The slow death of the dollar

We're sitting in our favourite caf in Paris. On the corner are two security guards trying to look inconspicuous. One speaks into an ear-mounted telephone. The other stares straight ahead. What are they looking for? Who are they meant to guard?

"They're still guarding Carla," [Sarkozy's wife who lives in the area] said a bar patron.

Maybe. But we're always surprised by how much people think they know that ain't so...

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Our friend Dylan Grice told us about a study where people were asked a simple question and then asked how sure they were about their answer. Those who were 100% sure were only right 70% of the time.

After a few minutes the undercover cops disappear.

Dear readers looking for investment advice should know better by now. If you think we know something about investing you've mixed us up with someone else. Besides, when it comes to the markets nobody knows anything.

We don't even believe in investing. Not the way most people think of it. We'll leave that to our colleagues, the ones with the big investing ideas.

What we do know is that you can't expect to get something for nothing, not in the world of finance and investment. So you can't expect to earn a lot from your investments unless you are lucky, or smart, or the feds rig the system in your favour. Which, of course, is what they've done for the last 40 years!

No kidding. In the early 70s, the feds created a new kind of money. Dollars with nothing behind them other than the feds themselves. If they wanted, they could destroy the dollar. Or keep it solid. It was entirely up to them.

In the event, they destroyed it slowly. In the early 70s, we recall buying gasoline for 25 cents a gallon. Now, it was over $3 when we left the US a week ago. It's lost more than 90% of its value!

But this destruction had consequences that were different for the 'rich' than they were for the working classes. Financial assets rose with the inflation of the money supply. The price of labour did not. Stocks went up 13 times. Consumer prices (excluding gasoline) went up about half as much.

No wonder the rich got richer!

And now the same dumbbell economists who encouraged the feds to mess up the monetary system are whining about inequality'.

Here's Brian Fung kvetching in the Atlantic. He says income equality is not just an economic problem; it's a matter of life or death. No kidding:

Growing income inequality in the United States has Americans talking about justice and economic fairness, but a new study suggests the burgeoning wealth gap is threatening more than just our pocketbooks. It might be raising our risk for an early death.

In one of the few studies to track the health effects of income inequality over time, one Ohio State University (OSU) researcher has discovered that an increase in inequality leads mortality rates to begin rising after five years. Inequality-linked mortality peaks about two years later, before tapering off five years after that. All told, even a modest increase in American societal inequality more than doubles an average individual's cumulative risk of death over the next 12 years.

Drawing data from the U.S. National Health Interview Survey for the years 1986 to 2004, the study found that for every 0.01 increase in the Gini coefficient -- a standard measure of a country's economic disparity where 0 represents perfect societal equality and 1 represents maximum inequality -- an average person's cumulative risk of death increased by 112 percent in the next dozen years. Hui Zheng, the OSU sociologist who ran the study, replicated the results using three different measures of inequality across a sample of more than 700,000 Americans aged 30 and older. He then ran the same test on 18- to 25-year-olds, with similar results.

Does inequality itself cause you to die young? If some guy in your town gets filthy rich, will your life expectancy go down? What if some guy gets extremely poor like Mike Tyson, said to be the poorest man in the world, because he has such a huge debt to the IRS? Will that take years off the lives of the rich?

We don't know exactly what insight Mr Fung is discovering. But we are pretty sure that he doesn't either. Income inequality in itself is not going to shorten anyone's life unless he gets depressed about it and blows his brains out.

Even then, we'll never really know why he did it.

Nobody knows anything. Especially economists.

And this from colleague, Justice Litle: An Italian businessman was recently caught trying to smuggle gold bars into Switzerland under his car seat, reports The New York Times.

Switzerland is running out of safety deposit boxes. Gold is flowing in from unexpected corners. According to the Swiss National Bank (SNB), demand for 1,000 franc notes is surging. And even the Swiss property and fine art markets are heating up.

Any port in a storm, as they say, for anxious euro-capital fleeing the twin thunderheads of debasement and capital controls.

For wealthy Europeans, the fear and trembling is justified. Germany was expected to have softened by now to have backed down a bit in the name of saving the monetary union. That does not appear to be happening hence the equity and currency markets tanking hard on Monday.

"Germany's Chancellor Angela Merkel dashed any hope that Berlin would allow joint bonds issued by the euro zone or other measures sought by partners," Reuters reports. Spain has been forced to beg for rescue. Another Greek finance minister has resigned. Cypress, newly cut to junk by Fitch, has justfour days to raise 4.8 billion euros.

It's little wonder Deutsche Bank strategists are in synch with Hugh Hendry's droll advice: "I would recommend you panic."

Via Spiegel: Investment experts at Deutsche Bank now feel that a collapse of the common currency is "a very likely scenario." German companies are preparing themselves for the possibility that their business contacts in Madrid and Barcelona could soon be paying with pesetas again. And in Italy, former Prime Minister Silvio Berlusconi is thinking of running a new election campaign, possibly this year, on a return-to-the-lira platform.

Nothing seems impossible anymore, not even a scenario in which all members of the currency zone dust off their old coins and bills -- bidding farewell to the euro, and instead welcoming back the guilder, deutsche mark and drachma.

It would be a dream for nationalist politicians, and a nightmare for the economy. Everything that has grown together in two decades of euro history would have to be painstakingly torn apart

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