G7 Flops!

Will the dollar continue to fall? Or will the G7 meeting this past weekend turn it around?

The answer will determine the immediate fate of gold, silver, oil, bonds, and soon, stocks as well.

It could alter the outcome of the 2004 presidential election and change the face of world politics for years to come.

And it could make the difference between success or failure in virtually all your investments.

So pay close attention to my log of the events as they unfolded over the past 72 hours …

FRIDAY, FEBRUARY 6. STRUGGLING FOR WORDS

The Boca Raton Resort & Club, where G7 finance ministers are meeting, is just a short drive from my home in Palm Beach Gardens — south on I-95 and then east toward the ocean on Camino Real.

Nearby, golfers leisurely tee off at the par-72 Country Club Course and windsurfers comfortably negotiate gusts and lulls offshore. Little do they realize that, inside, a drama is unfolding of potentially earth-shattering dimensions.

The finance ministers have a serious quandary. Within less than a day, they must come up with a statement that is both STRONG enough to combat a plunging dollar and, at the same time, WEAK enough to gain the unanimous support of all seven of the nations represented: The United States. Japan. Germany. France. Britain. Canada. Italy.

That’s tougher than hitting a hole-in-one with a chopstick; almost as hard as tacking into a tsunami.

Meanwhile, thousands of miles to the north and east, in London, Paris, Frankfurt, and Tokyo, the dollar has been falling into a bottomless pit, pounded by wave after wave of selling, driven lower by the most powerful combination of fundamental forces ever amassed in one time and place …

– The lowest U.S. money market rates in 45 years, making the dollar extremely unattractive to foreign investors …

– The largest U.S. budget deficit of all time (in dollar terms) — over a half trillion dollars …

– The largest U.S. trade deficit of all time (in both dollar AND percentage terms) — ANOTHER half trillion dollars and …

– The greatest exodus of jobs from America of all time — to low-wage countries like China, India, and even Bangladesh.

But in the resort’s signature 1926 building, the G-7 ministers huddle over a table for hours, desperately trying to come up with something meaningful to say to the world.

They know, in their gut, that even the most hyperbolic statement that the English lexicon could possibly deliver would not be nearly enough to combat the powerhouse of financial forces now lined up against them.

Paradoxically, they also know that even a moderately strong statement will be politically infeasible. The fundamental gaps between the ministers are just too wide and too deep:

THE AMERICANS, led by Treasury Secretary John Snow, want the dollar to continue FALLING — so they can save some of the jobs fleeing en masse to low-wage countries, not to mention their boss’s own job come November.

THE GERMANS AND THE FRENCH want the dollar to turn around and start RISING — so they can save their slumping economies. Ditto for the British and Canadians.

THE JAPANESE are in their own camp. They want to do everything in their power to keep the yen as cheap as possible DESPITE the cheaper dollar. Last year they dumped yen onto the market at the rate of nearly one billion dollars’ worth per trading DAY. This year, they want to CONTINUE dumping yen onto the market. They know that as soon as they STOP dumping more, the yen will go through the roof and the dollar will fall through the floor.

Clearly, everyone around the table has a totally different agenda — Americans seeking a dollar decline, Europeans wanting a dollar RISE, and the Japanese pushing for a decline in their own currency that’s only modestly less severe than the dollar’s.

The ministers talk until they’re blue in the face. They smile and nod politely. And all the while, in their mind’s eye, their heads shake in frustration. They struggle to come up with the right balance of words.

SATURDAY, FEBRUARY 7. THE “STATEMENT”

The sun is bright but the surf is rougher today. The seven ministers line up proudly in a neat row before the press. They have finally come up with a statement all can agree with. Each phrase has been carefully crafted; each word, painstakingly chosen. Ten words in particular have been drafted with special TLC:

excess
volatility
and
disorderly
movements
in
exchange
rates
are
undesirable

The ministers stand smiling before the cameras, six of them praying silently: Let these magic words stop the dollar decline. Let the foreign exchange speculators of the world rest in tranquility.

Never mind that in the pre-meeting chatter around the world, those speculators were clamoring for a far stronger statement!

Never mind that another set of words in the very same statement — pleading for “flexibility” in exchange rates — directly contradicts the notion of a strong dollar, especially against the Japanese yen!

Nevermind the forces now upon us — the worst American deficits in history and the lowest U.S. interest rates in nearly a half century!

SUNDAY, FEBRUARY 8. “TALKING IT UP”

Only a few hours have passed since the statement’s release. Even in East Asia, markets are still closed. But officials in Europe are hopeful that the G-7 statement will somehow turn the tide.

They describe their Boca Raton achievement as “historic.” Central Bank President Jean-Claude Trichet says, “it’s a very good communiqué.”

Deutsche Welle, Germany’s leading world news organization, hails it as “the strongest move yet to stop the plummeting dollar.” The BBC proclaims that the “U.S. has accepted” the goal that “the dollar should not get much weaker against the yen and the euro.” Analysts and traders everywhere anticipate at least a one- or two-week rally in the dollar before it resumes its decline.

SUNDAY NIGHT. DISAPPOINTMENT

It’s bedtime for me in Florida, but 10am in Tokyo. The foreign exchange market is going crazy. The dollar opens stronger. But then it hangs dead in mid-air and starts falling right back down again.

Against the euro, after being up a cent to $1.2600, the dollar plunges anew, to a two-week low of $1.2760 per euro. The dollar also falls to a two-week low against the Australian dollar, a four-week low against the British pound, and a new four-YEAR low against the Singapore dollar.

What’s happening? Ask some of the G-7 ministers watching from afar. Didn’t they believe our great statement? Didn’t our 10 magic words convince them we mean business (even if we really don’t)?

TODAY, FEBRUARY 9.

The answer is on Yahoo! News this morning, for all to see:

“Saturday’s statement from the two-day G7 meeting boosted the dollar as trade began in Asia. But the gains quickly evaporated as traders focused on the economic fundamentals behind the currency’s two-year slide and skepticism that the group would coordinate action to reverse the trend.

“Dealers interpreted the G7 statement — issued after a meeting of finance ministers and central bank chiefs in Florida — as acknowledging European concerns about the euro’s rapid rise. But they doubted the statement would be followed up with intervention in the market to support the dollar.”

WHAT NEXT?

I’m back at my home office. The Nikkei average just fell to 10,402 this morning, its lowest close since Christmas Day.

But here in the U.S., the stock market ended strong last week. Investors on Wall Street said they were happy that Friday’s employment release wasn’t as weak as last month’s dreadful report. Plus, they said they were ALSO happy that it wasn’t nearly as STRONG as it would take to make them worry sick about a quick rate hike by the Fed. Pollyanna would be proud.

Obviously, Wall Street has no inkling of what the sinking dollar can do to them. They have no idea of what it will feel like when the dollar selling gains momentum, when foreign investors panic.

Nor do they see what will happen when just a few of them start dumping a portion — even a very small portion — of the $4.6 trillion in U.S. government bonds, U.S. corporate bonds, and U.S. common equities they’re currently holding.

Average Americans don’t see it coming either. They don’t connect the dots between the dollar’s decline overseas and a declining purchasing power of the dollar at home … between the threat to the dollar and the threat to the entire economy … between the dire threat to the economy and an equally dire threat to the fabric of society.

When my Dad was alive, he did connect the dots.

About 45 years ago, when the federal deficit seemed to be going haywire, he founded the Sound Dollar Committee, which was instrumental in bringing about a balanced budget in the last year of the Eisenhower Administration — the last REAL balanced budget we’ve had ever since.

And about two decades ago, when the deficit was going haywire under Reagan, Dad tried to do it again.

Like the G-7 this weekend, his Sound Dollar Committee also held a top-level meeting at a beach resort in South Florida, only a few miles up the road from the Boca Raton Resort & Club. And like the G-7 ministers, they also issued a joint statement.

But unlike the wimpy, contradictory words of the G-7, theirs were clear: Balance the budget! Keep the dollar FUNDAMENTALLY strong. End the rhetoric! Quit the nonsense!

Looking back, I wish I had helped him more. He wanted so badly for me to attend his meetings, work beside him with the industry leaders that he invited, and stick with it for the full three days. Unfortunately, I only had time for three hours. But it wouldn’t have changed the end result: Their statement fell on deaf ears.

Now, though, we are in a different world.

When Dad held his last Sound Dollar Committee meeting in the early 1980s, the U.S. budget deficit was averaging around 5% of GDP. This time, it could hit 10% of GDP.

The U.S. trade deficit is now MANY times worse, and the dollar is fundamentally MUCH weaker.

Even optimistic economists agree that it will be almost impossible for the U.S. to grow its way out of its problems as it did in the 1980s.

And this time, I will not let Dad down.

Looking back, anyone can see how right he was. His fears about a falling dollar — and his zeal to rectify the wrongs — were prescient, to say the least.

There was one thing he was wrong about: Before he died, as he urged me to bring back the Sound Dollar Committee, he said that there was just ONE old cardboard box in our company’s warehouse, marked “Irving,” and that it contained all the documents and memoirs of the Sound Dollar Committee. But on Friday, I discovered that there are actually TWENTY-THREE boxes marked “Irving.”

They’re all being delivered to our office today. As I rummage through them, I’ll keep you posted as to what I find. I’ll also keep you up to date on any significant steps I may take along the way.

Good luck and God bless!

Martin

Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc.