State Of U.S. Economy

From John Browne (Senior Market Strategist for Euro Pacific Capital)

"The real financial implications of imprudent lending and borrowing and the rising level of U.S. government debt did not go unnoticed by the foreign exchange markets. The U.S. dollar began a dramatic decline, depreciating by more than 20% percent against the Euro in the past two years.

Now, the whole vast economic model of abundant liquidity and excessive leverage is moving in reverse. The liquidity boom has morphed into an insolvency crisis, aggravated by a fall in asset values. American consumer demand is falling dramatically. In a consumer economy, where 72 percent of GDP is comprised of consumption, American domestic corporate profits and stock markets look set for dramatic falls, leading to margin calls and yet more forced asset sales.

In short, a great ‘de-leveraging’ has embraced the American economy. The massive and excessive liquidity is now being squeezed out of the price of most assets. Investors, who remain owners of leveraged American domestic assets, stand to be hit hard--very hard. This financial suffering will be made worse as investors realize the effects of taxation, inflation and the debasement of their dollar currency upon any positive nominal returns they salvage.

The astute investor can insulate himself from this mounting financial dilemma. He should diversify immediately out of U.S. dollar-based assets into high (total return) yielding assets denominated in strengthening currencies of ‘producer’ nations such as those of Switzerland, Australia and Canada. In light of current conditions, it is then and only then that the astute investor is likely to become richer, not poorer."