Irrational Optimism by Navin Doshi & Sujay Desai (October 8th, 2009)

As a young nation, America has always preferred to boldly look ahead to a limitless future without much consideration for the past.  Because we have such a brief history, we tend to cut ties with past events as a matter of course.  In one regard, this perspective grants Americans the freedom to quickly overcome calamities with optimism and courage.  However, when held unchecked, our short-term memory has clouded our judgment and created an irrational optimism borne out of a refusal to learn from past misfortune.  This recession has its roots in our willful ignorance of all the warning signs related to loose credit, shaky loans, and exotic financial instruments. Apparently we stand at a precarious point in our economic crisis, and we need to finally face facts rather than dwell in a fantasy world of our own invention.  The recession will not evaporate just because the politicians and the public feel that Americans have endured enough pain and suffering.  On the contrary, as the economic indicators worsen, we may very well be just getting started with our downward slide.  If we are to learn one lesson from the financial collapse of 2008, it is that America needs to balance our unbridled optimism with some humility and a desire to avoid past mistakes.

When we examine the various key economic indicators, we see a consistency in the dismal nature of the numbers.  National unemployment is now at 9.8%, the highest it has reached since 1983.  More than 90% of American financial institutions are technically insolvent.  So far this year, 95 banks have failed and counting. The number of U.S. lenders unable to collect over 20% of their loans has hit an 18-year high.  The collective net worth of the Forbes 400, America’s richest group, has fallen by $300 billion in the last year, a drop of almost 20%.  As residential foreclosure rates continue to rise, banks are holding their breath in anticipation of the wave of 5-year interest-only commercial mortgages which will be due in the next one to three years.  When the commercial real estate foreclosure onslaught begins, banks may face a second financial crisis.  Consumer confidence has dipped, creating a bad omen for retailers as they look ahead to the all-important holiday season. As small and mid-size businesses lack capital for expansion, the unemployment rate will inevitably rise well into the double digits.

Bill Gross, the manager of the largest bond fund, and a feature columnist Allen Abelson of Barron’s believe that the U. S. government needs to be more concerned about deflation than inflation, contradicting what the stock market is telling us. Usually the message from the bond market is more accurate than the same from the stock market. The implication here is that interest rates should remain low for years to come. Highly credible monetary experts believe that America has no choice but plan an orderly decline of the dollar to 50% in ten years to get out of the deflationary spiral and the huge deficit. The implication here is that America needs to introduce about 7 % inflation every year for the next ten years. Mark Faber, a prophet of gloom and doom and a Barron’s round table contributor, believes that the dollar could sink in value very rapidly. His very recent statement was that ”it took 100 years for the dollar to go down to a dime, but the dollar of today could go down to a dime in less than 15 years”.

Last week, there was a news story, denied by the Arabs, that they are secretly negotiating with China, Russia, Brazil, and France to trade oil in a basket of currencies replacing the dollar. If it is true, the downward spiral of the dollar could accelerate. The great game the big powers play is always to gain advantage over any other trading partner. It is apparent that America is losing its leverage in the world currency market based upon the statements in the news media.

Ambrose Evans Pritchard of London Telegraph: “You can date the end of dollar hegemony from China’s decision last month to sell its first batch of sovereign bonds in Chinese Yuan to foreigners. It is this shift in Asia and Latin America that threatens dollar domination, not just the pricing of oil contracts”.

Fund manager Vitaly Nesis: “Domination of the dollar as the world currency has started to decline and gold will be its natural descendent. Gold should stay in the driving seat despite the spin coming from G-7 bankers. Perceived recovery is probably a mirage communicated by gullible media”.

Chinese government banker: “Transitional currency in the move away from dollar may well be gold”.  The golden rule over the ages has been that “those who own the most gold rule the world”.

Dow Theory letter editor, Richard Russell: “Meanwhile, a great bull market starts… a bull market that mirrors the demise of the dollar. Gold is priced in dollars, and as the dollar weakens, it takes an increasing amount of fiat dollars to buy an ounce of gold. Beginning in 1999, gold started up in a primary bull market. In my personal opinion, this is fated to be one of the greatest bull markets in history. It will be a bull market built on not one, but two powerful human emotions — both greed and fear. The speculative third phase lies ahead. Slowly but surely, the US public will finally realize that the US government is bankrupt both morally and monetarily. People will panic into gold… I believe that there will be a world panic to buy gold. This will set off one of the wildest and most explosive bull market in history”.

America once owned the most gold held in Fort Knox. Today, we do not know how much gold America has since it is kept secret. Congressman Ron Paul’s request to audit for gold reserve has been vehemently opposed by the Fed.  As of today (10/08/2009), gold traded at $1055, the highest level ever in its trading history.

(Navin Doshi, October 8th, 2009)
(Articles of Mr. Doshi, a writer and a philanthropist, are available on

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