Part 1 econ outlook 2005

In the first three paragraphs, Dr. Richebacher assumes his readers understand
what money is, or capital as he puts it. He assumes everyone is aware the USA
is printing too many dollars, and its deleterious effects.

Even the govt managers cannot agree just what money is, or how to define it, but
you can assume Dr. Richenbacher assumes it is gold, or silver, or both (today
anyway). Once those dollars in your pocket were notes tradable for gold and
silver, but not anymore. I'll scare up some explanations of all of that soon
and pass it on. It is enough to know for now that what we have now is fiat
dollars, faith money, which lasts as long as people believe in it.

You cannot write checks to pay for everything, well in excess of your bank
accounts, for long without trouble. Neither can govts. You and i would get in
trouble writing such checks, long before a Bill Gates would get in trouble, for
two reasons: one, bill gates' checks would be backed for longer than ours;
second, belief that bill gates is 'good for it' would last a lot longer than for
you or me... long after bill gates was bust.

You and I would be like Argentina, who got caught early; USA is like Bill Gates,
still with some time to go... our disasters are much smaller than a bill gates
disaster would be.

What Richebacher is setting up, is the agreed on basics between him and his
regular readers, and then he is going to lay out where their analysis may be
wrong. It is the fourth paragraph where he lays out his analysis. What we need
to know as we read Dr. Richebacher is

1. Low interest rates are a bad idea in the measure the central bank sets
interest rates. In essence, a board of nine people cannot possible know what
the interest rate should be, so they are guessing. This leads to malinvestment.

2. Cheap imports support low interest rates; low interest rates support cheap
imports. As we shift manufacturing overseas, our costs go down, profits
supposedly widen, profits are widen so interest rates (risk premium) is lower.
What really happens is a downward spiral where people consume more and save
less, all the while the financial world is gaining massive profits off the
transaction required to effect these changes. (Think loan fees, currency
arbitrage, credit card transaction fees, etc).

Absorb this, ask anyquestions, and we'll proceed in the coming days with the
rest of his article...

**Dr. Richebacher;

The badly flawed consensus thinking about the implications of sustained large
U.S. capital inflow starts with the error that U.S. assets are uniquely
attractive to foreign investors. The reality is that U.S. investors are earning
far higher returns on their assets in Europe and Asia than foreign investors do
on their U.S. assets. European firms and investors who invested heavily in the
United States during the "new paradigm" years in the late 1990s are still
smarting from horrendous losses. The DaimlerChrysler disaster is by no means an
isolated case.

As to U.S. bond yields, they are just marginally above euro yields, but
considerably below the yields obtainable in emerging countries. What is more,
after inflation, they are the lowest in the world. A falling dollar is, of
course, a virtually prohibitive deterrent to foreign bond purchases. In fact, it
might induce selling.

This leaves the central banks of Asian surplus countries as the potential buyers
of last resort for the dollar, unwanted by private investors. They did heavy
dollar buying in 2003 and in early 2004, but never forget, the dollar purchases
by the central banks have a heavy price in turning healthy economies into sickly
bubble economies.

"In essence, the lower inflation rates allow a looser monetary policy than
domestic conditions justify. For Greenspan and many others wanting the loosest
possible monetary policy, this was certainly a highly esteemed effect of the
trade deficit. For us, it is insane."

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