Liberty Coin Service

Broadcast 03/23/2011 on WILS-1320 AM

Click here to get to the broadcast in mp3 format.

Announcer:
Welcome to another edition of Things You “Know” That Just Aren’t So, And Important News You Need To Know presented by Patrick A. Heller, owner of Liberty Coin Service and Premier Coins & Collectibles in Lansing and Delta Township.  Take it away Pat.

Heller:
Good morning.  Whenever there is a crisis in other parts of the world, it has been typical for foreigners to seek the safety of the US dollar.  A common means to accomplish this is buying US Treasury debt.  As a result of these surges in demand, the US Dollar Index, which reflects the value of the dollar against other currencies, tends to rise.

The major earthquake, tsunami, and nuclear power plant problems that hit Japan on March 11 is a crisis that should have, once again, pushed up the value of the US dollar.

That is not what happened.

On March 17, the G-7 Group of Nations announced that it would coordinate a currency manipulation to sell Japanese yen to push down its value.  This action would also push up the value of the US dollar and other currencies.

At the March 18 market opening, the value of the US dollar quickly soared 3% to reach an Index of 81.75.  Then the bottom fell out.

By the close that day, the US Dollar Index had fallen all the way to 75.69, a 7.5% intraday decline!  This was the lowest close for the Index since late 2009.

On March 21 the US Dollar Index fell further, finishing at 75.41.

The decline of the dollar has to be understood in a wider context.  Many of the nations that are part of the basket of currencies by which the US Dollar Index is measured have themselves been actively lowering the value of their own currencies.  For the US dollar to still fall in value against these other depreciating currencies is a sign of extraordinary weakness. 

As the dollar declines, US Treasury debt interest rates will have to rise in order for foreign and domestic investors to be willing to hold the debt.  Strangely, that is not what has happened over the past ten days.

In fact, 10-year US Treasury debt interest rates have fallen. 

I think there is an explanation.  If the Federal Reserve has stepped up its purchases of US Treasury debt, either directly or through intermediaries, that would hold down the interest rate but would not have the same effect of pushing up the value of the US dollar.

As of the end of 2010, 45% of all US Treasury debt was held by China, Japan, and various Middle Eastern governments.  China is suffering its own domestic financial crisis, where it has been reducing the amount of US Treasury debt it holds.  To generate the funds to recover from the earthquake catastrophe, Japan is going to have to reduce its holdings of US Treasury debt and cut back on new purchases.  Many Middle Eastern governments are now scrambling to raise funds in order to use the largesse for projects to mollify their citizenry.  As a result, Middle East demand for US Treasury debt is also bound to decline.

Even in the US, Treasury debt demand is falling.  PIMCO, the world’s largest bond fund, has sold off all Treasury debt held by at least two of its largest funds.

Falling demand for US Treasury debt will accelerate the loss of safe haven status for the US dollar.  As the dollar continues to lose value, assets such as gold and silver will appreciate.  There is still time to protect the remainder of your personal wealth, but it would be best to act sooner rather than later.

That’s it for now.  Tune in again next week for more “Things you ‘know’ that just aren’t so, and important news you need to know.”  I’m Patrick A. Heller, owner of Liberty Coin Service in Lansing and Premier Coins & Collectibles in Delta Township.  Thank you for listening.