Re: [A-List] [Fwd: Re: [gang8] THE DOLLAR VS THE EURO]

["Anyutka" <annewilliamson@xxxxxxx>]

In reading Richard Russell's Saturday commentary at his
www.dowtheoryletters.com, I found the following 2 posts
appended to his remarks.  (Russell often adds bits and pieces from
subscriber email that he finds worthwhile.)  Each
comments on this particular discussion.  I know Hugo Salinas Price, and can
tell you he is indeed a brilliant man.

Anne

PS  For those who may not know, Richard Russell has been successfully
commenting on the markets for over 50
years now.  He enjoys a devoted following, and is truly a very savvy guy.

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This is one hell of a brilliant e-mail -- Russell


Dear Richard,
I sent you an article by this gentleman once before and would again like to
stress that he is a "no axe to grind billionaire" who I listen to more than
the advisories for obvious reasons, Mr Hugo Salinas Price is the owner of
the large durable goods company here in Mexico called Electra, also he owns
TV Azteca and Western Union, hope you enjoy reading his genius.
Ronaldo


The Shape Of Things To Come.-Hugo Salinas Price.


By Hugo Salinas Price

It seems that there are two different possible types of devaluation of the
dollar.

One, is a coordinated devaluation, where the big players all agree on a new
value for the dollar with regard to their own currencies. This new value
would be hammered out behind closed doors and ratified later at a meeting of
the G-7.

It appears to me, from reading what we have all been reading on the subject
of the problems in Europe and in Japan, and not to mention those of the
inscrutable Chinese, that it would be extremely difficult for the major
players in the world economy to arrive at any agreement to a substantial
devaluation of the dollar in order to reduce the U.S. trade deficit, running
at some $400 billion a year. The rest of the world is hooked on exports to
the U.S., and reducing its trade deficit means killing off a substantial
percentage of exports to the U.S. It seems to me, very difficult for a group
of nations to agree to that, to put it mildly.

So, this first type of devaluation, a concerted and agreed-to devaluation,
is hardly possible.

The second type of devaluation is your good old chaotic, traumatic
devaluation, the kind that destroys the lives of enormous numbers of
innocent citizens. The rest of the world has seen plenty of these
devaluations in the last 25 years, but the U.S. has not. The American people
do not understand what devaluation means because they have not physically
suffered from the phenomenon - as yet.

A devaluation of the dollar means that the dollar has to be worth less, in
terms of most of the other currencies in the world.

There is only one way that such a devaluation can occur: and that is, with
regard to a superior currency, in which all currencies, including the
dollar, are denominated. And that superior currency (the numeraire as it
used to be called) is, of course, gold.

The trade deficit will be, and has to be substantially reduced at the very
least, if not eliminated. That requires the devaluation of the dollar. There
is no other way. And that can only be achieved, through the mechanism of the
price of gold.

But, that does not mean just a rise in the price of gold in dollars. If that
happens, as it has been happening, no devaluation of the dollar in terms of
other currencies is taking place. The price of gold in all currencies just
goes up evenly, around the world. The dollar is still overvalued in terms of
Yen, Euros, Yuan, etc. etc.

A devaluation of the dollar, to close the trade deficit, requires an uneven
rise in the price of gold, expressed in terms of the diverse currencies of
the world.

Here's an example of an even rise in the price of gold around the world:

Suppose the dollar price of gold at $310/oz, and the dollar is worth 1.09
euro-cents, .68 British pounds, and 127 yen; conditions as they are,
approximately, at the moment.

Then, gold is worth $310/oz in dollars, 338 euros/oz, 211 British pounds/oz,
39,370 yen/oz.

Suppose gold rises evenly in terms of all these currencies. Let us suppose
gold goes to $350 dollars/oz., but the value of the dollar in terms of the
other currencies remains as above. Then we would have:

Gold in dollars is $350 dollars/oz., 381 euros/oz, 238 British pounds/oz,
44,450 yen/oz.

The rise in gold has benefited gold holders. The dollar has devalued with
regard to gold, as have the other currencies, but their relative values
remain the same, so nothing has been achieved with regard to the trade
deficit.

A real, gut-wrenching dollar devaluation that will trim the trade deficit
means that the worth of the dollar in terms of euros, pounds, yen and all
other currencies is shaken to the core, and all cross-currency valuations
are also affected: the euro-pound rate, the euro-yen rate, pound-yen rate,
the euro-yuan rate, the pound-yuan rate, the yen-yuan rate: you get the
idea.

This must also mean that the rise in the price of gold in these diverse
currencies is going to vary from country to country. Some countries will see
greater rises in the value of gold, expressed in their own currencies, than
others. I do not have any idea what the new gold prices will be, in terms of
these various currencies. But this scenario must take place, if the dollar
is to devalue significantly. It will be a free-for-all. In this scenario,
which I think is likely, the price of gold will, in my opinion, spin out of
control.

Because the significant devaluation of the dollar with regard to the yen,
the yuan, and the euro will affect so profoundly the productive structures
of Japan, of China, of the European Union - in fact, of the whole world -
there will be an attempt to maintain an even rise in the price of gold
around the world. But, this will not reduce the American trade deficit. Only
an uneven rise in the price of gold, in terms of the various currencies, can
trim down or reduce substantially the American trade deficit. The situation
is hard to visualize, but it appears to me that there will be an
international race to the bottom, in terms of the gold value of the diverse
units of each national currency. In other words, the currencies of the world
will devalue with regard to gold in a race to maintain the present parity
with regard to the dollar. This will be an attempt to frustrate the
devaluation of the dollar; in other words, an attempt to keep the dollar
overvalued, as it is at present, and retain the American trade deficit, in
order to preserve the existence of the export-oriented industries in each
country. No country wants to see its export industries shut down.

However, this attempt will fail. Disorder will prevail. Finally, some
countries will choose not to devalue their currencies further, in terms of
gold. When this happens, we shall see that gold has risen, in terms of
national currencies, to different heights in different countries. The
increase in the price of gold expressed in dollars, will be greater than the
increase in the price of gold expressed in other currencies. At that time,
the dollar devaluation will have become effective. The trade deficit will
tend to disappear. Americans will only be able to buy imported goods, to the
extent that they can pay for them with exports. The favorable part of this
traumatic experience will be that U.S. industry will have a rebirth from its
present ashes. U.S. workers will produce goods to satisfy Americans.

The dollar will no longer be the almighty currency it presently is. The U.S.
will take that place among nations, to which the laws of economics assign
it, according to its productivity of the goods which the rest of the world
wants to buy from it. A place very different from that which it presently
occupies, as producer of the world currency par excellence. Gold will be the
master.

New international trade relations will be established. When the dust
settles, the world will be a different place, entirely, from the world we
have known. "Globalization", a phenomenon that has been based on the
hegemony of the dollar, will be a thing of the past, an illusion that
dissipates like a dream. There are other considerations, like the
possibility of a great war, that goes along with this readjustment of world
international relations. I won't go into those considerations. Suffice it to
say, that all international trade relations, and the productive structure of
every country, now so heavily invested in "export for dollar income" will be
very much affected. The readjustment will cause the world a great deal of
real pain.

A war may obscure the change in trade relations and in world influence, but
the change must and will take place. The U.S. simply cannot indefinitely
live off the rest of the world to the tune of $400 billion a year. The
dollar must and will devalue, and I have here tried to outline "the shape of
things to come", that devaluation of the dollar implies.
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Dear Mr. Russel: I am a new subscriber since this year and I find your
comments, your ideas and the way you write fantastic. Thank you for keeping
up the work load at your age. I know you can't answer all the emails but
maybe you could comment on this subject in one of your letters.

The fact that you are saying that the coming economic power will be China -
some say their GDP will be equal to the one in the States in 15 years - you
have never mentioned an investment in chinese equities. As far as I can see,
equities and the chinese currency must go up if their economy is in a primar
(secular) bull market. What do you think?
Thank you for your time. Sincerely, Marc A. Peter, plastic surgeon in
Winterthur, Switzerland

Russell Comment -- OK, try CHN (NYSE), a fund I've been watching. This is a
closed-end fund dealing with Chinese stocks, and a fund that has been doing
well. I haven't bought CHN yet, but I've been tempted to. Chart of CHN below
courtesy of Big Charts.