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The Daily Reckoning

The dollar is in decline. So how to invest it?

The Federal Reserve's role should be to protect the value of the dollar.  But the dollar has been in decline for most of the last century.

By Guest blogger / May 3, 2012

A money changer shows some one-hundred U.S. dollar bills at an exchange booth in Tokyo in this 2010 file photo. Bonner argues that the Fed has been devaluing the US dollar for a century.

Issei Kato/Reuters/File

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Yesterday, we got a glimpse.

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Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning (dailyreckoning.com).

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Yes, dear reader, we were on our way to Sea Island. We looked across the bridge at another island — Jekyll Island. You know Jekyll Island, don’t you? It’s where the monster was created…

A group of the nation’s richest, biggest, and most powerful bankers got together there — in secret — in November, 1910. They figured it was time to put in place a system that would make it a little easier for them to make money. Instead of competing head to head, without any backstop to protect them when things got rough, they decided to set up a central bank.

The meeting was so cloaked in secrecy few believed it ever took place. Implausibly, it was first reported by the poet Ezra Pound. How Pound learned of it…and why he reported it…we don’t know. But that’s the word on the street.

B. C. Forbes reported in 1916:

Picture a party of the nation’s greatest bankers stealing out of New York on a private railroad car under cover of darkness, stealthily riding hundreds of miles South, embarking on a mysterious launch, sneaking onto an island deserted by all but a few servants, living there a full week under such rigid secrecy that the names of not one of them was once mentioned, lest the servants learn the identity and disclose to the world this strangest, most secret expedition in the history of American finance. I am not romancing; I am giving to the world, for the first time, the real story of how the famous Aldrich currency report, the foundation of our new currency system, was written… The utmost secrecy was enjoined upon all. The public must not glean a hint of what was to be done. Senator Aldrich notified each one to go quietly into a private car of which the railroad had received orders to draw up on an unfrequented platform. Off the party set. New York’s ubiquitous reporters had been foiled… Nelson (Aldrich) had confided to Henry, Frank, Paul and Piatt that he was to keep them locked up at Jekyll Island, out of the rest of the world, until they had evolved and compiled a scientific currency system for the United States, the real birth of the present Federal Reserve System, the plan done on Jekyll Island in the conference with Paul, Frank and Henry… Warburg is the link that binds the Aldrich system and the present system together. He more than any one man has made the system possible as a working reality.

And now it’s official. Ben Bernanke went there to give a speech in 2010, marking the 100th year of the meeting.

The role of the Fed…apart from greasing the skids for rich bankers…was supposed to be to protect the value of the dollar. Why the dollar needed protection was never explained. For the previous 100 years, it had been solid enough — except for during the War Between the States, when Lincoln printed up far too many of them in order to pay for his attack on the South. But Lincoln’s paper dollars came and went. And on the day the Fed was officially set up, in 1913, the dollar was still worth about as much as it had been when Napoleon Bonaparte set off for Russia.

Whatever the Fed was supposed do to, what it did not do was protect the greenback. Instead, the dollar slipped and slid throughout the 20th century and is now worth only about 3 cents.

Which is why we return to yesterday’s theme. There’s no guarantee. But we have a feeling that the dollar will continue to lose ground. Maybe not right away. But sooner or later.

And if someone will lend you money at the lowest mortgage rates in history…in advance of what could be the greatest inflation in US history…perhaps you should take it.

We’re down here at a financial conference. Among the attendees is colleague Steve Sjuggerud, who believes US real estate may be the best investment of all time. Adjusted for inflation, housing prices are back to 1979 levels, he says. But they’re much better deals now. Because mortgage rates in ’79 were 3 times higher.

“If you took out a mortgage in 1979,” says Steve, “you’d be paying 15% to 20% interest. So, over the life of a $200,000 mortgage, you’d pay as much as $700,000, including interest.

“And you got a lot less house for your money in 1979,” he continues. “The typical house sold in ’79 had only 1,600 square feet of living space. Today, the average is about 2,200 sq. ft. It’s a much bigger house.

“So, in terms of dollars per square foot, you’re paying about $75 now compared to about $100 back then.

In terms of affordability, and value per dollar, the US house is a better deal now than it has ever been, Steve concludes. It would have to increase in value by $100,000 just to get to normal affordability levels.

“There are unbelievable bargains around,” Steve goes on. He found a farm in Florida that had been appraised at more than $10 million in 2006. Now, the owner is bankrupt and the bank is desperate to get rid of it.

What bid will it take to buy it?

“Maybe less than $1 million,” says Steve.

There’s a time to be a borrower and a time to be a lender. As long as the Great Correction continues (and we think it will continue for a few more years…perhaps 10) it will be a good time to be a lender. Interest rates will tend to go down, not up. That is the lesson of Japan, where bonds have been the only decent investment for the last 22 years.

But thanks to that clandestine meeting on Jekyll Island 102 years ago, we probably won’t stay in a Japan-like rut forever. Ben Bernanke promises. He has ‘a little technology’ called a printing press. And he knows how to use it!

Your editor is not a good example. He bought a house and paid more than he needed to pay. But he was buying a house, not an investment. At least that’s what he told himself.

Still, he figures that he will mortgage the place and let Ben Bernanke help make it a better deal. It may be a good time to be a lender now, but we will borrow anyway. The borrowers’ time must be coming.

What are the odds that a dollar’s worth of debt…at 4% interest…will still be worth a dollar 10 years…20 years…30 years from now? The odds can’t be very high.

The headline story over the weekend was that GDP growth in America, in the last quarter, was “disappointing.” Which just goes to show how little people understand what is going on.

The Great Correction began 5 years ago. The feds have been fighting it ever since — with trillions of dollars’ worth of fiscal and monetary stimulus. You can see what good this does. Just look at the Dow. After Lehman went broke the index dropped to the 6,000 level. Then, the feds began dumping in money. Remember TARP? And tax cut extensions. And ‘cash for clunkers’? And ZIRP? And QEI, QEII, and now…the Twist?

Naturally, the markets…and the economy…react. GDP growth resumed in 2009. But most of the growth depends on further spending and money-creation by the feds. We don’t know how much of it…maybe all of it.

There is no ‘recovery.’ Instead, the private sector is correcting…or trying to…and the economy is merely returning to its trend. GDP growth rates have been going down for 40 years. Growth rates averaged about 4% in the ’70s…3% in the ’80s and ’90s…and then about 2% in the ’00s. On a 10-year trailing average basis, they are down to about 1.6% now. And they still seem to be headed lower.

What caused this drop off in growth is a matter of debate. (We have our ideas!) But the decline in the last quarter was right in line with what has been going on for more than a generation.

As long as growth is disappointing, the feds will fight it…and they’ll fight the Great Correction too. The US government borrows a trillion dollars a year…with no end in sight.

And last year, 61% of that money came from…Ben Bernanke’s printing press.

Keep up the fight, Ben! And our long-term fixed-rate mortgage will eventually be worthless.

Regards,

Bill Bonner
 for The Daily Reckoning

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