The dollar is in decline. So how to invest it?
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Bill Bonner Guest blogger
Yesterday, we got a glimpse.
Yes, dear reader, we were on our way to Sea Island. We looked across the bridge at another island 鈥� Jekyll Island. You know Jekyll Island, don鈥檛 you? It鈥檚 where the monster was created鈥�
A group of the nation鈥檚 richest, biggest, and most powerful bankers got together there 鈥� in secret 鈥� in November, 1910. They figured it was time to put in place a system that would make it a little easier for them to make money. Instead of competing head to head, without any backstop to protect them when things got rough, they decided to set up a central bank.
The meeting was so cloaked in secrecy few believed it ever took place. Implausibly, it was first reported by the poet Ezra Pound. How Pound learned of it鈥nd why he reported it鈥e don鈥檛 know. But that鈥檚 the word on the street.
B. C. Forbes reported in 1916:
Picture a party of the nation鈥檚 greatest bankers stealing out of New York on a private railroad car under cover of darkness, stealthily riding hundreds of miles South, embarking on a mysterious launch, sneaking onto an island deserted by all but a few servants, living there a full week under such rigid secrecy that the names of not one of them was once mentioned, lest the servants learn the identity and disclose to the world this strangest, most secret expedition in the history of American finance. I am not romancing; I am giving to the world, for the first time, the real story of how the famous Aldrich currency report, the foundation of our new currency system, was written鈥� The utmost secrecy was enjoined upon all. The public must not glean a hint of what was to be done. Senator Aldrich notified each one to go quietly into a private car of which the railroad had received orders to draw up on an unfrequented platform. Off the party set. New York鈥檚 ubiquitous reporters had been foiled鈥� Nelson (Aldrich) had confided to Henry, Frank, Paul and Piatt that he was to keep them locked up at Jekyll Island, out of the rest of the world, until they had evolved and compiled a scientific currency system for the United States, the real birth of the present Federal Reserve System, the plan done on Jekyll Island in the conference with Paul, Frank and Henry鈥� Warburg is the link that binds the Aldrich system and the present system together. He more than any one man has made the system possible as a working reality.
And now it鈥檚 official. Ben Bernanke went there to give a speech in 2010, marking the 100th year of the meeting.
The role of the Fed鈥part from greasing the skids for rich bankers鈥as supposed to be to protect the value of the dollar. Why the dollar needed protection was never explained. For the previous 100 years, it had been solid enough 鈥� except for during the War Between the States, when Lincoln printed up far too many of them in order to pay for his attack on the South. But Lincoln鈥檚 paper dollars came and went. And on the day the Fed was officially set up, in 1913, the dollar was still worth about as much as it had been when Napoleon Bonaparte set off for Russia.
Whatever the Fed was supposed do to, what it did not do was protect the greenback. Instead, the dollar slipped and slid throughout the 20th century and is now worth only about 3 cents.
Which is why we return to yesterday鈥檚 theme. There鈥檚 no guarantee. But we have a feeling that the dollar will continue to lose ground. Maybe not right away. But sooner or later.
And if someone will lend you money at the lowest mortgage rates in history鈥n advance of what could be the greatest inflation in US history鈥erhaps you should take it.
We鈥檙e down here at a financial conference. Among the attendees is colleague Steve Sjuggerud, who believes US real estate may be the best investment of all time. Adjusted for inflation, housing prices are back to 1979 levels, he says. But they鈥檙e much better deals now. Because mortgage rates in 鈥�79 were 3 times higher.
鈥淚f you took out a mortgage in 1979,鈥� says Steve, 鈥測ou鈥檇 be paying 15% to 20% interest. So, over the life of a $200,000 mortgage, you鈥檇 pay as much as $700,000, including interest.
鈥淎nd you got a lot less house for your money in 1979,鈥� he continues. 鈥淭he typical house sold in 鈥�79 had only 1,600 square feet of living space. Today, the average is about 2,200 sq. ft. It鈥檚 a much bigger house.
鈥淪o, in terms of dollars per square foot, you鈥檙e paying about $75 now compared to about $100 back then.
In terms of affordability, and value per dollar, the US house is a better deal now than it has ever been, Steve concludes. It would have to increase in value by $100,000 just to get to normal affordability levels.
鈥淭here are unbelievable bargains around,鈥� Steve goes on. He found a farm in Florida that had been appraised at more than $10 million in 2006. Now, the owner is bankrupt and the bank is desperate to get rid of it.
What bid will it take to buy it?
鈥淢aybe less than $1 million,鈥� says Steve.
There鈥檚 a time to be a borrower and a time to be a lender. As long as the Great Correction continues (and we think it will continue for a few more years鈥erhaps 10) it will be a good time to be a lender. Interest rates will tend to go down, not up. That is the lesson of Japan, where bonds have been the only decent investment for the last 22 years.
But thanks to that clandestine meeting on Jekyll Island 102 years ago, we probably won鈥檛 stay in a Japan-like rut forever. Ben Bernanke promises. He has 鈥榓 little technology鈥� called a printing press. And he knows how to use it!
Your editor is not a good example. He bought a house and paid more than he needed to pay. But he was buying a house, not an investment. At least that鈥檚 what he told himself.
Still, he figures that he will mortgage the place and let Ben Bernanke help make it a better deal. It may be a good time to be a lender now, but we will borrow anyway. The borrowers鈥� time must be coming.
What are the odds that a dollar鈥檚 worth of debt鈥t 4% interest鈥ill still be worth a dollar 10 years鈥�20 years鈥�30 years from now? The odds can鈥檛 be very high.
The headline story over the weekend was that GDP growth in America, in the last quarter, was 鈥渄isappointing.鈥� Which just goes to show how little people understand what is going on.
The Great Correction began 5 years ago. The feds have been fighting it ever since 鈥� with trillions of dollars鈥� worth of fiscal and monetary stimulus. You can see what good this does. Just look at the Dow. After Lehman went broke the index dropped to the 6,000 level. Then, the feds began dumping in money. Remember TARP? And tax cut extensions. And 鈥�cash for clunkers鈥�? And ZIRP? And QEI, QEII, and now鈥he Twist?
Naturally, the markets鈥nd the economy鈥eact. GDP growth resumed in 2009. But most of the growth depends on further spending and money-creation by the feds. We don鈥檛 know how much of it鈥aybe all of it.
There is no 鈥榬ecovery.鈥� Instead, the private sector is correcting鈥r trying to鈥nd the economy is merely returning to its trend. GDP growth rates have been going down for 40 years. Growth rates averaged about 4% in the 鈥�70s鈥�3% in the 鈥�80s and 鈥�90s鈥nd then about 2% in the 鈥�00s. On a 10-year trailing average basis, they are down to about 1.6% now. And they still seem to be headed lower.
What caused this drop off in growth is a matter of debate. (We have our ideas!) But the decline in the last quarter was right in line with what has been going on for more than a generation.
As long as growth is disappointing, the feds will fight it鈥nd they鈥檒l fight the Great Correction too. The US government borrows a trillion dollars a year鈥ith no end in sight.
And last year, 61% of that money came from鈥en Bernanke鈥檚 printing press.
Keep up the fight, Ben! And our long-term fixed-rate mortgage will eventually be worthless.
Regards,
Bill Bonner
听蹿辞谤 The Daily Reckoning
