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Moneyization Part Eight

Moneyization: The global financial phenomenon of individuals and businesses moving their funds to monies in which they have the highest confidence, or money which has a higher store of faith.

Or, Money Is A Flow Not A Balance:

The Westphalian based model for money has been fading for sometime, and probably should have been declared dead many decades ago. National borders mean no more to financial and money flows than they do to the lowly sparrow. Neither money nor sparrows stop at borders. Individuals, all around the globe, now choose their money, not governments!

Money flows around the world rather than resides as a balance. Think about your checking account. The flows are most important, they determine your balance. As Cohen has written, "Currency domains properly speaking are social spaces, defined not by political frontiers but by the range of each money's effective use and authority: 'space-of-flows,' to use an increasingly popular expression . . ."(Cohen,1998,p.21). The flow of money should be our focus, and the direction of that flow is to the Euro and away from the U.S. dollar.

Readers would find Cohen's 1998 good background, but his 2004 work, The Future of Money, would be more beneficial. Cohen's important contributions to the thinking on money are currently part of our monthly effort. While not widely known to the investing community, his insights would probably thrill many of those that are seriously considering what money will be like in the future.

The first chart is derived from data originally created for a previous article on the growing importance of the Euro. In that work the Euro was considered as a balance, or how much of exists at a point in time. In this chart the Euro is considered as a flow. The bars represent the U.S. dollar value of the cumulative flow into Euros since July 2003, using the left axis. Triangles represent the U.S. dollar price of Gold.

As readily apparent from the chart, the Euro has benefitted from a strong flow into that global money. This flow is a combination of quantity and price. As we all know, the value of the Euro relative to other national monies, particularly the dollar, has risen. At the same time, the Euro has attracted a flow from neighboring countries and others. Owning the Euro has become fashionable. Owning the U.S. dollar has become unfashionable. Just with restaurants when they become faddish, customers are joyfully entering the front door. The same is happening with the Euro, the money "restaurant" of choice. This movement is the manifestation of moneyization.

The U.S. dollar price of Gold, represented by the triangles and using the right axis, has risen as global money users have voted with their wallets. They do not desire to dine at the "dollar diner" when the "Euro café" has seating available. Especially with the Chinese national money remaining inflexible, the Euro is the national money of choice. The flow is into the Euro. That reality means that the Gold price of the dollar will continue to decline, and that the U.S. dollar price of Gold should continue to rise.

Importantly, this flow into the Euro has created the necessary "monetary mass" to cause it to be acceptable around the world. Robert Mundell, Nobel Prize winner and one of the Euro's 'godfathers,' "When the euro was created it instantly became the second most important currency in the world "(Mundell,2003,p.21). Further Mundell wrote, "Monetary mass is important"(Mundell,2003,p.21). That mass is a strong magnet. All about the EU, countries are lining up at the "Euro café" for seating. How many countries are lining up to abandon their national money in exchange for the U.S. dollar?

The reality that the central banks of nations, such as Korea, might begin to diversify their holding came as a real shock to those still addicted to paper assets. Gold and Silver investors had foreseen this possibility for some time. But hey, we are not uppity. Any of those holders of paper assets ready to admit their debilitating addiction are welcome into the "Gold/Silver café". Come on in, plenty of seating available for the next serving. The grand buffet, the Super Cycle to US$1,300, is only now being prepared.

The second chart is an update of one that recently appeared in The Value View Gold Report and a recent Moneyization article. The Federal Reserve reports weekly the holdings of U.S. government debt by foreign official institutions held at the Federal Reserve. Portrayed in the chart, with bars, is the year-to-year change in those balances. While still rising, the rate of acquisition, buying, has slowed dramatically. Momentum always slows before any series turns down.

These holdings of U.S. government debt by foreign institutions at the Federal Reserves did go to a new high last week, despite the Korean announcement. The weekly increase, $20+ billion, was the largest weekly increase since January of 2004. This large jump came at a time similar to last year, suggesting that it may be a seasonal flow rather than indicative of current investment trends. Across the chart is a line indicating the trend of the weekly changes, and it has a decidedly negative slope. Foreign official institutions have not yet started to sell U.S. debt, but the flows are consistent with the Korean announcement of a move to diversify holdings.

The reasons for investor concern over the willingness of foreign investors to purchase U.S. debt are related to the value of the dollar and U.S. interest rates. Ultimately foreign central banks will reach the limit to which they will support U.S. debt. Interest rates will rise in the U.S. despite the "measured and meandering" policies of the Federal Reserve. As the U.S. economy has been supported largely by a housing bubble, that economic sector will be the epicenter of the coming U.S. mega-recession. Already housing trends are suggesting concern, and any major increase in interest rates would be devastating.

All markets are moved by money, and despite the wishful thinking of some ego-economists, so is the U.S. housing industry. More important, U.S. housing prices, like most around the world, are entirely supported by debt. Without the flow of money from borrowings, housing prices could not go up. For that reason, the third chart is of importance. Money flows, though different ones, are pushing up the Euro's value and U.S. housing prices. However, the flow to housing is slowing! For a start, Fannie Mae is going to reduce the size of the firm's mortgage portfolio. (FT,24 Feb 2005,23)

The third chart is of the index of applications for mortgage loans to purchase housing, and this weekly data comes from the Mortgage Bankers Association. A little over a year is covered by the line connected circles which represents the weekly plot. Also included in the chart is a line which represents the 25-week moving average of the data.

As is apparent, applications have faltered thus far in 2005. The current plots are well below the moving average suggesting some weakness in the demand for loans to buy housing. Weather could be a problem. Maybe everyone was so interested in football this year they had little time to go look at houses. Or maybe, much of the demand for housing has been satisfied, a scarey thought. Whatever the causes, should this series not show a decided improvement in the next few weeks serious concern for U.S. housing would be appropriate. And despite what the housing bulls say, if people do not borrow money to buy houses the price of houses will not rise.

Any move by foreign investors to shun purchases of U.S. debt will push up interest rates in the U.S. That action would indeed be the end for the Housing Bubble in the U.S. And before we get all those emails about the guaranteed nature of housing prices, without money flowing into a market prices do not go up. That reality is not open to discussion. The implications of a downturn in U.S. housing along with a devaluing dollar are quite ominous. And remember the same things were said about U.S. stock market returns a few years back, and which has now produced a negative return for more than five years.

And finally for the believers in housing, consider the 25 Feb report on existing home sales from the National Association of Realtors(marketwatch.com). They revised their data for 2004, still a strong year BUT 10% lower than previously estimated. Actual sales were 90% of the previous estimate. Further, the peak was in June of 2004 at 7.02 million annualized units, more than 8 months ago. Both December and January were about 4% below that level.

Refuge does exist though from the depreciating dollar and the imminent bust in U.S. housing prices, as many readers now understand. Gold and Silver provide protection from the continued "measured and meandering" policies of the Federal Reserve. Periodic rallies in the dollar's long term down trend provide opportunities in the form of weaker prices for the precious metals. These periods of price weakness, as shown in the last chart, provide opportunities!

Currently, the indicators suggest that both Gold and Silver are over bought. A retracement to US$425 is possible, a prelude to a move to US$440+. What is likely developing is the first indication of the upper band of the new channel into which they are moving. $1,300 Gold is not destined to happen immediately but over time. Periods of price weakness, when they develop, should be used as buying opportunities. Investors need to be positioned to participate in the Gold Super Cycle now developing, and not remained mired in paper assets.


Cohen, B. J.(1998). The geography of money. Ithaca: Cornell University Press.

Mundell, R.A.(2003). Currency areas, exchange rate systems, and international monetary reform. In Salvatore, D., Deon, J.W. & Willett, T.D.(Eds.), The Dollarization Debate(pp.17-45). New York: Oxford University Press.

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