The year 2004 saw a spate of central banks decide that perhaps their dollars holdings were a bit excessive (the phrase “running out our ears” was heard around the world). This week South Korea’s central bank expressed the desire to diversify out of its substantial dollar holdings. On Feb.22nd, a day in which gold spiked more than $7 and the dollar suffered its sharpest one-day drop against the Euro, Bloomberg News reported:

“South Korea's central bank, which has a total of $200 billion in reserves, said in a Feb. 18 report to a parliamentary committee it will increase investments in assets denominated in currencies such as the Australian and Canadian dollars. The country's reserves are the world's fourth biggest, behind Japan, China and Taiwan, according to data compiled by Bloomberg.”

This trend of increasing international dollar-queasiness really caught hold last year with the surge in the Euro, and all of a sudden the dollar’s status as the world’s reserve currency became seriously threatened. The US accounts deficit is now some $1.8 billion PER DAY. This is simply money we borrow, promising to pay back later, with meager interest, and in a depreciating currency, to boot.

How good a deal is that for the rest of the world? Well, not very. And it seems that the world is catching on. Jim Sinclair of JM Mineset declares that:

“When 52% of the world's central banks have declared that they are not just buyers but are sellers of a percentage of their US dollar holdings "times are a changin." The key factor here is not the percentage of their holdings that they are willing to liquidate but rather that they are NO LONGER buyers of US debt instruments. That is a dynamic switch in the marketplace. I would imagine that the other 48% are not now motivated to pick up the slack…”

As for the US stock market in this environment, with the exception of the oil and oil-service stocks, the prospects seem decidedly dicey. Perhaps the Dow in its current trading range is as good as we can expect. Will Gourd of J.P. Morgan Private Bank was quoted by AP today:

"With the different reports out and oil above $50 a barrel, you're just not going to see anyone interested in equities right now.” In a strained attempt at optimism, Mr. Gourd offered the following wishful thinking, "We believe oil can be back in the low $40s by the end of the first quarter, though, and that could help spur interest again."

Which brings us, or not, to the current row over Social Security. The whole argument over who is going to pay what into the system, and at what age they are going to be allowed to draw out “their” benefits, and once they do, how many dollars they might receive per month, is really a tempest in a teapot. After all, Social Security is a federal program, involving dollars, which can be printed at will, created out of thin air, so to speak. To worry about a fiscal crisis, or even a shortfall, in a pensions scheme backed by a government which is so adept at creating dollars, simply seems foolish.

Here's a modest prediction: In due time, we in the US will all receive our Social Security checks without fail, and they will contain both more dollars and less money than one could possibly imagine, if you understand the difference

As Alan Greenspan himself said last week to Congress,

“We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power."