Cash is King

Sep 27, 2011

Buenos Aires, Argentina

Cash is king.

Ai yi yi...

Last week was the worst for investors in 3 years. Even gold melted down, as we thought it eventually would.

The only things to go up were US Treasury debt and the dollar. As expected, the Great Correction is doing its work.

So far, the stock market has held up as well as it has. But now it seems to be selling off. And gold is selling off too.

Rich people buy gold. They can afford to. They know the end of the dollar is coming - sooner or later. They can wait.

But the middle classes need dollars. Debtors need dollars. Consumers need dollars. Almost everybody needs dollars. In a correction, cash is king. And the king of kings is the dollar. Here's CNN confirming what Dear Readers already know:
...the data [from the census] gave the first glimpse of what happened to middle-class incomes in the first decade of the millennium. While the earnings of middle-income Americans have barely budged since the mid 1970s, the new data showed that from 2000 to 2010, they actually regressed.

For American households in the middle of the pay scale, income fell to $49,445 last year, when adjusted for inflation, a level not seen since 1996.

And over the 10-year period, their income is down 7%.

"Economists talk about the lost decade in Japan. Well, with these 2010 data, we can confirm the lost decade for the American middle class," said Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities.

Sure, it's fair to say Americans at all levels of income, from rich to poor, were hit hard in the decade that started with the dot-com boom and bust, and ended with the Great Recession.

But according to the census data, those losses disproportionately hit the lowest 60% of Americans, while the richest 40% actually gained wealth, relative to the entire U.S. economy.

The middle classes need dollars. They want dollars. Because it's a currency - believe it or not - that you can still trust. No thanks to Bernanke, Obama, et al.

Instead, our gratitude goes to the Great Correction itself. It's doing the work of an honest central bank. It is making the dollar respectable again. Thanks to the Great Correction the greenback can hold its head up. Uncle Sam's money is Number One.

How so? In a correction, almost everything goes down. And almost everyone gets scared that his investments and his savings (which he put into stocks on the advice of his financial magazine) will go down too.

Your editor says that in the long run gold will be a better place for your money than dollars. But everyone can't wait for your editor to be proved right. Most people have bills to pay. And you don't pay bills with gold. You pay them with dollars.

And imagine that you are a European or an Asian investor? What are you going to do with your money? Put it in a French bank or a Greek bond? Nope. You want something safer. You want a US treasury bond.

And as long as the Great Correction is allowed to continue...US Treasury debt will be a good place for your money. The trouble is, we don't know when the feds might run a bull in a china shop...and break all the teacups. So, here at the Daily Reckoning at least, we'll stick with our gold through this correction, confident than when we come out the other side the dollar will be among the porcelain shards and gold will still be standing tall.

When we entered this Great Correction we figured the process would take a few years. We felt like a judge had just given us a prison sentence.

"Five to ten," said your honor.

Now, it looks like it will take longer. We figured the feds wouldn't be able to finance their deficits for very long. That would force them to hit the panic button and begin dropping dollars from helicopters. But what the market is showing us now is that this Japan-like phase can last a long, long time. Because the correction itself is making the dollar and dollar debt more attractive!

Get this: the yield on 10-year US Treasury debt is now lower than the yield on the S&P. What happened to the risk premium in stocks? It has disappeared. Now US Treasury debt is more risky - as indicated by the yields - then stocks. And our guess is that it is going to get much, much riskier. The longer the correction goes on...the deeper it goes...the more people will want the safety of US notes and bonds. And the more they buy Treasury debt...the lower go the yields...

Meanwhile, stocks should go down...pushing up yields. That's what happens in a correction. That's what happened in Japan over the last 20 years.

Most likely, we'll see yields of 5% on the S&P before this is over. That's because prices will be cut in half.

Meanwhile, we'll see yields on bonds go down to 1% or so on the 10-year bonds. This correction means business. It appears to be even more powerful than we imagined. It is not merely correcting a bull market and a credit bubble. We don't know for sure, but it may be correcting an empire, modern government, the dollar-based monetary system...and who knows...maybe an entire civilization.

We'll just have to wait to see how far it goes. ---------------------------------------------------------- Free Video ----------------------------------------------------------

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*** Dear Reader, do you recall our Daily Reckoning interpretation of the Iraq War? Well, we didn't either.

But then we remembered. How could the Bush Administration do something so stupid?. It played right into the terrorists' hands. It put the empire on course for bankruptcy. While stirring up enemies everywhere.

Our interpretation of this was that George W. Bush and the neocons were not really trying to protect the US; they were trying to destroy it. Otherwise their actions made no sense. After all, they aren't stupid.

In other words, they were just the witless tools of history. America had gotten too big for her britches. She had no foreign enemies that were up to the challenge of bringing her down. She needed to do the work herself.

So far, so good. The empire is going broke...and nobody seems able to do anything about it.

What's more, the work of destruction goes on!

Michael Brenner
19 September 2011

The United States' audacious bid to dominate the greater Middle East by military force is going at close to full throttle. This is despite the talk in Washington about over-extension, budgetary constraints, and war fatigue. Three stories this week reveal this dismaying truth while conveying the flavor of the prevailing mindset in the White House and the security agencies.

First is the revelation that the imperial-scale American embassy complex in Baghdad already needs expansion to accommodate the 6,000 mercenaries there to ride shotgun for the 9,000 civilian employees whenever they clamber out of their bomb-proof offices. That number includes roughly 1,200 U.S. officials and 7,800 hired help from places like Bangladesh and Sri Lanka to do the laundry, clean the rooms and serve the food. The mercenaries also will guard the citadel and its satellite fortresses in Basra, Mosul and Erbil. These Blackwater types have the additional duty of escorting salesmen and agents for American businesses selling and servicing weapons for the Iraqi military. The forces commander-in-chief will be Hillary Clinton. They are in addition to the 10,000 troops that Washington is trying to impose on the reluctant Iraqi government and thousands more on call next door in Kuwait,...

The second story recounts the Obama administration's plans to escalate further the drone campaigns in Yemen and Somalia. There is a mild debate between those who want to restrict assassinations to (supposedly) identified leaders of al-Qaida in the Arabian Peninsula and al-Qaida in East Africa. Others are keen to expand the target list to include (suspected) foot soldiers; other radical Islamist groups who use violence against people on our side, i.e. remnants of the Saleh regime in Yemen or those who currently reside in the presidential palace in Mogadishu (with an American-sponsored African Union force having taken the baton from the Christian Ethiopians whom we earlier inflicted on the Muslim Somalis in a foregone bloody failure to hold at bay the Islamists); and even radical fundamentalist organizations only potentially hostile to the United States. In this latter perspective, a manifest threat to the United States is unnecessary for targeted killings and Special Forces operations. Again, there is no public statement of exactly why it is imperative to do these things that not only violate international law and national sovereignty but are counter-productive by their provoking bitter anti-American feelings among the natives -- leading some to contemplate doing us harm directly.

Finally, there is the mounting military campaign to eliminate all anti-American groups in Northwest Pakistan -- be they local al-Qaida residue, some variety of Taliban, the Haqqani network, their Kashmiri and Punjabi based allies and whomever else gets in the way...

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

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