COMMENTARY:

Thinking about Valuations

I’ve been thinking about valuations. Actually I’ve been thinking about money, the US dollar, the US Treasury, the EURO, oil and gasoline, the stock (equity) markets, and Norway’s income and net worth listing. If you haven’t noticed, the US Dollar has dropped over the recent weeks. If what you purchase seems to cost more today than it did a month ago, I’d suspect that this is due to the fall of the Dollar relative to the other major currencies in the world.

You see, since we import so much of what we consume, we have to purchase these foreign goods, services, and foodstuffs with dollars converted into whatever currency is needed. Some countries are willing to accept Uncle $ugar’s buck for their goods, services and foodstuffs—but a growing number of nations is not so willing, and therein lies the rub. The US Dollar is still the reserve currency of planet Earth, but it is looking like its glory days may be over (or at least are being strongly questioned in the meeting rooms of the central banks around the globe). Over time, this shift/decline in relative valuations hit the Greeks, Romans, French, and English, and ended their position as the global money.

One major difference between the “then-dominant currencies” and now is that all currencies today have nothing but a lick and a promise behind them. This is true whether you are talking about Dollars, EUROs, the Yen, Pounds Sterling, Krona, Riyals, Rubles, Pesos, or Renminbis. There is no established weight of gold/silver behind any currency. Each country pretty much prints as much currency as it wants or needs. The valuation relative to other currencies depends on how the world perceives the “full faith and credit" of the issuing nation. Our government’s treasury is in the business of printing money.

The Buck has taken quite a ride in the past 70 years. The US may have lost its status of being the official currency of OPEC—despite the invasions, the wars, and/or the coup d’états staged by the US government to prolong that monopoly position. Still... the Dollar remains the world’s reserve currency only because there is no other one out there with enough printed “chits” to replace it. There are mega TRILLIONS of Dollars and dollar-denominated financial instruments. Therein rests the problem.

The Constitution of the United States is very specific as to who is responsible for the currency. The US Treasury is mandated to promote a strong currency for this nation. However, since the time of WWI, the Federal Reserve Banking system has been delegated the responsibility of printing the bucks. Since that fateful turnover of our money supply to “the Fed” under the administration of President Woodrow Wilson, the Dollar has lost roughly 93% of its purchasing power. The declines continue to this day.

The US Treasury no longer is committed to maintaining a strong dollar as its primary guiding mandate. The Treasury, and whichever retired partner from the investment banking firm of Goldman Sachs is serving as Treasury Secretary, is now focused on keeping Congress and the US Government "in money." (It should be noted that our present Treasury Secretary came from a research position at the Fed—not from Goldman Sachs.) The US has been running deficits in just about every category imaginable. Our National Debt now hovers around $12 TRILLION. We have funded our recent runs of conspicuous consumption by borrowing to buy anything we wanted—not just what we needed. Now that an economic downturn has pushed most households into buying only what they absolutely need, the credit has contracted. Foreign countries are now re-TH*NK*NG their blank check policies of continuing to loans US/us whatever we need to keep the ball rolling and the shoppers shopping. What will be the impact?

The Dollar has dropped so much of late that the EURO, which cost LESS that $ .80 (at its roll-out in 1999) now costs just OVER $1.50. This is an 87.5% change in valuation in just about 10 years. A barrel of crude oil on the world’s markets now is priced in the mid $80’s per barrel. A gallon of regular gasoline goes for $2.749 a gallon—up $ .20 in under two weeks. This change, and the recent blip in the equity markets, are due to erosion in the valuation of the Dollar, and not norms of supply and demand.

As the Obama Administration now completes 9/48ths of its first term of office, we are seeing the changes and fixes promised. The country appears to be “under-whelmed” by the policies... and then “overwhelmed” by the costs. The bailouts have gone to the few while the typical American family suffers. We were promised transparency, but just what have we gotten for the $1.4 TRILLION in one fiscal year’s added national debt? Norway has perhaps the only true transparency. That country just published what EVERY individual made (and was worth in 2008) in their respective local newspapers.

Hmmm... I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.