Where does 2003 fit into the scheme of history?
Was 2003 the first year in a new American prosperity that will continue for years to come? Or was it merely an interlude in a long period of instability and protracted decline that began in 2000?
For many American corporations, the answer could make the critical difference between expanding profits … and a wave of bankruptcies.
For many investors, it will make the difference between great gains and horrible losses.
For Mr. Bush, it will be the determining factor between an easy ride into a second term … and a harrowing, photo-finish election in November.
And for you, the key is to get the CORRECT answer — whether it’s good or bad. We can’t predict the future. But if you and I take a moment — to step away from the trees and look at the BIG PICTURE — we should come away with some valuable clues about what lies ahead.
THE BEST TEACHER I’VE EVER KNOWN
Some people get their big-picture orientation from school; others, from the street.
I did neither. When it comes to a broad sense of history, I learned the most from my father. Among all the teachers I’ve ever encountered, Dad was easily the all-time best.
Back in 1928, sixteen years before I was born, Dad became a “customer’s man†(a broker) on Wall Street. He had no money in the market when the ’29 crash struck. But in early 1930, when the market enjoyed a substantial rally, he borrowed $500 from his mother to sell short select stocks. He told me that by the time the market touched rock bottom a few years later, he had $100,000.
Then, he did exactly the opposite. He bought every stock he could lay his hands on — right near the all-time bottom of the market.
Later, when I was six, Dad decided to start teaching me about the stock market and the economy. While other kids were playing checkers or cards, he and I played a stock market game that he invented. Whatever I wanted to buy, he would sell; and whenever I wanted to sell, he’d be the buyer.
He also taught me about the great booms and busts of history. He blew up a balloon until it seemed like it was ready to burst. Then, as I instinctively raised my hands to cup my ears, he asked: “How many more breaths before it pops?â€
That taught me two lessons: If you blow up a balloon far enough, it always explodes. But you can never pinpoint exactly when.
A WHITE HOUSE VISIT
During the summers, when I was off from school, Dad would take me with him to his office or even on important business trips.
His office was at 50 Broad Street, next door to the New York Stock Exchange. Since I had recently returned from three years in central Brazil, where even a telephone was a rarity, I was awed by almost anything: The speed of the elevator to the 20th floor … the neat lettering on the frosted glass door … the majestic Underwood typewriter … the huge adding machine.
So you can imagine my intense interest when Dad took me with him to Washington on an official visit to the White House. Dwight D. Eisenhower was president, and Dad said he was helping the president on a very important mission.
Although it was nearly five decades ago, I remember the scene vividly. It was a hot summer day, and we took a taxi from Union Station straight to Pennsylvania Avenue. As we walked up to the guard gate, I was afraid the man was going to say I was too little to visit the White House. But he just took Dad’s name, checked a list, smiled at me, and waved us in.
From the newsreels I had seen at the movies, I knew the president was bald, just like my Dad. But the man we met inside had hair. That tipped me off immediately that he wasn’t the president, and, from my perspective, couldn’t possibly be as important as the two bald men that I respected the most.
The room was almost as big as Dad’s entire office. But it felt more like a museum, with paintings on most of the walls. Isn’t it strange how images stick in one’s memory, but words, especially those spoken among others, go in one ear and out the other? I have no recollection of what they discussed.
But looking back over my father’s writings as well as his Congressional testimony of that era, I can easily figure out what the topic probably was: The federal deficit and the dollar.
THE BUDGET BATTLE OF 1959
On January 3, 1959, President Eisenhower gave one of the most important — and least remembered — state of the union speeches in American history. Reading in a monotone from a device on his podium that scrolled the text a few lines at a time, he warned:
“We must avoid extremes … of waste and inflation which could reduce job opportunities, price us out of world markets, and shrink the value of savings. To keep our economy sound and expanding, I shall … present to the Congress a balanced budget.â€
Eisenhower’s big-picture view was simple: To compete with other countries, the U.S. had to keep its costs down; and to control costs consistently over time, the federal government had to balance the budget. The idea is not new or complex. But today, it is neither understood nor accepted in Washington.
It wasn’t immediately accepted back then, either. Indeed, the most conspicuous reaction to Eisenhower’s speech came in the form of a rude but unspoken interruption from the second row of the House chambers — an unrestrained yawn by the Senate Democratic leader, Lyndon B. Johnson. It was the first warning of a major battle over the budget.
The opponents charged that Eisenhower’s balanced budget “comes close to being a fraud on the American people. … The individual budget items are an intricate combination of defeat, deception and denial.†With this diatribe, it looked as though Congress would defeat Eisenhower’s proposal, and that’s when Dad decided to play a role.
“FIGHT TO THE LAST DITCH TO PRESERVE OUR DOLLAR!â€
With the blessing of two prominent Americans — presidential adviser Bernard Baruch and former president Herbert Hoover — Dad formed a small lobbying group, naming it the “Sound Dollar Committee.â€
The Sound Dollar Committee’s first action was a full-page ad in the Wall Street Journal, appealing to Americans to balance the budget and “FIGHT TO THE LAST DITCH TO PRESERVE OUR DOLLAR!â€
The ad also implored citizens to: “Let [politicians] know you will NOT vote them out of office if they take a courageous stand. Remind them that it’s your money that’s being spent, that they should act IMMEDIATELY in cutting out those expenditures that are NOT ABSOLUTELY NECESSARY.â€
This ad merely set off the first sparks. A few days later, the Chicago Tribune called, asking for permission to run a similar ad of their own at their own expense.
The Los Angeles Times, the New York Daily News and the Reader’s Digest followed suit. Scores of newspapers and magazines joined the Sound Dollar Committee in a nationwide mail-in campaign aimed at state and federal legislators — to balance the budget and protect the dollar.
The results were overwhelming: On February 15, 1959, the New York Times reported that “a blizzard of correspondence has whitewashed legislators’ desks. Some of it has piled up in unanswered bundles on office floors.â€
At just one politician’s office, the Times estimated over 100,000 letters and telegrams. Another source estimated that the total number of protests received on Capitol Hill was in the millions.
Senator Proxmire changed his mind and voted in favor of budget cuts. One after another, congressmen shifted their votes and supported Eisenhower. And the budget was balanced.
That was 1959. Now, fast forward 45 years to 2004 — and you will be amazed at how much has changed …
THE TRILLION DOLLAR DEFICIT! A DOLLAR DISASTER!
First, the relative size of the problem is far greater today:
* In 1959, Eisenhower’s proposal for the entire budget for a full year was just $77 billion, far less than today’s DEFICIT for just one QUARTER. Indeed, for fiscal 2004, official estimates range from $450 billion to $500 billion, and if you include the so-called “off-budget†items, the deficit could be over ONE TRILLION DOLLARS!
* In 1959, as a proportion of GDP, the size of the budget and the government overall was a small fraction of today’s.
* In that era, the U.S. industry was very competitive — dominating key world markets with superior technology and know-how, maintaining a solid trade surplus. Today, with the exception of a few bio-tech and high-tech fields, other countries are often beating the pants off us. Result: Our current account deficit (made up mostly of the trade deficit) is near $500 billion, the worst in history, even in proportion to the size of our economy.
* These huge deficits MUST inevitably show up in a dollar decline, and sure enough, that’s exactly what happened in 2003: The dollar fell sharply against nearly all foreign currencies, hitting new lows on December 31. Remarkably, the decline was not only against the currencies of large, industrial economies like the European Community, Britain and Japan … but also against the currencies of countries like Argentina, Brazil, and Australia.
In contrast, back in 1959, the dollar’s value was pegged to major world currencies under the Bretton Woods agreement. Independent of the controls, however, the value of the dollar against major foreign currencies was stable in the late 1950s. Today, it’s falling virtually nonstop.
CHEERING THE MONSTERS
The threats that Eisenhower warned of in 1959 were mostly future scenarios. So the leaders of that era were acting well in advance, seeking to fight off demons that they could only see in their mind’s eye.
Today, in contrast, monstrous problems are all around us … and ironically, rather than putting up a fight, our leaders are cheering them on.
You see, back in 1959, the majority of America’s government and business leaders had personal memories of the Crash of ’29 and the Great Depression. They had no illusions regarding the limits of government power or the consequences of economic instability. When they saw even the POSSIBILITY of big red ink in Washington, they responded with grave alarm — and firm action.
Now, the situation is precisely the opposite. The only Americans who were adults during the Crash of ’29 are now at least 92 years old! How many of these nonagenarians are active decision-makers in government or business today? A half dozen would be many. Thus, even with the proven REALITY of a deficit bloodbath, our leaders’ most notable reaction is silence or … complacency.
Compare also the attitude toward the U.S. dollar: In 1959, although the dollar was still stable, any future threat was viewed as a national crisis. In 2004, not only do we actually HAVE a dollar crisis, but it’s widely welcomed as an easy way out of our mounting trade difficulties.
The prevailing view: “To get America competitive again, rather than make sacrifices, reduce costs, and balance budgets, all we have to do is cheapen the U.S. dollar.â€
But this tactic will go wrong for two reasons: First, because some of the big trade-surplus countries, like China, are cheapening their currencies just as fast as we cheapen ours. And second, because a falling dollar is pressuring foreign investors to sell their U.S. stocks and bonds, threatening to drive down our markets.
The deficits are out of control and the dollar is plunging. But Wall Street is busy celebrating Dow 10,500, and Washington is politics as usual. Our entire economy is in grave danger, and no one seems to give a damn.
NO LASTING PROSPERITY WITHOUT STABILITY
Much has changed since the middle of the last century, but there is one fundamental fact of life that will never change: TO ACHIEVE SUSTAINABLE PROSPERITY, WE MUST FIRST HAVE FINANCIAL STABILITY.
There is just no other way. And therein lies the correct answer to what the future will bring:
We do not have financial stability. Instead, our economy seems to be mostly a series of blown up balloons: The federal debt balloon, the foreign debt balloon, the mortgage debt balloon, and another new balloon emerging in the stock market, especially in overvalued tech stocks.
What about the recent strength in the manufacturing sector? No, that’s not a balloon in itself. But it’s directly DRIVEN and SUPPORTED by the spending generated by the many debt balloons.
YOUR CHOICES
Right now, the stock market is still going up, and the dollar decline is not yet having a visible impact.
So you have two choices: You can join the bandwagon, jump on the hottest stocks, and possibly even enjoy a short ride.
Or you can learn from history — and plan your financial future based on the big picture I have outlined for you here, on this first Monday of the New Year.
This latter path is based largely on safe investing. But it does not exclude select stock market investments as vehicles. Nor does it preclude more aggressive strategies that can potentially turn today’s megatrends — out-of-control deficits, a falling dollar, and rising gold prices — into megaprofits.
The specific instructions are in my Safe Money Report and in our premium services. But the basic steps are self-evident:
1. Build up your savings.
2. Be extremely selective in your investments, especially in the stock market.
3. Protect your assets with specialized vehicles that are designed to go UP in value as a direct consequence of the deficits and the dollar fdecline.
4. If you have funds available for speculation, use those same vehicles to aim for very substantial profits.
I trust these will be among your building blocks for a prosperous 2004.
Good luck and God bless!
Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc.
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