
dollars to purchase U.S. Treasury Paper. This allows them to at least earn
interest on the foreign deposits. The newly created local monetary units then
enter their banking system and increase the nation's money supply. The end
result which may take time to work through the system, is the reduced
purchasing power of those monetary units already in existence, and higher
domestic prices.
A good example of the effect of the above process was recently highlighted in
news emanating from China. As you know China is one of our nation's most
important trading partners, and is likely destined to one day lead the list.
Their generally low prices have attracted an enormous influx of U.S. dollars
as American after American has sought the great bargains produced in their
country. While the flood of dollars used to purchase their goods has helped
their nation improve both their economy and the state of their citizenry, it
has also had a deleterious effect. Quoting a recent New York Times article,
"China's inflation rate rose to 2.9 percent in the first two months of
the year...The cost of food, which accounts for about a third of the index,
rose 8.8 percent in February after climbing 4 percent in January and 2.4
percent in December." Inflation is beginning to emerge there.
The January, $15.3 billion U.S. trade deficit with China was an individual
country record. Most of these $15.3 billion dollars will find their way to
their central bank which in turn will be compelled to issue new yuan credits
to their depositors. Thus, their money supply will be further expanded. The
final result will be the stimulation of future across the board price
increases for their nation.
I have used China as an example. However, all of the trading partners with
which we are in a balance of payments deficit are suffering a similar fate.
Japan, South Korea, Malaysia, European Union countries and a host of other
nations are also being similarly forced to increase their monetary
aggregates, and are thereby threatened with an upset to their domestic
pricing structures. This, in order for them to continue doing business with
the U.S.
As the United States continues to inflate its money supply, many other
countries have taken our lead. Japan, which has yet to extricate itself from
its fifteen-year economic malaise, numerous European Community countries, as
well as a number of additional states are pursuing a similar tact. Their goal
is not only an attempt to similarly stimulate their economies via the
printing press, but to also improve their competitive advantage in the
world's markets by weakening their respective currencies.
The foreign accumulation of 2+ trillion U.S. dollars combined with the
fostered money supply increases by many of our trading partners has damaging
consequences. Not only have they been forced to increase their monetary
aggregates with each dollar that they acquire, but many are also aggressively
expanding their measures of money in order to cheapen their currencies, and
thus halt the dollar's decline against their domestic monetary units.
We are beginning to see the first signs of rising global inflation unfold as
depicted by China's current experience. Several commodities are already
trading near or at all time highs. I believe that this trend is destined to
continue and will produce far higher prices for all commodities, as they
respond to the enormous issuance of fiat currencies by all of the world's
major countries. At some point increasing prices will feed upon themselves.
One nation after another will experience higher prices as both the cost of
needed commodities and finished products, work their way through their
economies.
The hardest hit nation will be the U.S. This will occur because foreign held
dollar credits will finally return to our shores. These will swell our
already enormous pool of domestic dollars. Foreigners are just beginning to
sense that all is not right with the dollar. The first countries are
beginning to limit their U.S. dollar holdings. Russia, Malaysia, China, Japan
and South Korea have already announced their desire to achieve this goal.
Later, a flight from the dollar will occur.
Foreign entities will sell their U.S. treasury securities and will exchange
the received dollars for their own currencies. Our bond market will plummet
as will the dollar, and inflation will become rampant. Gold and to a lesser
extent silver will then act as life boats on a stormy sea. They will save
those who recognize their importance, and gold will again return to the
limelight as the only true and desirable form of money worth holding.
This series of events will not occur overnight. We likely have a few years or
more to prepare. Our government will fight the demise of the dollar and the
outbreak of inflation with all of the available methods at their disposal.
They will call in all of the favors owed them by other nations, and will
twist as many arms as is necessary to coerce the other countries to retain
their dollar holdings. In the end they will lose. I for one hope that they
will be successful for as many months or years as possible. It will not be a
pleasant experience when our dollars finally come home to roost, but the
stage is being set for an inflationary storm when they return.
I publish Financial Insights.
It is a monthly newsletter in which I discuss gold, the financial markets, as
well as various junior resource stocks that I believe offer great price appreciation
potential.
Please visit my website www.financialinsights.org where
you will be able to view previous issues of Financial Insights, as well as
the companies that I am presently following. You will also be able to learn
about me and about a special subscription offer.
CAVEAT
I expect to have positions in
many of the stocks that I discuss in these letters, and I will always
disclose them to you. In essence, I will be putting my money where my mouth is!
However, if this troubles you please avoid those that I own! I will attempt
wherever possible, to offer stocks that I believe will allow my subscribers
to participate without unduly affecting the stock price. It is my desire for
my subscribers to purchase their stock as cheaply as possible. I would also
suggest to beginning purchasers of these stocks, the following: always place
limit orders when making purchases. If you don't, you run the risk of paying
too much because you may inadvertently and unnecessarily raise the price. It
may take a little patience, but in the long run you will save yourself a
significant sum of money. In order to have a chance for success in this
market, you must spread your risk among several companies. To that end, you
should divide your available risk money into equal increments. These are all
speculations! Never invest any money in these stocks that you could not
afford to lose all of.
Please
call the companies regularly. They are controlling your investments.
FINANCIAL INSIGHTS is written and published by Dr. Richard Appel and is made
available for informational purposes only. Dr. Appel pledges to disclose if
he directly or indirectly has a position in any of the securities mentioned.
He will make every effort to obtain information from sources believed to be
reliable, but its accuracy and completeness cannot be guaranteed. Dr. Appel
encourages your letters and emails, but cannot respond personally. Be assured
that all letters will be read and considered for response in future letters.
It is in your best interest to contact any company in which you consider
investing, regarding their financial statements and corporate information.
Further, you should thoroughly research and consult with a professional
investment advisor before making any equity investments. Use of any
information contained herein is at the risk of the reader without
responsibility on our part. Past performance does not guarantee future
results. Dr. Appel does not purport to offer personalized investment advice
and is not a registered investment advisor. The information herein may
contain forward-looking information within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. In accordance with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the statements contained herein that look
forward in time, which include everything other than historical information,
involve risks and uncertainties that may affect the company's actual results
of operations. © 2005 by Dr. Richard S. Appel. All rights are reserved. Parts
of the above may be reproduced in context, for inclusion in other
publications if the publisher's name and address are also included for
credit.
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