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Snow to Dollar: "Drop Dead!"
(May 23, 2003) Gold closes the week at $368.80, jumping nearly $10 on Monday as the dollar plummeted following assertions by the Secretary of the Treasury Paul Snow that, yes, in fact the dollar IS worth the paper it’s printed on. He also mentioned that the new $20 bill with multicolor ink will be more difficult to counterfeit – but if trends continue, who would bother?
"US Dollar Hit by Snowstorm, Gold Rockets Upwards"

The "Snowstorm" that hit the dollar started with Snow's appearance on ABC's "This Week" show of Sunday May 11, during which he said “When the dollar is at a lower level it helps exports, and I think exports are getting stronger as a result.” This somewhat innocuous statement was taken by the markets to be a sign that the administration favors the idea of allowing the dollar to slide, with the hope that a cheaper dollar would bolster exports and help shake off the deepening recession the US economy is going through.

So immediately on Monday May 12, traders sold the dollar, sending the Euro at one point to its highest level of this young century, $1.625. On that same day, Treasury spokeman Tony Fratto insisted, “The dollar policy remains unchanged.” Gold broke through $350 and closed at $351.60 that day.

“The dollar policy remains unchanged,” according to Mr. Fratto, and that policy, according to both Secretary Snow and his predecessor Paul O’Neill, is that of a “strong dollar.”

So, pray tell, what is a ‘strong dollar?’

On Sunday, May 18, Secretary of the Treasury John Snow was asked by reporters at the Group of Eight meeting in Deauville, France what the word “strong” means to him. Secretary Snow answered by saying,

“You want people to have confidence in your currency. You want them to see the currency as a good medium of exchange. You want the currency to be a good store of value. You want it to be something people are willing to hold. You want it hard to counterfeit, like our new $20 bill. Those are the qualities.”

This statement, a carefully-worded yet ultimately lame explanation, signaled to the world that the "strong dollar" policy is now officially over.

David Hale, in a Financial Times article of May 19th entitled "Washington's Weak Dollar Policy," summed up the damage done:

"The dollar's decline has been painless for US financial markets because investors are complacent about inflation. The failure of bond yields to rise has also produced a policy of benign neglect in Washington. Federal Reserve officials say the falling dollar is a European problem, not a US one. John Snow, the US Treasury secretary, effectively abandoned the previous administration's strong dollar policy over the weekend by issuing his own definition of what constitutes a strong currency. It does not include market prices.">br>

To a great extent, this path of least resistance taken by the Treasury is seen as a way to bolster the competitiveness of US exporters. A weaker dollar makes US goods more affordable abroad, which is good for any US business with an international presence.

What’s left unsaid is that the policy of a weaker dollar, while benefiting a few exporters, beggars the American consumer in a myriad of ways. A weaker dollar means higher prices in this country for imported cars and the oil to fuel them, and all the electronics, home appliances, clothing, shoes, and the countless other items that are no longer made in the USA.

We Americans have, mostly without knowing it, come to count on the world to produce so much for us, and to accept our fiat “dollar” in payment on terms greatly favorable to us. We have been able to out-source virtually all our industrial capacity. Our productivity consists chiefly of printing the dollars we use to pay the rest of the world for all the ‘stuff’ they provide.

And now we are, through the mouthpiece of Secretary Snow, announcing to the world that the dollars that they received for those goods are subject to devaluation - and it could happen pretty damn quick, too. As Dave Lewis writes in his May 19th column that ran in,

“…(I)t is worth noting that while an accelerating decline in the US$ should work to restore market equilibrium, it is the final act in a rather large "appropriation" of the world's savings. Just as Nixon's decision to go off the Gold standard was in effect an announcement to the world that the US, as world's banker, had not safeguarded deposits well, so too is a large rise in the value of Gold today…. The "strong $ policy" of Bob Rubin, which was, in effect, the same as the promise that the US$ was as "good as Gold" in the 60s, now has, I believe, come to an end.”

Over the past few weeks the dollar has lost value against gold, the euro, the yen, and most of the world's currencies. Incredibly, in the time since US tanks rolled into Baghdad, the dollar has even lost over half its value in relation to the Iraqi dinar, a currency which features the likeness of their now-absent leader Saddam Hussein. How could that be? Well, they're simply not making dinars anymore, and at the same time we we are flooding Iraq with US $20 bills.

Meanwhile, back at the Fed, Alan Greenspan testified before Congress on Wednesday May 21st, and touched on the subject of money. In an AP article entitled "Greenspan Promising Fight Against Deflation" that ran in our local Arizona Republic newspaper, the Maestro of the Federal Reserve uttered the following sentence, which we offer here without comment:

"We see no credible possibility that we will at any point, irrespective of what is required of us, run out of monetary ammunition to address problems of deflation or anything similar to that which disrupts our economy."

Plain English is not the only victim when a currency is devalued - the entire process is always an ugly affair. When FDR devalued the dollar in 1933 from $20.67 per ounce of gold to $35, it was a shocking act that destabilized a 140-year-old hard-money currency known as the US dollar, and he was called, among other less polite epithets, a traitor to his class.

When Nixon struggled in 1968 to maintain the dollar at $35 (against an assault led by the French), the battle for dollar integrity was tremendously newsworthy, and the consummate politician Nixon spent considerable time and effort trying to avoid having the dollar significantly devalued on his watch. It took four years of tiny, hard-fought little incremental devaluations to re-peg the dollar officially, and temporarily, at $42 per ounce in 1971. In 1972 the official gold/dollar relationship was finally abandoned and gold first broke through the $200 level in 1974.

The dollar devaluation currently underway will be no less unpleasant, but so far its dramatic slide in value against gold and the world's currencies are met in this country with indifference and a stifled yawn. The integrity of the dollar is not, in political terms, 'on message' at this time.

As David Hale writes, "...the White House will not be able to encourage a dollar rally until Karl Rove holds a press conference on the subject." The issue of the relative strength of the dollar is a subject almost totally invisible to Americans.

Traditionally, this is the point in the narrative where the reader finds the moral of the story, a timely warning, or some call to action. So even though we’re probably preaching to the choir, we’ll say it anyway:

"Only gold will save your assets."


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