The US election last November, and most notably the appointments made by the Bush Administration thereafter have proven to be a catalyst taking the dollar to new lows versus the euro. A catalyst because it confirms continuity of policies that have driven the trade deficit to dramatic and unsustainable extremes: The latest numbers available put the deficit at a record $60.3 billion, an annualized $724 billion, over 6% of the GDP. The re-appointment of John Snow as Treasury Secretary cemented this view; his periodic lip service to a “strong dollar policy” is not taken seriously by anyone anymore.

The next major catalyst is waiting around the corner — Greenspan’s pending retirement in January 2006. The discussion about his succession will heat up by this summer at the latest. At that time, the media will take a closer look at where Greenspan’s policies of free credit have pushed the US consumer; and more importantly, different scenarios will be discussed as to which path a successor will take: on a loose money path in an effort to keep the party going, or on a path of monetary restraint. As Bush’s goal is to keep this economy running at any cost, it is rather obvious what type of person he will appoint.

Greenspan has already conducted damage control by warning the government about serious challenges ahead, while at the same time distancing himself from the policies that have lead to them. Once he is out of office, some of the blame will shift concerning his role in the policies that have led the US into the current situation. He will no longer be untouchable.

In the meantime, we have started to see the fallout of the weak dollar among the weaker European players. The British car manufacturer Jaguar announced a US$1bn write-off for their failed US expansion strategy. Jaguar now has a negative net worth and is begging Ford for a capital infusion. And General Motors has given a warning shot to its Saab subsidiary, saying that the brand has generated losses in 9 out of its past 10 years, and it may be time to abandon the brand altogether. Finally, GM is giving Fiat the ultimate vote of no-confidence by paying the troubled Italian carmaker US$2bn so that Fiat will forfeit its put option to sell itself to the US carmaker. All these companies have made significant mistakes in recent years – in the current environment, mistakes are fatal.

The US consumer market continues to be flooded with cheap imports from Asia, a process enabled by Asian currency subsidies (fixed exchange rates, currency interventions, extreme purchases of US Treasuries). A side effect of Asian overproduction is high commodity prices. US firms, dealing with high raw materials prices and low consumer prices, continue to reduce overhead by accelerating their outsourcing, so that Asia can produce even more, flooding the US market with more goods and driving commodity prices even higher, so that US firms will have to cut costs further to remain competitive… Needless to say, US consumers are not only used to cheap imports, they are also dependent on cheap imports because they don’t feel particularly secure about their jobs and have been encouraged to go deeply into debt so that consumption doesn’t abate.

No one has failed to notice that currency swings have become more volatile. Much of this is because the US consumer would really rather take a break and get his house in order; but this won’t happen because the Fed, and the Administration with the Treasury have decided that consumption must continue to rise, as 70% of US GDP depends on the US consumer.

The US dollar has lost its status as a “hard currency.” This has not gone unnoticed in the rest of the world. OPEC used to set a target US dollar price; in December, OPEC president Purnomo Yusgiantoro said clearly that the frequently-quoted target price range of $22 – $28 dollars per barrel was based on 2000 exchange rates, and that it would be only appropriate, for example, for Europe to look at oil in terms of euros.

While the US is busy destroying its currency, the rest of the world is looking for new alliances. China is considering a $13 billion dollar bid for 115-year-old US oil giant Unocal to help secure its future energy needs and India is in discussion with Iran and Russia to satisfy that region’s surging energy needs.

As a result of these policies and trends, Merk Investments has continued to increase our hard currency cash and gold holdings.