Dollar is past the point of no return - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 13 May 2010
Dollar is past the point of no return A  A  A

Paris, France

A very short message today....

We're hosting our first Family Office Partner's Reunion...

The family office is just a different way of holding and organizing wealth. In fact, it's a different way of thinking about money. Instead of making money to enjoy yourself, you enjoy the idea that the rest of the family will be able to enjoy it. And if you do it right, maybe several generations will enjoy it.

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Do you have to be rich? Well, it helps. But the answer is no. It's just a different way of looking at it.... You have to have some money that you don't intend to spend yourself, of course. Then, you draw the family into the project of increasing it...managing it...and using it. The amount probably matters less than the idea itself.

Even with $10,000, you could go to your children and say:

"Here...this will be the cornerstone of the family wealth. Let's manage it together. Maybe by the time your children are your age, it will be a much more important legacy."

Then again, maybe they'll just buy a sports car.

Can you still buy a sports car for $10,000? We bought our first real automobile for $78. It was a '37 Plymouth. Beautiful car. All original. And it ran well...for a while. We were only 16. We didn't have a driver's license yet, but we were getting ready.

Then, the first real, roadworthy automobile we bought - at 17 years old - was a '61 MGA. Remember those? A little British sports car. A two-seater. What fun we had with that! We would play hooky from school, for example, and drive down to Chesapeake Beach. Or, we drove into Washington, DC, where we claimed to be over the legal drinking age and nobody asked any questions anyway. Or, sometimes we just drove around with the top down.

Back in those days there was very little traffic on the roads of Southern Maryland. You could drive where you wanted. Then, you could stop by the side of the road and explore the woods...or drive to some empty beach along the Chesapeake...

What a great time it was be young, white, and pretend to be over 21! Maybe it was a great time to be young and black too. We don't know.

One of our friends at the time was a black girl named Ruby. Segregation had ended just a few years before. Blacks and whites did not mix socially. But we'd put the top down on the car and drive around together. There wasn't anywhere to go, really. And nothing much to do. But on a nice day, it was a delight just to be out and about in the little red sports car. People would stare and shake their heads... A white boy with a black girl? It just didn't seem right!

Whatever happened to Ruby? We don't know... Maybe she'll read this and we'll hear from her.

Why are we reminiscing? Well, that little sports car only cost us $200.
Too bad we didn't put it in a barn somewhere and hold onto it. Today, it would be worth thousands.

You can't buy an MGA for $200 dollars today, partly because they are a collectors' item and partly because the dollar ain't what it used to be.

Why ain't the dollar what it used to be?

Don't ask silly questions. You know perfectly well.

Because it's just paper. And in the Wall Street Journal yesterday was the harbinger of something big. A guest editorial suggested that the US return to the gold standard!

The stock market went up 148 points yesterday. Gold went up even more -- $22. Stocks have gone nowhere in the last 11 years. Gold is at an all-time high.

And now gold goes up on 'good' news and on 'bad' news. Inflation? Gold goes up. Deflation? Gold goes up. When stocks go goes up more. When stocks go down, gold goes up anyway.

Why? The gold market is anticipating a blow-up in the world's monetary system.

We see it coming too. We've already seen what happens when a small country runs up too much debt. Investors get worried.
Interest rates rise. The country can no longer borrow to cover its deficits...or to pay its past loans. Disaster.

But the Greek situation is not very different from the situation in dozens of other countries - including Portugal, Spain, Italy, Britain and the USA.

America is unique...and just the same. It is already so deep in debt that even if you taxed 100% of Americans' income, the resulting take wouldn't be enough to cover the deficit (people would earn less). And if you cut the Pentagon budget by'd still have a deficit too.

It would take a remarkable act of political courage and discipline to put the US back on the path towards sound public finances. Do you see that happening? We don't.

Instead, what we see are more deficits - from here to kingdom come.

Already, the US national debt (to say nothing about the unfunded liabilities and future debts already in the pipeline) is approaching 100% of GDP. (Greece is at 120% of GDP...soon to be 150%).

At 100% of GDP, the economy must grow at least at the same rate as the interest charge on the debt - or the debt will get larger and larger. In other words, if you paid 5% on the debt...and the rate of GDP growth were 5%...then, if you devoted all the additional growth to paying the interest on the debt, you'd stay in the same place!

The last measure of growth in the US was 3.2%...probably declining. (We'll set aside the important question as to whether this growth is real or fiction.) But long-term borrowing costs for the feds are headed to 5%. And as investors lose confidence in America's ability to pay...or its willingness (or ability) to keep the dollar from falling in value...the carrying cost on debt grows.

It is probably too late already. We are probably past the point of no return, as economists Rogoff and Reinhart insist.

In our view, the US could still save itself IF it could made an extraordinary commitment to budget cutting. But we won't hold our breath.

Instead, we'll buy more gold.

*** In a bar in Paris...

A woman, blond hair, well-shaped, came in. Tanned and confident. She took a chair at the bar and ordered a coffee. It was 9AM. Your editor was sitting at a table writing his Daily Reckoning. Men in blue coveralls stood at the bar drinking their morning coffee. A couple of businessmen sat at a nearby table.

When the woman entered the bar, everyone noticed. Not that there is any shortage of beautiful women in Paris. But no one wants to miss an opportunity to look at one.

The woman enjoyed the attention. There was a slight smile on her face as she sipped her coffee and read a newspaper.

A man in blue jeans, about 45, with graying hair and a George Clooney look about him, entered the bar. He stood near the woman and ordered a coffee. At first, he did not seem to notice her. He looked calm. At ease.

Then, when he noticed the woman drinking coffee beside him, his left foot rose so that the toes tapped the floor. He glanced at her...then glanced away...then shifted his posture once...twice....still tapping his toe on the floor.

He looked at himself in the mirror behind the bar. He brushed his hair... He looked like he was searching for a cigarette... then, he took out a Blackberry and began checking messages...glancing at the woman from time to time...tapping his toe...shifting around...looking in the mirror...

He cleared his throat. He leaned toward the woman... He reached for a lump of sugar in the bowl in front of her...

"Pardon..." he said.

She looked up. She smiled. She went back to reading her paper.

His smile slumped. He drank his coffee and left the bar.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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May 13, 2010

We have been reading Bill's views on Europe in the past week. What is his take on India, China?

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