Dollar weakening on euro smokescreen

J. Keith Johnson Senior Writer, The Gold Informant
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The celebration over the recent movements in the dollar may have been a bit premature, if the past two weeks are any indication. In previous months we’ve seen dollar strength on bad news out of Europe and what appears to be growing concern over oil amidst Middle East troubles.

These past two weeks it seems that spins on the euro are accomplishing their desired effect. Consider some of the news coming out of Europe, regardless of its reality or realistic implications.

The European Central Bank has agreed to raise the ceiling on financial aid funding. While this seems like good news on one hand, it’s certainly not going to alleviate the sovereign debt issue in Europe. Debt is debt, and continues to be debt until paid off. By loaning more now to pay off previous debt, all that’s being assured is more debt.

However, whenever politicians kick the commode a little further down the road, investors see it as more opportunity to pick up some gains today. As a result, the euro has risen almost 2% in the past two weeks, compared to a drop in the U.S. dollar of almost 1.5%. The Swiss Franc, of course, paralleled the euro, since the franc was tied to the euro several months ago.

The confidence investors are showing in the euro is unjustified. Any idea that the Eurozone will come out of the current financial crisis with anything short of a crash landing is illusory, at best. When the central banks promise more money to help bolster the economy, who do the people think is going to have to pay for that money? Don’t they realize that every euro used to bail out PIIGS is actually on loan to the people of the Eurozone, plus interest? And, somehow, they perceive this as a good sign?

Apparently they do. Otherwise the euro couldn’t possibly rise in value in any reasonable market. In fact, according to the Thomson Reuters/University of Michigan final index, consumer sentiment rose almost a full percent during March.

Spain is in serious trouble. In fact, in their battle against increasing debt they’ve promised to raise taxes and cut spending; to the tune of 27 billion euros. The idea of pulling spending (much of which provides income for taxpayers) and raising taxes to overcome deficient revenues is self-defeating. It’s a downward spiral from which, unless something drastic happens, there is no recovery. This is what Greece is facing today. You can only draw so much blood before you end up with a corpse.

Make no mistake, this is exactly what’s happening to the people of the U.S. as well. More debt is foisted upon us in order to pay the debt we’ve piled up. With each measure we’re promised that we won’t have to pay today. But at what cost? When will someone have to finally pick up the can? It’s already unmanageable, with each U.S. citizen on the hook for almost $50,000 in sovereign debt.

What can we do about it? Perhaps little, in terms of the big picture: Vote. Strive to understand the times. And prepare your assets for whatever comes next, whether it’s implosion in the form of deflation, inflation or stagflation. Right now U.S. fiscal policy demands continued inflation, so dollars are depreciating by the day. Find investments that grow faster than the inflation rate and offer a good hedge against economic turmoil. Whether you’re in the U.S., or any other part of the world, it’s likely that nothing will offer the stability and possible growth that precious metals do. Because of their durability, tradability and limited availability, they’ve been found to be the default currency during past economic turmoil. Don’t be caught in the smokescreen. Instead, be prepared to rise above it.

J. Keith Johnson is a senior writer for The Gold Informant.