GOLD & ECONOMIC FREEDOM

Oct 10, 2003

->Dollar down, $373 gold, $32 oil, GE slips, Dow falls
->$33M campaign to promote new $20 bill -CNNfn
->Investors Return to Risky Margin Buying -AP ->US CEOs don't expect to hasten hiring - Bloomberg
->Missing Statistic: U.S. Jobs That Went Overseas - NYT
->'Twin deficits' put dollar's valuation at risk - AC
->A Dangerous Read!... Bankers to stop free market?
->Cleaning Up a Dirty Business - BusinessWeek
->Foreclosures rising …The Nature of Change
->Buffett worries that the Golden State could lead the U.S. back into recession. But is he wrong? - CNNfn
->Consumer debt rose $8.2B in August - Reuters
->Global jitters give gold new glitter - FT.com
->2003-04 Economic Fundamentals - Richard Russell
**WEEKEND SPECIAL** COLUMBUS DAY: In Praise of Gallant Men

"Gold and economic freedom are inseparable ...Deficit spending is simply a scheme for the 'hidden' confiscation of wealth."

-ALAN GREENSPAN, Federal Reserve Chairman

-CRAIG. R. SMITH, CEO SATC - AMERICA: For Better … Or Worse?

ED. NOTE: Read Alan Greenspan's 1966 Essay, "Gold and Economic Freedom" and much, much more today. Get your FREE copy of The New Gold Rush, Pt. I & II here!

MARKET NEWS DIGEST

U.S. stocks diverge, Dow ends down - CBS.MW
GE weakness, crude surge battle strength in chips
By Tomi Kilgore, CBS.MarketWatch.com, Oct. 10, 2003

NEW YORK (CBS.MW) -- Major U.S. stock indexes diverged Friday, as the Nasdaq celebrated the first birthday of a new bull market with a modest gain, while weak earnings from Dow component GE rained on the blue-chip party.

A surge in crude prices to a new contract high tamed the airline sector, and a "good, but not great" quarterly report from Juniper Networks hurt networkers. Semiconductor stocks were bolstered by an analyst's upgrade of bellwethers Intel and Texas Instruments. The Dow Jones Industrials Average slipped 5 points to close at 9,675, erasing earlier gains of as much as 32 points, as 18 of 30 components traded lower.

December gold futures climbed $4.30 to $374.10 amid continued weakness in the U.S. dollar.

Efforts by Japan's central bank to stem the rise in the yen by relaxing its grip on monetary policy failed, as did an unexpected decline in the U.S. trade deficit in August. The buck was down 0.5 percent vs. the yen at 108.55, after hitting a three-year low near 108.30 in overnight trading.

The euro surged 0.6 percent against the greenback to $1.1809.

http://www.cbs.marketwatch.com

The Blame Game - Stephen Roach, Morgan Stanley
Oct. 10, 2003

NY -- Tough economic times always produce scapegoats. Politicians and policy makers are invariably quick to point the finger elsewhere rather than face up to their own failings. Such is the human condition. America’s jobless recovery is a case in point. The US body politic is now taking dead aim at China -- making it the poster child for the latest outbreak of scapegoatism. The risk is that the blame game won’t stop there.

America’s multinational corporations could well be next in line, as protectionism morphs into old-fashioned populism. As always, those pointing the finger usually have the most to hide. That’s precisely the case today. As I see it, the real problem is made in America. Washington is engaged in the most reckless fiscal policies since the “guns and butter” blunders of the late 1960s.

Lost in the din of the politically-inspired blame game is the inarguable power of a simple macro accounting identity: Saving must always equal investment.

This isn’t some wild-eyed theory -- it’s just the way that any economy must always balance its books. If a country is lacking in domestically generated saving -- precisely the case in the United States today, with its rock-bottom 0.7% net national saving rate in the first half of 2003 -- it is faced with two stark choices: It can either rebuild domestic saving by suppressing aggregate demand or borrow surplus saving from abroad. Inasmuch as suppressing aggregate demand is not exactly politically palatable, America has opted to finesse its accounting identity by borrowing from abroad. Such a choice, of course, is not without consequences. In order to attract the foreign capital, the US must run massive current-account and trade deficits. In case you haven’t noticed, that’s exactly what’s happened -- America’s current-account deficit stood at a record 5.1% of GDP in the first half of 2003, and the trade deficit made up about 90% of that imbalance. In other words, for a saving-short US economy, the macro accounting identity virtually guarantees a massive trade deficit.

FULL STORY

Melba-toned money takes center stage Thursday -CNNfn
October 8, 2003, By Gordon T. Anderson, CNN/Money contributing writer

NEW YORK (CNN/Money) - It's party time for the nation's moneymakers: the redesigned $20 bills reach the public this Thursday.

That morning, $19 billion worth of the new notes go into circulation -- some 20 percent of the total value of all $20 bills. As early as 6 a.m., armored trucks will start delivering them from Federal Reserve vaults to commercial banks across the country.

Old Hickory gets a makeover.

Meanwhile, the Fed and its Bureau of Engraving and Printing (BEP) will hold a nationwide series of publicity events, part of a $33 million campaign to let the world know the new bills are legit.

"The goal is public education, to build awareness and trust," said Dawn Haley, a spokeswoman for the Bureau of Engraving and Printing (BEP).

FULL STORY

ED. NOTE: Craig Smith will discuss the "new money" live on radio this week (see left column for times/stations)

1) WHY IS GOVT SPENDING $33M TO PROMOTE THIS NEW "RAINBOW" CURRENCY ... TO "BUILD TRUST?" ... OR ... TO CAMOUFLAGE THE RAPID DEVALUATION OF OUR "OLD" DOLLARS?
2) WHAT DOES IT MATTER THE COLOR OF A DOLLAR - THEY ARE FALLING IN VALUE REGARDLESS, RIGHT? ... IS THAT GOOD OR BAD FOR AMERICANS?
3) WHY IS THAT THE NO ONE AT THE FED, GOVT OR ECONOMISTS CAN DEFINE A "DOLLAR" ANY LONGER?

Investors Return to Risky Margin Buying - AP
By RACHEL BECK, AP Business Writer

NEW YORK -- Such short memories these investors have. They got burned before by borrowing cash to buy stocks. And now they are right back doing that again.

Buying on margin, as it's called, is going on at a pace not seen in some parts of the market since the height of the last bull market. And individual investors seem to be behind much of these gains.

Margin buying can result in big returns if stocks go up, but losses can be magnified and holdings wiped out if prices tumble.

"This creates an illusion that people think that they can buy things that they really can't afford," said Brian Orol, president of Strategic Financial Planning Group in Raleigh, N.C.

FULL STORY

US CEOs don't expect to hasten hiring- Bloomberg
Yet many see fiscal growth accelerating, 10/9/2003

WASHINGTON -- A majority of leaders of the largest US companies aren't planning to step up hiring as demand rises and the economy accelerates next year, a survey of the 190-member Business Council found.

About 55 percent of the chief executives surveyed said they expect the economy to grow by more than 3 percent next year, beating the 2.8 percent economists project for this year and last year's 2.4 percent. Half predicted the jobless rate would decline next year. Only 14 percent said they would pick up their pace of hiring, and 63 percent planned to add about the same number of workers as this year.

The "most surprising" finding was the lack of a pickup in hiring even as executives forecast an acceleration of growth and a decline in the jobless rate, said Franklin D. Raines, vice chairman of the council, who is also chief executive of Fannie Mae, the biggest purchaser of US mortgages. "This raises the conundrum as to how all of these things will happen at once."

http://www.bloomberg.com

Buffett worries that the Golden State could lead the U.S. back into recession. But is he wrong? - CNNfn
October 7, 2003 By Mark Gongloff, CNN/Money Staff Writer

NEW YORK (CNN/Money) - As Californians go to the polls Tuesday to pick a governor, it might be easy to dismiss the entire process as a political sideshow with few implications for the national economy.

Warren Buffett, for one, would disagree.

"If California has troubles, the country has troubles," Buffett said in August. "If California prospers, the country prospers." The billionaire investor is acting as an economic adviser to the campaign of Republican candidate Arnold Schwarzenegger.

In fact, California's recent financial woes, including a whopping $38 billion budget deficit, look suspiciously like those of a number of other states -- states that got fat on higher tax revenues during the late-'90s boom, spent like crazy, and are now terribly hung over.

"As the national economy gets better, California will get better, and some of its problems will be less acute," said Joshua Feinman, chief economist at Deutsche Bank Asset Management.

The one wild card in the California deck is housing. The state has some of the hottest -- some would say over-inflated -- markets in the country, including Riverside-San Bernardino, Los Angeles, and Sacramento; in all three areas, home prices jumped more than 20 percent in the second quarter, according to the most recent data from the National Association of Realtors.

It still seems unlikely to most economists that these markets are really in a bubble, which would mean prices there are due for a sudden, drastic falloff that would slam the regional and state economies.

And those economists had better be right, since severe housing-market pain, in major cities in California or elsewhere, could put the rest of the economy at risk.

"If there were a bubble in California and if it were to burst, that would be a national economic catastrophe," said Wells Fargo's Sohn, who emphasized he didn't think there were any regional real estate bubbles.

But he added: "Clearly, California is very vulnerable on that score, along with some parts of the East Coast, from Boston to Washington, D.C."

http://www.cnnfn.com

Global jitters give gold new glitter - FT.com
By Justine Lau in Hong Kong, Financial Times; Oct 06, 2003

Chinese businessman Lu Zhongtao last week travelled to Hong Kong with his wife for the first time to celebrate the October 1 birthday of his nation. As well as going to a theme park and watching the fireworks, he snapped up three gold necklaces and one gold bracelet in a Kowloon jewellery store in a matter of 15 minutes. "We like gold very much. Gold is good because it never loses its value," Mr Lu said.

Like many others in China, Mr Lu sees gold as a symbol of wealth and an eternal investment, creating huge potential for the precious metal on the mainland where gold jewellery trading was once highly regulated until a year ago.

Evy Hambro, fund manager of Merrill Lynch's World Gold Fund, said China, which is already the world's fourth-largest gold consumer, could become the biggest in two years once gold trading is made available to all of its population.

The robust demand in China is one of the factors supporting the healthy gold price. Since 2001, gold bullion has risen from a low of about US$256 to a seven-year high of US$393 recently, as a result of low interest rates, a weak US dollar and global geopolitical uncertainties.

While gold is usually perceived as a defensive investment tool, Mr Hambro said the demand in gold would not slow down despite the recent rallies in global equity markets.

"One thing people have learnt from the last bull market is their portfolios were too concentrated, so they ended up having far too much of one sector," said Mr Hambro, suggesting investors to allocate 3 to 5 per cent of their investment portfolios on gold to balance their risks.

"That's enough to make a difference when the rest of your portfolio is doing really badly but will not cause any pain if the rest of your portfolio is doing very well," he said.

http://www.ft.com

WASHINGTON (Reuters) — Consumer debt rose again in August, climbing a larger-than-expected $8.2 billion, the Federal Reserve said Tuesday.

The gain was led by a sharp rise in nonrevolving credit, which includes loans for cars, mobile homes, education expenses and vacations. The July increase was revised to a $6.1 billion from the initially reported $6.0 billion rise.

Wall Street analysts had expected a smaller August gain of only about $6.0 billion.

http://www.usatoday.com

Gold bugs hold tight - CBS.MW
By Peter Brimelow, CBS.MarketWatch.com, Oct. 6, 2003

NEW YORK (CBS.MW) -- The gold bugs are mad. And they want to get more than even. Friday's abrupt $17-dollar bullion break doesn't seem to have shaken any of them loose. The average exposure of gold timers monitored by the Hulbert Financial Digest remained at 62.5 percent. That sort of faith might normally inspire some contrary-opinion concerns.

But while the gold timers' average exposure is high, it's well below the recorded peak of 89.6 percent. At midnight eastern on Sunday, gold was fighting back in London, up some $3.00 to $373 an ounce. The conventional wisdom: Friday was a one-day version of the 1990s. The economy seemed strong -- or at least the unemployment numbers weren't as bad as expected.

"But the good news for Wall Street was bad news for the Midas metal," wrote John Myers of Outstanding Investments. He went on: "Gold is regarded as an alternative currency, as well as a hedge against stock market losses. With investors taking any economic news as a sign that things are improving, they turned away from gold for other stocks."

Richard Russell of Dow Theory Letters actually suggested a gold break might be coming last Thursday night, although he has been modestly disclaiming credit. But he wrote this weekend: "My belief is that ultimately the dollar must fall, maybe 30%, 40% or even more against a basket of all currencies including the Asian currencies. This is a fundamental market solution.

"As for gold, it will fluctuate, but head generally higher, since gold is in a primary bull market. "The central banks will do everything they can to halt the rise of gold, since rising gold, particularly fast-rising gold, constitutes a red flag for the central banks. It's a red flag that tells the world that intrinsic wealth is preferable to fantasy wealth, and fantasy wealth is what the central banks are now offering to the world in the form of fiat currencies, or paper."

http://www.cbs.marketwatch.com

House OKs less pension pay-in - AP
Short-term relief for overextended plans
Associated Press, Oct. 9, 2003

WASHINGTON - The House voted Wednesday to allow businesses to pay less into workers' pension plans over the next two years, saying the $26 billion in relief was needed to enable companies to keep plans afloat and protect benefits for future retirees.

Supporters said the bill, approved on a 397-2 vote, would give breathing space to companies and defined-benefit pension plans that have been hurt by a combination of low interest rates, the poor economy, stock market losses and an increase in retirees.

Unions, fearing some companies might otherwise terminate or default on their pension plans supported the bill.

http://www.azcentral.com

A Missing Statistic: U.S. Jobs That Went Overseas - NYT
By LOUIS UCHITELLE, October 5, 2003

The job market finally showed some life in September, but not enough to sidetrack a growing debate over why employment has failed to rebound nearly two years after the last recession ended. The debate intrudes increasingly on election politics, but in all the heated back and forth, an essential statistic is missing: the number of jobs that would exist in the United States today if so many had not escaped abroad.

The Labor Department, in its numerous surveys of employers and employees, has never tried to calculate this trade-off. But the "offshoring" of work has become so noticeable lately that experts in the private sector are now trying to quantify it.

By these initial estimates, at least 15 percent of the 2.81 million jobs lost in America since the decline began have reappeared overseas. Productivity improvements at home - sustaining output with fewer workers - account for the great bulk of the job loss. But the estimates being made suggest that the work sent overseas has been enough to raise the unemployment rate by four-tenths of a percentage point or more, to the present 6.1 percent.

http://www.nytimes.com

Foreclosure rate on rise Valley-wide - AZ Republic
Catherine Burrough, The Arizona Republic, Oct. 5, 2003

In the midst of the hottest housing market in Phoenix history, a record number of people are losing their homes to foreclosure.

People are caught living paycheck to paycheck. Laid-off workers can't find jobs. First-time buyers are too deep into debt. Homeowners are snared into bad refinancing deals. And some two-income families with expensive dream homes can't keep up.

The Valley homeowners struggling to pay their electric bills and living in constant fear of losing their homes no longer are just the financially vulnerable or working class living in west Phoenix or El Mirage. Like the economic woes, the problem has cut across lines to the middle class living in pricey new Chandler subdivisions and even to the wealthy with posh homes in Paradise Valley.

http://www.azcentral.com

WEEKEND SPECIAL: COLUMBUS DAY: In Praise of Gallant Men

In Praise of Gallant Men:
Columbus & Cortez: Conquerors for Christ, by Dr. John Eidsmoe
(Green Forest, AR: New Leaf Press, 1992)
by Steve Wilkins

Organizers of the quincentenary celebration of Columbus's discovery of the New World were initially fearful this momentous anniversary might pass without its duly deserved fanfare. O ye of little faith! Far from slipping by unnoticed, few things have caused more of a stink. Who "wouldda thunk" a man who has been dead for over four and a half centuries could cause such a commotion!

The ruckus started over a year ago when the National Council of Churches could hold its peace no longer and belched out all manner of vile bile over the upcoming celebration. Columbus together with all those other DWEMEs (dead, white, European male explorers) were beneath contempt. Heroes? No way, Antonio! Worthy of honor? Not on your life, Ferdinand!

These men were not gallant explorers, they were pestilential beasts, virus-carrying vermin, Bible-thumping, Hell-threatening, closed-minded fundamentalists-fascists, ecocidal maniacs! That's what they were! Such was the "enlightened", "objective" assessment of the modern Church-freaks who write the reports for the National and World Council.

When I first heard of this wacko report, naive whipster that I am, I thought the world would give them the old horse-laugh and go on about its business. I must learn never to underestimate the sensitivities of the self-appointed guardians of the downtrodden! Men and women, boys and girls, "Afro-Americans", "Native Americans" (even a few "American Americans"), feminists, environmentalists, socialists and communists (i.e., practically all the faculties and staffs of American universities), homosexuals, and nearly everyone but the Adult Children of Alcoholics, fell over themselves jumping on poor ole Chris. As a result, it has been quite a year for old explorers.

God, in the midst of all the stench of what today sadly passes for 'scholarship', has provided us with real examples of what history should be. Folk like Kay Brigham, George Grant, and John Eidsmoe have prevented us from being left at the mercy of the writings of the incurably lamebrained and environmentally disabled. As a result of their work, 1992 may well go down as the most significant year in Columbus scholarship since 1942 (the year of the publication of Professor Samuel Eliot Morison's Admiral of the Ocean Sea).

For the first time in history, we have Columbus's almost forgotten Book of Prophecies in English (together with a fine biography on the Admiral by Mrs. Brigham: Christopher Columbus in the Light of His Prophecies). George Grant's The Last Crusader gives us more of the medieval background crucial to understanding Columbus's efforts. Add to these works the latest book by John Eidsmoe and you have a nice set of volumes that Christians may read with profit and great delight.

John Eidsmoe is well known for his work in law and history. His Christianity and the Constitution is one of the better books on the Founders and their thought. His latest foray into the field of history is Columbus & Cortez, Conquerors for Christ.

Readers of the book will be pleasantly surprised to get more than the title promises. We not only get the straight scoop on Columbus and Cortez, we also receive a very able overview of Islam and how it affected the Medieval mindset in the 15th century. Furthermore, we are given a fascinating account of the Vikings and their efforts at Christianization in the New World long before Columbus.

How many have ever heard that there were sincere Christians among the Vikings in the 10th century? How many are aware of the evangelistic endeavors carried out by the converted Viking kings to bring the gospel to Norway and Iceland around the same time?

This will perhaps be the most surprising part of the book for most readers. By now, many Christians (at least those who keep up with Christian historical revisionism), are aware of Columbus's Christianity and they might have heard about the faith of Cortez and a few others. The only Viking most people have ever heard of is Leif Eiriksson (most are like I was in high school, when you say "Vikings" they think only of those who play football in Minnesota). But here we learn about the great Christian leaders among the Vikings (in addition to Leif): Olaf and Thangbrand, Gizur the White and Hjalti, and the renown Skeggjason.

The history of the Vikings is one of the more neglected aspects of what is already a woefully overlooked period of history. The Vikings are virtually unknown and commonly portrayed exclusively as terrible, godless raiders. Thanks to Dr. Eidsmoe (who is, by the way, of Scandinavian descent) we now have more light shed on this epoch and these people. This is a very important (though brief) section of the book.

The discussion of Columbus is first rate...FULL STORY

COMMENTARY

A DANGEROUS READ! - IFP News
Financial Reckoning Day: Surviving the Soft Depression of the 21st Century
by Bill Bonner and Addison Wiggin
($27.95, WILEY, 9/03, 2nd printing, WSJ Bestseller)

A book review by David Bradshaw, Idea Factory Press , October 7, 2003

"A word fitly spoken is like apples of gold in pictures of silver." -Proverbs 25:11

"Peace, prosperity, liberty and morals have an intimate connection." -Thomas Jefferson, 1813

OVERVIEW

Over the last three years of reading Bill Bonner's Daily Reckoning, I have come to admire both his moral and economic philosophy and consider his to be one of the most trustworthy on the planet.

Because one's moral philosophy is the foundation of their economic theory, it is critical to filter our financial counsel with the same care we would in filtering our moral counsel -- before we take it to heart.

Properly discerning the times requires intellect, experience and humility. Thankfully, all of these characteristics intersect in this book. Bill serves his readers as more of a guiding light than a self-proclaimed "expert."

Financial Reckoning Day effortlessly bridges present day problems with historic lessons, without pushing the reader to arrive at all of the same conclusions.

DANGEROUS READ

On behalf of the morally concerned majority, I would like to alert you that Financial Reckoning Day is a very dangerous read, especially to those unwilling to face hard, financial truths of the 21st century head on.

The authors skillfully paint a very different big picture of America's present economic problems -- as well as key solutions. They expose a much more precarious economic future, than most Americans have ever been told (or at least been willing to listen to).

You are not likely to uncover the wisdom distilled in this book in the mass media, but Truth has a way of passing the test of time and it's getting harder and harder to ignore the logic behind owning physical gold and shunning debt.

The authors have mastered the art of finding humor and entertainment while tearing the veil off of the commonly held deceptions of our age. These metaphors help the reader achieve an increased knowledge, wisdom and discernment -- at just the moment NYT says investors are… "most confused."

A CLEAR CALL TO ACTION ...
Read Full review, Publisher's Overview and Special Offer

GREED MORE EVIDENT THAN FEAR - Eric Fry, DailyReckoning.com
Oct. 7, 2003

- "We're a what's-my-monthly-payment nation," says Northern Trust chief U.S. economist Paul Kasriel. "The idea is to have my monthly payments as high as I can take. If you cut interest rates, I'll get a bigger car."

- If the dollar keeps sliding, America's what's-my-monthly- payment consumers will be making much higher monthly payments. But very few stock market investors are worrying about such things. Stocks are rising and that's all that really matters.

- Didn't investors learn anything from the 1990's?...$7 trillion of shareholder wealth disappeared between February 2000 and October 2002. Somebody somewhere must have lost some of that money. Nevertheless, greed is much more evident than fear.

- "You would think that seeing such a massive amount of wealth wiped off their books would have made investors cautious about the market - deeply mistrustful, even - but that hardly seems to have been the case," notes CNN/Money. "Flows into the mutual funds are steady, online trading has picked up and casual conversation is turning back to what stock did what. Even more distressingly, the stocks that have been doing the best are the sorts of highfliers that got investors into so much trouble last time around."

- The stock market bulls are back, their ranks are swelling, and they are fearless. Most sentiment indicators are showing levels of bullishness that exceed that of both 2000 and 1987.

- "There is a whiff of 1987," says the New York Times' Floyd Norris, "and not just in the buoyant sentiment indicators. Then, as now, there was international economic discord. The dollar was weak, and the Treasury secretary was criticizing policies of others for harming the world economy."

- But that was then...History could not possibly repeat itself, could it?

http://www.dailyreckoning.com

Cleaning Up a Dirty Business - BusinessWeek
We're seeing whole new patterns of misdeeds that continued way past the point when Enron imploded. It should have been a wake-up call

Oct. 13 issue - When the Enron scandal broke two years ago, optimists argued that we were dealing with only "a few bad apples." Instead, it turns out, Enron was an example of the Cockroach Theory: if you see one cockroach, a whole nest is undoubtedly lurking nearby. We were absolutely overrun by those little financial buggers last week. Just as we started trying to stamp out old scandals-the trials of former Credit Suisse First Boston star investment banker Frank Quattrone and former Tyco chairman Dennis Kozlowski got underway-a whole new bunch of roaches sprang out of the wall. A former top hedge-fund trader, Steven Markovitz, copped a plea to making improper "market timing" trades with mutual funds; Alliance Capital became the fifth fund manager to admit allowing such trades; Prudential Securities (now Wachovia) and Merrill Lynch canned employees for improper fund trading, and JPMorgan Chase paid $25 million to settle charges it violated rules covering initial public offerings of stock. A scandal scorecard in Friday's Wall Street Journal listed 16 cases. Send out for more bug spray.

IF YOU'RE an optimist, you say that these trials and plea bargains and admissions show that the system is correcting itself and things are getting better. But the problem is that we keep getting new scandals. We're not just chewing over old cases like Enron and Tyco. We're seeing whole new patterns that continued way past the point when Enron imploded, which should have been a wake-up call for everyone.

The mutual-fund scandal, which is still expanding, could well turn out to be the most disturbing of all-worse than even Enron, WorldCom and Wall Street analysts shilling for the companies they were supposed to be covering. You expect some bad behavior out of Wall Street and corporate America. But mutual funds? They're supposedly regulated up the yin-yang. You may have to worry about some funds' excessive fees and crummy performance and inappropriate marketing.

http://www.businessweek.com

U.S. 'twin deficits' put dollar's valuation at risk
By DONALD RATAJCZAK, The Journal-Constitution, Oct. 6, 2003

During the 1980s, economists complained about the "twin deficits" of government borrowing relative to gross domestic product and high trade deficits as a share of domestic production.

As the government deficit vanished during the boom of the next decade, "twin deficits" were mentioned only in assessing currency risk of developing countries. The "twin deficits" are back, but discussion remains muted. Why? Let us look at the currency risk that can be caused by government and trade deficits.

Developing countries do not have enough domestic savings to finance large government deficits. Thus, international lenders must help finance those budget shortfalls. Similar international sources must provide credit to importers because exports are not sufficient to create enough international capital to finance those imports.

If trade deficits and government deficits are rising together, the international borrowing needs of a developing country balloon. Very high interest rates are needed to continue attracting the world's savings. While an ensuing recession might deflate imports and lower the trade deficit without currency devaluation, most countries choose currency adjustments over job losses.

http://www.journalconstitution.com

The Nature of Change - John Mauldin, FrontlineThoughts.com
Oct. 4, 2003

My career path is an echo of a million other entrepreneurs and businessmen and women. We all deal with change. In fact, the amount of change that I have had to deal with is rather unremarkable. There are millions of people who go through far more abrupt changes.

Some of the changes were forced upon me. Some of them I willingly embraced. I have told my friends that I hope this is the last time I have to "re- invent" myself. I succumb to the fantasy that most investors have: that the trend of today will continue. And yet, I know that this is not likely. The field in which I plow and reap is changing rapidly, and it is unlikely that in 10 years it will even look the same. I will write more on the changes that are coming to your investment world in just a few paragraphs. You know that I believe we are in a decade long (at least) secular bear market. This is going to make investors more cautious and to look for places to invest besides long only large cap stocks and mutual funds. Hedge funds will be one of the places they turn.

Again, with some irony, I think hedge funds will become completely acceptable, even the preferred investment vehicle, just as we hit the bottom in this current secular bear cycle. Having been burned by a market that has disappointed for over a decade, I can only imagine how hard it will be to get investors excited once again about index funds.

Since I plan to write for another 30 years, that means I will probably witness another 2-3 cycles. I will see yet another secular bull cycle, in which long only funds will be precisely where you should put your money. Some "new" technology will drive a fundamental change in the world. Things will change. It will end up in 2030 (or whenever) with a new cast of characters telling us that "this time it is different." Nanotechnology or artificial intelligence or cold fusion or whatever alchemy we invent in the coming decades, like the internet did in the 90's, will somehow repeal the business and investment cycle that has prevailed since the Medes were trading with the Persians. It will be interesting to see if I can recognize when the "times are a'changing."

FULL STORY: Change is Like a Train

Central banks will do anything to stop free market - Reuters
10/7/2003 By Stella Dawson, Chief ECB Correspondent

FRANKFURT, Oct. 6 (Reuters) -- European policymakers warned on Monday against too rapid foreign exchange movements, in what analysts called an attempt to slow the euro's rapid ascent against the dollar.

But by stopping short of calling its rise of more than 20 percent against the U.S. unit over the past year unwarranted, they made clear they are more concerned about the pace of the shift than its direction.

European Central Bank President Wim Duisenberg said in a Spanish newspaper interview the ECB will do all it can to ensure that the U.S. dollar's fall, which he called unavoidable, is slow and gradual.

He added that the euro should not bear the brunt of the dollar's decline alone -- an echo of Group of Seven financial officials' concerns that Asian countries' currency sales to retain their export edge unfairly pushes up the euro.

"We hope and pray that this (dollar) adjustment, which is unavoidable, will be slow and gradual. Until now, the adjustment is only against the euro," Duisenberg was quoted as saying in the business newspaper Expansion.

German Finance Minister Hans Eichel also said in a newspaper interview published on Monday that policymakers "have to be vigilant that such movements do not happen too rapidly."

Analysts called the remarks an opening salvo to temper the speed of the euro's rapid climb but not a precursor to central bank intervention to stop it.

The euro is up more than 10 percent this year alone in response to the burgeoning U.S. trade and budget deficits and the Bush administration's apparent indifference.

"The dollar is going down, no doubt about it, and all the ECB can do is stand there with its fingers in its ears and jawbone it (the euro) into a slow grind up", said David Brown, chief European economist at Bear Stearns in London.

Trying openly to talk the euro currency down would cause loss of face at the ECB when all the forces point toward to the dollar weakening further in the months ahead, he said.

The single currency last week reached $1.1768, up from $1.0760 on September 3, before Friday's strong U.S. jobs data knocked it down to around $1.1580 on Monday. Some analysts said the policymakers' comments on Monday helped pinned it at lower levels.

The central bank must withstand some political pressure on the currency's surge, though. Germany's DIHK chambers of commerce and industry association said on Monday it hopes the single currency does not rise much above the $1.20 to $1.25 level.

"A rate of $1.25 would be damaging for exports. We must be clear about this," Martin van Wansleben, its head, said.

Eichel said policymakers must be wary of foreign exchange movements that are too fast when asked by the French daily La Tribune how the euro's rise was affecting the European economy.

His deputy Caio Koch-Weser called on the European Union and the United States to form an alliance to provide leadership for the world's economy, which could address trade and currency issues. He made the proposal in an article in the Financial Times, co-authored with Fred Bergsten of the Washington-based Institute for International Economics.

Currency analysts said the ECB is far more likely to use its interest-rate tool if it wants to counter the export-damaging effects of the euro rise than to intervene.

"The euro zone has room to cut rates, so that would be the first port of call, given their focus on price stability," said Shahab Jalinoos, senior currency strategist at ABN Amro in London. Official ECB rates now are at 2 percent

A rising euro worries the ECB because it dampens demand for euro zone exports just when the 12-nation economic bloc, which stagnated in the second quarter, is struggling to get back on its feet. But a strong currency can also squeeze out import price pressures.

The ECB is not ruling out action in the foreign exchange markets. A bank spokesman said the Financial Times on Monday was wrong to conclude in its report on the Expansion interview that Duisenberg had implied euro intervention was unlikely.

"He left this question completely open," Manfred Koerber told Reuters.

http://www.gata.org

2003-04 Economic Fundamentals - Richard Russell, DTL
Dow Theory Letters, Oct. 4, 2003

China and Asia can, and are, producing merchandise far below the cost of what that merchandise can be produced for here in the U.S. Now the service industry too (think India) is moving towards Asia.

This is creating huge imbalances in the transfer of funds. It’s producing half a trillion dollars a year in a U.S. negative trade balance. On top of this, the U.S. Federal budget is out of control to the tune of another half trillion dollars.These enormous imbalances must be addressed sooner or later. They are unsustainable.

This means that either the U.S. accepts a major recession, which cuts consumer buying way back in the U.S. or – The U.S. dollar sustains a huge drop in value against other currencies, particularly the Asia currencies or – The Chinese and most of Asia agree to a major revaluation upwards of their currencies and particularly the Chinese renminbi. Or the U.S. puts up stiff tariffs.

Which of these are the most likely to occur?

We know the U.S. administration, backed by the Fed, will not accept a recession or even a slowdown in business. Thus, we see the Fed fighting any recessionary tendencies with everything in its arsenal. The main idea is to keep consumers buying, and this adds to the problem, since it keeps the negative trade balance going and even increasing.

The U.S. authorities would like a weaker dollar, but Asia has been fighting this by buying dollars in an attempt to keep the dollar strong. Tariffs would lead to retaliations and a trade war.

The Chinese have no intention of allowing a major revaluation upwards of the renminbi. They like matters the way they are, since they have the acute problem of putting millions of Chinese unemployed to work.

My belief is that ultimately the dollar must fall, maybe 30%, 40% or even more against a basket of all currencies including the Asian currencies. This is a fundamental market solution.

Even if this happens it may not solve the trade imbalance problem. But it would be a fundamental move in a situation that is unsustainable.

The longer the dollar solution is held off, the worse the situation. The twin problems of the Iraq and Afghanistan are pushing the U.S. budget imbalances even further and further into the red. The U.S. policy of being policeman to the world, I believe, will prove to be unsustainable over time. It is also an added pressure on the dollar.

From my subscriber’s standpoint, we need insurance. We take out insurance against car trouble, we take out insurance against home trouble, we take out insurance against our lives.

What about insurance against the item that everything we own is denominated in – and obviously I’m talking about the dollar?

Insurance against the dollar consists of gold, to a lesser extent gold stocks, and another currency. The main competing currency to the dollar, as I see it, is the euro.

Thus I believe it is wise, if not mandatory, to own gold, gold stocks and probably euros in the form of German short-term bonds denominated in euros.

The above are the fundamentals, as I see them. Two and two equals four. Yet if you tell people that two and two equals five often enough and with authority, in time many people will believe you.

Many years ago the dollar “was as good as gold,” since you could turn your dollars into the government and receive gold. Today the government is implying that the dollar is still “as good as gold.” After all, you and I continue to work for dollars, don’t we?

Yet today the dollar is simply as good as our confidence in the dollar. Intrinsically, the dollar is worth nothing, and dollars can and are printed by the billions every week by the government. Yet by law we must accept dollars because the U.S. government states that they are “legal tender.”

Logically, this tells us (at least it tells me) that the dollar as a store of value is doomed. It’s only a matter of time before the dollar falls, and falls big time.

The above are the fundamentals as Richard Russell sees them. Only God knows the timing of the dollar’s fall, but the ultimate fall of the dollar should be understood by every one of my subscribers. And that’s all I have to say for this weekend. Mull it over, guys and gals, because I firmly believe that it’s the truth.

As for gold, it will fluctuate, but head generally higher, since gold is in a primary bull market.

The central banks will do everything they can to halt the rise of gold, since rising gold, particularly fast-rising gold, constitutes a red flag for the central banks. It’s a red flag that tells the world that intrinsic wealth is preferable to fantasy wealth, and fantasy wealth is what the central banks are now offering to the world in the form of fiat currencies, or paper.

DTL

NOTE: Richard Russell has an article in The New Gold Rush, Pt. II on Page 11. "The U.S. Dollar Achiles Heel" Get it!