Preparing for the Dollar’s Next Swoon

01/21/2009 9:35 am EST

Focus: FUNDS

Richard Young

Editor, Young's Intelligence Report

Richard Young, editor of Intelligence Report, says the result of all the government bailouts will be inflation and dollar devaluation, and he suggests a way to play it.

Milton Friedman noted in the Wall Street Journal: “For all practical purposes, the Federal Reserve controls one thing and one thing only: the volume of its own obligations—that is, high-powered money, or the base.”

Today’s astronomical rate of base growth relates directly to the massive financial bailouts of the US financial industry. Ahead, we face a second wave of bailout money for the basically insolvent US auto industry. And in the first quarter of 2009, we’re looking at the likelihood of a Rooseveltish New Deal #2 that could well total over $1 trillion.

There are only two ways to fund such spending. You can pull the money from the pile that already exists by borrowing it or by taxing. Or you can print new money that does not exist—an option that is already well under way. And if over an extended period (let’s say two years) you print money at a rate of growth that substantially exceeds growth of production, you will get a much higher rate of inflation. (This, of course, assumes that such money growth is simply not compensation for deceleration in velocity or the turnover of money in our economy.)

The eventual consequence for bailouts and New Deal #2 spending will be a nasty burst of inflation. And when any country runs the printing presses too long, its currency loses value versus more stable currencies. Thus the recently strong US dollar will lose value primarily against gold and the Swiss franc.

Back in the mid-1970s, one dollar would get you about 3.5 Swiss francs. In the period ahead, you will be getting less than one Swiss franc for your US dollar. The long-term trend in the US dollar is down versus the Swiss franc. And I look for this trend to extend well into the future, which is why my own biggest recent investment has been in Swiss francs through Currency Shares Swiss Franc Trust (NYSE: FXF).

And I, of course, advise investment for you. My long-term goal with my investment in FXF is to improve modestly on a similar investment in US Treasury bills. (FXF closed at around $87 Tuesday—Editor.)

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