"The dollar hit another low against the euro yesterday - the 8th in a row. Gold rose, briefly, over $410. Both gold and the euro have had nice runs against the dollar; do not be surprised by a pullback.
Still, there are two reasons why these trends are not likely to come to an end anytime soon: the U.S. trade deficit...and the U.S. federal deficit. The trade deficit now requires about $1.5 billion in new lending from overseas - every day. With not enough money coming forward, the dollar is falling. As it falls, fewer and fewer foreigners see the benefit of holding U.S. dollar assets. On the contrary, they will sell...pushing the dollar farther, and perhaps faster, that people expect. So far, the dollar has fallen more than 25% against the euro - with no improvement whatsoever in the trade deficit. This suggests that it will have to fall much, much further.
"The bill for speculative excesses and global imbalances has yet to be paid," warns Stephen Roach.
Adding to the bill are appalling spending increases and deficits of the Federal government. No democrat could have dug a deeper debt hole than the one hollowed out by the George II administration. Spending is rising twice as fast as under Clinton...and more than twice as fast as GDP. This year, federal spending per household will top $20,000.
Everybody wants something for nothing. Yesterday's paper brought a picture of a pack of feeble scoundrels gathered around George Bush while he signed a bill to provide pills for old people. Again, it must have seemed like a wish come true for the drug companies and graybeard mooches. "Keeping our commitment to seniors," was the caption. "Pandering for votes," would have been a better one. "To hell with the young, who will have to pay the bill for this nonsense," the story might have explained. "These geriatric drug addicts vote!"
Americans must think they will never have to pay the federal bills...or the personal ones. Somehow, it will all work out...they must say to themselves. And it will, somehow. But not without regrets.
Short-term interest rates will remain at Eisenhower era lows, said the Fed yesterday. But it is a very different world we live in today, Kurt Richebächer points out in his December letter. In 1959, non-financial borrowing rose 1.4 times the increase in GDP for the year. In 2002, non- financial borrowing totaled $1.34 trillion - 7 times the increase in GDP. It was also true that in 1959, Americans were borrowing the money "from themselves." Net national savings totaled 12% of GDP. Now, with almost no national savings of their own, they rely on the kindness of strangers. Net national savings in 2002 were 0.6% of GDP.
Before too long, we predict, the dollar will barely buy 60% of a euro. Foreigners will hold it in contempt and be reluctant to take it. Each dollar will be an emblem of recklessness, a scarlet letter of financial sin. Traveling abroad, Americans will be embarrassed to open their wallets."
http://www.dailyreckoning.com