Bretton Woods

by Addison Wiggin

The year was 1944. For the first time in modern history, an international agreement was reached to govern monetary policy among nations. It was, significantly, a chance to create a stabilizing international currency and ensure monetary stability once and for all. In total, 730 delegates from 44 nations met for three weeks in July that year at a hotel resort in Bretton Woods, New Hampshire.

It was a significant opportunity. But it fell short of what could have been achieved. It was a turning point in monetary history, however the result of this international meeting, the Bretton Woods Agreement, hadthe original purpose of rebuilding after World War II through a series of currency stabilization programs and infrastructure loans to war-ravaged nations. By 1946, the system was in full operation through the newly established International Bank for Reconstruction and Development (IBRD, the World Bank) and the International Monetary Fund (IMF).

What makes the Bretton Woods accords so interesting to us today is the fact that the whole plan for international monetary policy was based on nations agreeing to adhere to a global gold standard. Each country signing the agreement promised to maintain its currency at values within a narrow margin to the value of gold. The IMF was established to facilitate payment imbalances on a temporary basis.

This system worked for 25 years. But it was flawed in its underlying assumptions. By pegging international currency to gold at $35 an ounce, it failed to take into effect the change in gold's actual value since 1934, when the $35 level had been set. The dollar had lost substantial purchasing power during and after World War II, and as European economies built back up, the ever-growing drain on US gold reserves doomed the Bretton Woods Agreement as a permanent, working system.

This problem was described by a former senior vice president of the Federal Reserve Bank of New York: "From the very beginning, gold was the vulnerable point of the Bretton Woods system. Yet the open-ended gold commitment assumed by the United States government under the Bretton Woods legislation is readily understandable in view of the extraordinary circumstances of the time. At the end of the war, our gold stock amounted to $20 billion, roughly 60 percent of the total of official gold reserves. As late as 1957, United States gold reserves exceeded by a ratio of three to one the total dollar reserves of all the foreign central banks. The dollar bestrode the exchange markets like a colossus."

In 1971, experiencing accelerating depletion of its gold reserves, the United States removed its currency from the gold standard, and Bretton Woods was no longer workable.

In some respects, the ideas behind Bretton Woods were much like an economic United Nations. The combination of the worldwide depression of the 1930s and the Second World War were key in leading so many nations to an economic summit of such magnitude. The opinion of the day was that trade barriers and high costs had caused the worldwide depression, at least in part. Also, during that time it was common practice to use currency devaluation as a means for affecting neighbouring countries' imports and reducing payment deficits. Unfortunately, the practice led to chronic deflation, unemployment, and a reduction in international trade. The lessons learned in the 1930s (but subsequently forgotten by many nations) included a realization that the use of currency as a tactical economic tool invariably causes more problems than it solves.

The situation was summed up well by Cordell Hull, US secretary of state from 1933 through 1944, who wrote:

"Unhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair economic competition, with war...If we could get a freer flow of trade...so that one country would not be deadly jealous of another and the living standards of all countries might rise, thereby eliminating the economic dissatisfaction that breeds war, we might have a reasonable chance of lasting peace."

Hull's suggestion that war often has an economic root is reasonable given the position of both Germany and Japan in the 1930s. The trade embargo imposed by the United States against Japan, specifically intended to curtail Japanese expansion, may have been a leading cause for Japan's militaristic stance.

Another observer agreed, saying that poor economic relations among nations "inevitably result in economic warfare that will be but a prelude and instigator of military warfare on an even vaster scale."

Bretton Woods had the original intention of smoothing out economic conflict, in recognition of the problems that economic disparity causes. The nations at the meeting knew that these economic problems were at least partly to blame for the war itself, and that economic reform would help to prevent future wars. At that time, the United States was without any doubt the most powerful nation in the world, both militarily and economically. Because the fighting did not take place on US soil, the country built up its industrial might during the war, selling weapons to its allies while developing its own economic strength. Manufacturing by 1945 was twice the annual rate of 1935-1939.

Due to its economic dominance, the United States held the leadership role at Bretton Woods. It is also important to note that the United States owned 80 percent of the world's gold reserves at the time. So the United States had every motive to agree to the use of the gold standard to organize world currencies and to create and encourage free trade. The gold standard evolved over a period of hundreds of years, planned by a central bank, government, or committee of business leaders.

Throughout most of the nineteenth century, the gold standard dominated currency exchange. Gold created a fixed exchange rate between nations. Money supply was limited to gold reserves, so nations lacking gold were required to borrow money to finance their production and investment.

When the gold standard was in force, it was true that the net sum of trade surplus and deficit came out to zero overall, because accounts were eventually settled in gold - and credit was limited as well. In comparison, in today's fiat money system, it is not gold but credit that determines how much money a country can spend. So instead of economic might being dictated by gold reserves, it is dictated by a country's borrowing power. The trade deficit and the trade surplus are only "in balance" in theory, because the disparity between the two sides is funded with debt.

The pegged rates - the value of currency to the value of gold - maintained sensible economic policy based on a nation's productivity and gold reserves. Following Bretton Woods, the pegged rate was formaThe concept was a good one. However, in practice the international currency naturally became the US dollar and other nations pegged their currencies to the dollar rather than to the value of gold. The actual outcome of Bretton Woods was to replace the gold standard with the dollar standard. Once the United States linked the dollar to gold at a value of $35 per ounce, the whole system fell into place, at least for a while. Since the dollar was convertible to gold and other nations pegged their currencies to the dollar, it created a pseudo-gold standard.lized by agreement among the leading economic powers of the world.

The British economist John Maynard Keynes represented Great Britain at Bretton Woods. Keynes preferred establishing a system that would have encouraged economic growth rather than a gold-pegged system. He favoured creation of an international central bank and possibly even a world currency. He proposed that the goal of the conference was "to find a common measure, a common standard, a common rule acceptable to each and not irksome to any."

Keynes' ideas were not accepted. The United States, in its leading economic position, preferred the plan offered by its representative, Harry Dexter White. The US position was intended to create and maintain pricestability rather than outright economic growth. As a consequence, Third World progress would be achieved through lending and infrastructure investment through the IMF, which was charged with managing trade deficits to avoid currency devaluation.

In joining the IMF, each country was assigned a trade quota to fund the international effort, budgeted originally at $8.8 billion. Disparity among countries was to be managed through a series of borrowings. A country could borrow from the IMF, which would be acting in fact like a central bank.

The Bretton Woods agreement did not include any provisions for creation of reserves. The presumption was that gold production would be sufficient to continue funding growth and that any short term problems could be resolved through the borrowing regimens.

Anticipating a high volume of demand for such lending in reconstruction efforts after World War II, the Bretton Woods attendees formed the IBRD, providing an additional $10 billion to be paid by member nations. As well-intended an idea as it was, the agreements and institutions that grew from Bretton Woods were not adequate for the economic problems of post-war Europe. The United States was experiencing huge trade surplus years while carrying European war debt. US reserves were huge and growing each year.

By 1947, it became clear that the IMF and IBRD were not going to fix the problems of European post-war economic woes. To help address the issue, the United States set up a system to help finance recovery among European countries. The European Recovery Program (also known as the Marshall Plan) was organized to give grants to countries to rebuild. The problems of European nations, according to Secretary of State George Marshall, "are so much greater than her present ability to pay that she must have substantial help or face economic, social, and political deterioration of a very grave character."

Between 1948 and 1954, the United States gave 16 Western European nations $17 billion in grants. Believing that former enemies Japan and Germany would provide markets for future US exports, policies were enacted to encourage economic growth. During this period, the Cold War became increasingly worse as the arms race continued. The USSR had signed the Bretton Woods agreement, but it refused to join or participate in the IMF.

Thus, the proposed economic reforms turned into part of the struggle between capitalism and Communism on the world stage.

It became increasingly difficult to maintain the peg of the US dollar to $35-per-ounce gold. An open market in gold continued in London, and crises affected the going value of gold. The conflict between the fixed price of gold between central banks at $35 per ounce and open market value depended on the moment. During the Cuban missile crisis, for example, the open market value of gold was $40 per ounce. The mood among US leaders began moving away from belief in the gold standard.

President Lyndon B. Johnson argued in 1967 that:

"The world supply of gold is insufficient to make the present system workable - particularly as the use of the dollar as a reserve currency is essential to create the required international liquidity to sustain world trade and growth."

By 1968, Johnson had enacted a series of measures designed to curtail the outflow of US gold. Even so, on March 17, 1968, a run on gold closed the London Gold Pool permanently. By this time, it had become clear that maintaining the gold standard under the Bretton Woods configuration was no longer practical. Either the monetary system had to change or the gold standard itself would need to be revised.

During this period, the IMF set up Special Drawing Rights (SDRs) for use as trade between countries. The intention was to create a type of paper gold system, while taking pressure off the United States to continue serving as central banker to the world. However, this did not solve the problem; the depletion of US gold reserves continued until 1971. By that time, the US dollar was overvalued in relation to gold reserves. The United States held only 22 percent gold coverage of foreign reserves by that year. SDRs acted as a basket of key national currencies to facilitate the inevitable trade imbalances.

However, Bretton Woods lacked any effective mechanism for checking reserve growth. Only gold and the US asset were considered seriously as reserves, but gold production was lagging. Accordingly, dollar reserveshad to expand to make up the difference in lagging gold availability, causing a growing US current account deficit. The solution, it was hoped, would be the SDR.

While these instruments continue to exist, this long-term effectiveness can only be the subject of speculation. Today SDRs make up about 1 percent of IMF members' nongold reserves, and when in 1971 the United States went off the gold standard, Bretton Woods ceased to function as an effective centralized monetary body. In theory, SDRs - used today on a very limited scale of transactions between the IMF and its members - could function as the beginnings of an international currency. But given the widespread use of the US dollar as the peg for so many currencies worldwide, it is unlikely that such a shift to a new direction will occur before circumstances make it the only choice.

The Bretton Woods system collapsed, partially due to economic expansion in excess of the gold standard's funding abilities on the part of the United States and other member nations. However, the problems of currency systems not pegged to gold lead to economic problems far worse.

How to recover from verbal blunders

Face-saving strategies for the most common — and most embarrassing — social gaffes...

Mistaking a friend's mother for her grandmother is bad enough. But the stammering and yammering that follows leaves all three of you red-faced, squirming, mortified: "It's not that you look old, but that your daughter looks so young! Or maybe it's because you've let your hair go gray...which looks beautiful, by the way! Have I mentioned that I desperately need to get my eyes checked?" Unintended insults are bound to happen, but there are ways to ease the post-blunder embarrassment.

Here are smooth recovery plans for six common bloopers. (The best way to get out of the above jam? Just apologize sincerely, then change the subject — fast.)

Saying What You Think (Without Thinking First)...

Real-Life Example:

"While talking to my friend's girlfriend during a New Year's Eve party, I launched into a long tirade about my distaste for the Republican Party," says a woman from Washington, D.C. "It turns out her father was a big fund-raiser for George W. Bush and is now a Bush-appointed ambassador."

How to Remove Your Foot:

Whether you've just denounced single-sex education to a Smith College alumna or SUVs to a Chevy Suburban driver, the best way out is to laugh and chide yourself. Caroline Tiger, the author of How to Behave: A Guide to Modern Manners for the Socially Challenged ($13, http://www.amazon.com/exec/obidos/tg/detail/-/1931686319/qid=1092416364/sr=1-1/ref=sr_1_1/104-1945627-3528751?v=glance&s=books), suggests softening the blow with a line like "Oh, I should have listened to my mother when she told me not to talk about controversial subjects at parties!" Regardless of the situation or subject, resist the temptation to automatically apologize. "It's obviously something you feel strongly about, and backtracking would sound insincere," says Tiger. Listen politely if the person counters with her philosophy, then segue to a neutral subject. (The merits of Krispy Kreme doughnuts, anyone?)

In the Future:

You don't need to censor yourself, but expect — and respect — dissenters. "Sure, going off about something can leave you in an awkward situation," says Nick Morgan, the founder of Public Words, a communications coaching company based in Arlington, Massachusetts. "But it's disagreement and differences that make life interesting." Of course, very controversial or potentially hurtful views should be kept to yourself, unless you're among close (and forgiving) friends.

Gossiping With the Wrong Crowd

Real-Life Example:

"At a dinner party, I ranted on and on about a local company's president who'd had an affair with his secretary," says a woman from Rhode Island. "Then I looked around, and no one was reacting. So I said to the man next to me, 'Now go ahead and tell me the secretary is your sister.' He said, 'No, it's my mother.'"

How to Remove Your Foot:

Don't try to explain yourself — you might only make things worse. Just apologize earnestly and say, "Please forgive me." If you're griping about someone who, as it happens, overhears you, you need to own up. "Blame it on yourself," says author Caroline Tiger. "Say, 'I'm sorry. I'm having a really bad day. I don't know what got into me.'" Peggy Post, the author of Emily Post's Etiquette ($38, http://www.amazon.com/exec/obidos/tg/detail/-/0062700782/qid=1092416522/sr=1-1/ref=sr_1_1/104-1945627-3528751?v=glance&s=books) says, "One of the greatest acts of kindness is to be a gracious forgiver. Hopefully the person will let you off the hook" — or at least not gripe about you.

In the Future:

"The standard advice would be to not gossip, but you're going to anyway — it's human nature," says communications coach Nick Morgan. "So just make damn sure that you know the person you're gossiping with" — and always be aware of who is within earshot.

Mistaking Plumpness for Pregnancy

Real-Life Example:

"This happened to a friend of mine," says author Peggy Post. "She ran into a business associate she hadn't seen in a while at a meeting and said, 'It's so nice to see you! When are you due?' To which the woman replied, 'I had my baby months ago.' My friend was so embarrassed, and it was extremely awkward between them from then on."

How to Remove Your Foot:

"In this instance, groveling is in order," says author Caroline Tiger. "Apologize profusely, say how stupid you feel, then move on. Don't dwell on it or make up excuses." If the person is a friend or a colleague whom you see often, Post suggests writing a note to further smooth things over. "That being said, it's awkward to write a note, too," she says. "Just keep it simple: 'I can't believe I did that. Please accept my apologies.'

In the Future:

If you aren't 100 percent sure, don't say anything. "I did this once and learned my lesson," says Charlotte Ford, the author of 21st-Century Etiquette ($14, http://www.amazon.com/exec/obidos/tg/detail/-/0142003123/qid=1092416652/sr=1-1/ref=sr_1_1/104-1945627-3528751?v=glance&s=books). "Now I ask somebody else first if the person is pregnant or not. And if the other person isn't sure, then I keep my mouth shut." Chances are, a woman who's expecting will bring up the topic herself.

Spoiling a Surprise Party

Real-Life Example:

"When I was a teenager, I was invited to a surprise sweet 16," says a New York woman. "A few days before the party, I excitedly asked the surprise honoree, 'Are you going to your party on Saturday?' Oops! I then begged her to not reveal my gaffe to the party givers, for fear they would ostracize me. This was in 1960. To this day, I cringe at the mention of a surprise party."

How to Remove Your Foot:

You can't stuff the cat back into the bag, but you should handle it with care once it's out. "If you collaborate with the person for whom the party is being thrown, you won't ruin it for the host, too," says author Peggy Post. If the host finds out the surprise is blown, however, Post recommends admitting to the mistake and doing your best to make up for it, either by helping to get ready for the party or by sending the host flowers.

In the Future:

The closer you are to the surprisee, the easier it is to slip. Try to limit contact with the guest of honor as the party approaches, and have a credible and airtight excuse prepared if she asks about your plans for that evening (out of town visiting your parents, dining with a friend she's never met, etc.).

Misfiring a Scathing E-Mail

Real-Life Example:

"I was upset with my boss one day and rattled off an e-mail to my coworker about how our boss should not bring stress from his home life into the workplace," says a woman from New York. "But because I was so consumed by the situation, I typed my boss's name into the 'To' line instead. Luckily, I didn't get fired. I never named him in the e-mail, and he assumed it was about someone else."

How to Remove Your Foot:

Whether your e-mail maligned a boss or a friend, own up to it immediately. Don't hastily type another note to apologize, since it could be interpreted as insincere, and become further fodder in forwarded e-mails about you. Rather, call the person and say, "I cannot believe I just did that. I am a complete idiot. I'm so sorry." If you were expressing genuine frustration in your e-mail, as opposed to general cattiness, author Caroline Tiger recommends gently addressing it: "In some situations, this faux pas could offer a starting point for discussion." Take note: The "unsend" feature offered on e-mail programs like AOL (which is owned by Real Simple's parent company, AOL Time Warner) may seem like a foot-in-mouther's fantasy, but it works only in specific cases. The recipient must use the same service provider as you do (which is often the case at the office) and must have not yet opened the offending e-mail.

In the Future:

"The speed, anonymity, and brusqueness of on-line writing provide the perfect breeding ground for major mishaps," says Patricia T. O'Conner, coauthor of You Send Me: Getting It Right When You Write Online ($18, http://www.amazon.com/exec/obidos/tg/detail/-/0151005931/qid=1092416812/sr=1-1/ref=sr_1_1/104-1945627-3528751?v=glance&s=books). "The best way to deal with this kind of thing is not to let it happen in the first place. Stop and think before you click Send, especially when you're sending radioactive material."

Flubbing a Figure of Speech

Real-Life Example:

"I was talking with a woman who had recently had an abortion, and I used the phrase 'pregnant pause,'" says a Massachusetts woman. "It was completely out of context, but I felt terrible anyway."

How to Remove Your Foot:

In most cases, you can just continue your conversation. Although you may be horrified that you said "See what I mean?" to a blind person, for example, he most likely didn't pick up on it — and if he did, he probably knew you weren't being hurtful. "Don't tie yourself up in knots over the literal meanings of common expressions," says Sue Fox, author of Etiquette for Dummies ($22, http://www.amazon.com/exec/obidos/ASIN/0764551701/qid=1092416898/sr=ka-1/ref=pd_ka_1/104-1945627-3528751). "Oftentimes your behavior and comments affirm the person's dignity — you don't view them as different." But if you stumble upon a sensitive subject — say a friend's mom has died and you start cracking "yo mama" jokes (which, you should know, stopped being funny in the late 80s) — acknowledge the gaffe with an "I'm sorry, I clearly wasn't thinking" and then quickly move on.

In the Future:

Short of stripping all slang, figures of speech, and colloquialisms from your vocabulary, there isn't much you can do to avoid what may be the most common foot-in-mouth situations. So relax: They happen to everyone.

- RealSimple.com

A future so bright....GOLD

by James Turk

Predicting year-ahead price action for any asset class is tricky, and gold, with its sensitivity to political as well as economic currents, is trickier than most. But tricky does not mean impossible. The way a Wall Street analyst might look at stocks versus bonds and conclude that one or the other is undervalued; it's possible to use gold's supply/demand trends and value relative to other assets to gain an idea of how it should behavein the short run. Here are two such approaches, both of which (surprise) are flashing screaming buy signals:

No asset, including gold, exists in a vacuum. Stocks, bonds, real estate,and precious metals all compete for the same limited pool of capital,which means that for gold to be attractive, its prospects must be not just good, but better than those of, say, growth stocks.

One way of making this comparison is the Dow/gold ratio, which compute show much gold it takes to buy the Dow Jones Industrial Average of majorAmerican stocks. As you can see from the chart below, this relationship has been rather volatile.

In 1971, gold was $40 per ounce ($1.28/gg) and the Dow was 890, meaning that it took about 22 ounces of gold to buy the Dow. Nine years later,less than one ounce would buy the Dow. By the end of 1999, the two haddiverged once again, with gold at $279/oz. ($8.90/gg) and the Dow at about11,497, for a Dow/gold ratio of 41, far higher than its early-1970s peak.But note that this time around, both numbers in the ratio have an extra zero. That's because of inflation. A dollar purchases today what 10 cents purchased in 1971, so we need 10 times as many dollars to buy an ounce ofgold or the Dow Industrials.

A Dow/gold ratio at the high end of its range implies two things. First,if historical relationships hold, gold is more likely to rise versus stocks in coming years than to fall. Second, the distance between the 1971high and 1980 low gives a hint of how far gold can run this time around,especially with the financial gale now at its back.

One of the shocking things about gold is how little there is of it. In our sometimes frantic 4,000 years of searching, we've found perhaps 135,000 tonnes. Today, the world's entire hoard of gold would occupy a single (admittedly very heavy) cube 60 feet on a side - equivalent to the volumeof three good-sized houses or the bottom 10 percent of the Washington Monument. To put this in perspective, the U.S. produces about 240,000 tonnes of steel each day.

But unlike steel, where production can be expanded by simply building more factories, the supply of gold increases only when we find and mine new deposits. Since 1492, there has never been a year in which the world'sabove-ground gold stock increased by more than 5 percent. The nineteenth-century average was about 2 percent, which is one reason that inflation was non existent for gold-standard currencies: The world's money supply was constrained by nature to a low-single-digit growth path. Although gold no longer circulates as currency, it still has both monetary and commercial uses. The demand from these sources is estimated at around 4,000 tonnes each year. The output of the world's gold mines is currently about 2,500 tonnes, creating an annual supply shortfall of more than 1,500 tonnes, or approximately 50 million ounces.

For most commodities, a supply/demand imbalance of this size would cause either the price or the level of production, and probably both, to soar.But commodities are consumed after they're produced, and gold, remember,is not just a commodity. Gold is money, which, once discovered, tends to be hoarded. So the vast bulk of what has been mined is still around, andthe current deficit is covered by owners of previously mined gold. Central banks, as you know, sell and/or lend millions of ounces per year, which,together with other forms of "dishoarding," like people selling their jewelry and gold coins, fills the gap. So while an annual supply shortfallof 50 million ounces is clearly a positive, absent a big jump in demand,above ground stocks of gold are more than sufficient to make up the difference. In other words, current mine production is far less important for gold's exchange rate than are trends in demand.

And on the demand front, things are looking up, thanks to the emergence of Asia's sleeping giants. The whole world is setting up factories in China,both to exploit its cheap, highly motivated workforce and to gain access to a billion new consumers. This is bad news for U.S. and European factory workers, but for China, the result is an embarrassment of riches,including a trade surplus that exceeds $100 billion a year with the U.S.alone. By the end of 2003, China's foreign exchange reserves - mostly inthe form of dollars - exceeded $400 billion. And Chinese leaders, showing an historical savvy currently lacking in the West, were eyeing gold.Beijing is rumored to be buying much of the gold Western central banks areselling (and considerably more than the annual 100 tonnes it reported to the International Monetary Fund the past two years).

In 2002, Beijing removed the Communist-era ban on its citizens owning gold. In a survey quoted in the Hong Kong edition of China Daily, 20percent of Chinese respondents said they were willing to move 10 to 30 percent of their savings into gold. An analyst quoted in the same story put the resulting increase in gold demand at about $36 billion, or about 300 tonnes annually.

India, meanwhile, is attracting almost as much foreign capital as is China, and in October 2003 ended a four-decade ban on bullion trading.Because India has traditionally been a huge market for precious metals(much of the gold mined in the West already ends up in Indian safes oradorning Indian women), the combination of rising incomes and more liberal ownership rules should have the same effect there as in China.

How will this suddenly much wider gap be filled? It's possible thatcentral banks - which, as you'll see shortly, are more concerned with minimizing gold's exchange rate than maximizing the value of their gold reserves - will step up their sales. And they'll certainly try to talk the exchange rate down through anti-gold propaganda. But neither will do thetrick, because government resources - of both gold and public credulity - are limited. Much more likely is that gold's exchange rate will rise untilthe rest of us start converting our jewelry and coins into dollars.

A DAY THAT WILL GO DOWN IN HISTORY

by James Boric

Mark this day down on your calendar: November 27, 2006. It is a day investors will look back to in 10 or 15 years and wish they would have realized its importance.

Unfortunately, most won't realize this until it's too late. But I don't want you won't fall into that trap. Let me explain...

For the first time since the British pulled out of India in 1947, the world's largest democratic nation opened its virgin $300 billion retail sector up to a foreign mega-retailer.
Namely: Wal-Mart.

Yesterday, Wal-Mart announced it formed an alliance with Bharti Enterprises Ltd. (a leading Indian telecommunications company) to open hundreds of stores in India over the next several years. According to anarticle on investor.com, "Under the deal, Wal-Mart and Bharti Enterprises will set up a joint venture to manage procurement, inventories and logistics, while stores will be set up under a franchise agreement, said Sunil Bharti Mittal, the chief executive of the Indian company.

"This is a massive story - although it didn't make the headline of anymainstream news source that I saw. (It was buried under about 10 storiesthat came out that day). This sole event will lead to billions andbillions in profits for investors - especially for those involved in small-caps.

For the last 49 years, the Wal-Marts, Targets and Sam's Clubs of the world were not granted access to India's blossoming consumer class. The country's leftist leaders wanted to protect the millions of small-time shopkeepers that dominate the retail sector. After all, the politicians need votes come election time. And this has been the major item on the Communist ticket for years now.

To be a true super power you cannot close yourself off competition -whether foreign or domestic. By doing so, you sacrifice your own people's long-term prosperity for short-term mediocrity. By allowing major retail outfits like Wal-Mart into India, you encourage billions of dollars to bespent on access roads, parking lots, water purification, infrastructure development, banking development, insurance writing and real-estate development. And on top of that, you encourage billions in foreign direct investment - money India can use to improve its living standard.

As a guy who has been to India twice in the last three years (and seen theproblems with my own eyes), believe me: India has a lot of room for improvement.

Of course, there will be some negatives that follow Wal-Mart and other massive retail outfits into India. Thousands of mom and pop shop ownerswill go out of business - just like they have here in the United Statewhen Wal-Mart set up shop. Politicians (who are on the hook come electiontime) will scream bloody murder - just like they do here in the United States. And thousands of folks without a job will tell Wal-Mart and itssupporters that they are the devil incarnate - just like they do here inthe United States.

BOO-HOO. Get over it. All great economic nations are founded on aprinciple of competition - both domestic and from abroad. That's how progress is made. That's how improvements are encouraged. And that's how ingenuity is promoted.

It's also how investors make a lot of money.

The last time a major Asian country opened its retail sector to foreigndirect investment was China in 1992. It opened its then $75 billion cashcow to foreign investment for the first time ever. And what followed in China was a wildly lucrative series of events...

· The Hang Seng Stock Exchange rose as much as 314%
· The Shanghai Stock Exchange's market value soared 44 times over
· And the Chinese retail market grew from $75 billion to $480 billion.

That's a 15.3% annual growth rate for 13 years.Looking forward, there are going to be a lot of investment ideas that popup in India. Many of them will be small-cap in nature. But it is going to take time to find the really good ones.

BLUE GOLD - also known as Water.

by Brian Durrant

As the chattering classes worry about the implications of global warming in the second half of the 21st century, they should be reminded of more pressing priorities. The Stern Report estimates that it will cost $450bn a year to avert the worst consequences of climate change. This is an enormous amount of money to spend on a hypothesis that has achieved a political consensus before a scientific consensus. Let us consider the more immediate concern: water.

About 1.3 billion people - that’s a fifth of the world population - still do not have access to clean water, while 2.5 billion or near 40% lack adequate sanitation facilities. Asia alone accounts for two-thirds of the people worldwide whose drinking water comes from unsafe sources like rivers and ponds. Instead of spending huge sums lowering the remote risks of climate change, it is feasible that spending $75bn a year (one sixth of the sum earmarked as necessary to deal with climate change) would give everyone clean drinking water, sanitation and basic health care now.

The United Nations Environment Programme says, "During the 21st century, water is destined to become as precious as oil". Just as many conflicts of the 20th century were characterised by the scramble for oil resources, access to "blue gold" is increasingly becoming a source of resentment now. Water is a particularly vexed issue in the West Bank. The strategic value of water has long been appreciated in the Middle East but now it is beginning to make an impact closer to home. London’s long run average rainfall dropped below that of Istanbul, Dallas and Nairobi earlier this year.

Water is in ever greater demand, while water of the right quality and in the right place is increasingly in short supply. The demand for water is insatiable. The population of the world has doubled since 1950, but over the same period water consumption has increased six-fold. The population of the world is forecast to rise from 6.5 billion to 8 billion in 20 years’ time and as living standards improve water demand will go through the roof.

At that point water demands will exceed availability by over 50%. People will increasingly live in water scarcity areas and disputes over resources are inevitable. Since 1950 approximately 80% of all violent disputes over water have occurred in the Middle East, but now incidents are spreading round the globe.

In India and China in particular the massive and unregulated use of private pumps is depleting underground aquifers at unsustainable rates. And this week Chinese President Hu Jintao, held talks with Indian Prime Minister Manmohan Singh. India is reportedly concerned about Chinese plans to divert water from the Yarlung Zangbo river (called Brahmaputra in India) to the Yellow River. China denies such plans but their need for water provides ample motive.

If you look at water consumption in its entirety, Fred Pearce in "When the Rivers run dry" argues that a Westerner consumes as much as a 100 times their own weight in water every day. After all it takes 11,000 litres of water to grow the feed for enough beef for a quarter pounder hamburger, or it takes 25 bathtubs of water to make a single T-shirt.

But the supply and demand dynamics for water are different for most other commodities in one crucial respect. There is exactly the same amount of water on the planet as there always was. The problems are location and contamination. Water is often plentiful where people are not and vice versa. Canada for instance has as much as China, but just 2.3% of the population. At the same time water is becoming more polluted than ever. According to the Xinhua state news agency, the drinking water of 300 million Chinese is contaminated.

The investment opportunity is, therefore, in an area which attends to the shortages of clean water. In particular China’s breakneck economic growth has left a trail of vital problems that need to be addressed. In China only 23% of sewage is currently being treated, yet the government has a target of 90% by 2010. It is estimated that some $22bn must be spent by China on wastewater treatment alone to meet the needs of the 900 million urban dwellers forecast by 2015. The potential market for solutions to these challenges is enormous. The global market for water treatment is currently worth $50bn and growing at a rate of 8% a year.

An interesting take on the Iraq War...

And more views from Bill:

*** The German's exports equal 40% of their economy. For Austria, Belgium, the Netherlands, and Ireland exports are half of GDP. All these countries are benefiting from globalization.

The US, on the other hand, has been a victim of its own good fortune. It can export money. America has the world's reserve currency which put it in much the same position as Spain in the 16th century. Gold, then, was the world's reserve currency. And Spain had gold. She had stolen it from the Aztecs and Incas, fair and square. And when she brought it back to the Old World, she found herself immensely rich.

What happened next, you might wonder? Well, we'll tell you...

Two things:

First, this extra gold represented a huge increase in the money supply. Naturally, prices rose. Consumer price inflation soon became a major fact of life throughout Europe – but especially in Spain.

Second, the Spanish found that they could buy what they needed from abroad. They had money, so they didn't need to develop domestic manufactures. Neglecting their own business and commerce, the Spanish lived on imports. We don't have the figures, but the circumstances imply a huge trade deficit between Spain and the rest of Europe during the 1500s. Goods and services came to Spain…and gold left her.

By mid-century, Spain was already in decline. Her gold had run out. All she had left was military power. So she put together her 'Invincible Armada' to attack England. As we all know, the armada soon proved vincible and Spain retired to second-rate, then third-rate status and remained there for centuries. As recently as the 1970s, people in France said: "Africa starts at the Pyrennees."

*** "What is really driving the US economy is the war in Iraq and the war against terror," said a dinner companion on Saturday night. "They're spending $75 billion per quarter; that's $300 billion a year. And it's in addition to the regular budget. People think that money goes to building roads and schools in Iraq. But most of it – all but 15% or so – is spent in the US It goes to contractors for computer programs, weapons, supplies. That has a huge impact on the economy. And that's why there is so little opposition to the war. People know that when the war stops, the economy goes into recession."

Our friend is a contractor for the Pentagon:

"It is unbelievable how much money is being spent. They are spending billions right on the Pentagon building itself. And now there's a lot of argument about where the money is being spent. People in New York are complaining about spending money in Montana. And they've got a point, of course. Montana is not exactly the front lines in the war against terror. But from a defence point of view, almost all the money is wasted anyway, so it probably doesn't make much difference.

"What a strange and wonderful war. Rather than tightening our belts, the war is taken as a pretext to spend more money.

Some more Dollar rantings...

Bill Bonner, from Paris:

Today, we listen to the markets.

The poor old greenback has dropped 4% against the euro and the yen since October. Now, at $1.33 per euro and nearly $2 per pound sterling, the US currency is at its lowest point in almost 2 years. For an American, London has gotten even more expensive. But for a Londoner, Florida has become an even greater bargain.

What is the currency market telling us? Maybe nothing. Markets squawk from time to time for no apparent reason. But sometimes they whisper something important.

We listen carefully. We turn our ear. We bend our heads. And what do we hear?

"Beware the falling dollar," says Fortune magazine.

Fortune didn't need to tell us that. What astonishes us about the dollar is not that it loses its value, but that it still has any. The US trade deficit is reaching up towards $1 trillion. No nation has ever run so deeply in the red for so long. For every dollar of output, the country loses about 8 cents. For every $100 worth of movies, backhoes, and beef cattle it sells, it spends $108 on flat-screen TVs, oil, and imported sushi. If it were a real business, it would have gone broke long ago.

But the US is not a business. It is the world's biggest economy, with the world's biggest supply of nuclear weapons. And it is the guarantor of 21st century globalization and also the provider of its most common means of exchange – the aforementioned US dollar. The US economy, and its money, are at the very center of the new imperial cycle that has dominated global markets since the early '90s.

"Yes, but the dollar is the weak link," the currency markets whisper. "Foreigners to the US don't have to keep it in their vaults. And they don't have to take it at $1.33 per euro or $650 per ounce of gold."

Ah, that's it, isn't it? The US can set up puppet governments in third world hellholes; it can whip any conventional military force on the entire planet; but it can't force investors to take dollars at par.

For the moment no one seems particularly concerned about the falling dollar. Ben Bernanke is instead focusing on the threat of inflation, implying that he will raise rates. This, of course, would help support the dollar. Hank Paulson is still talking about the 'strong dollar' policy initiated by Robert Rubin, in whose footsteps he walked at Goldman and now at the US Department of the Treasury.

"Little risk for the US as the dollar weakens," says a weekend headline in the International Herald Tribune. Most American policy experts see the dollar's decline as a good thing, the paper tells us. It makes Florida vacations less expensive to Europeans, bringing in tourist money. And it makes GM and Ford products even better bargains; good news for Detroit.

Even Nancy Pelosi, the next Speaker of the House, has nothing bad to say about the falling dollar. In fact, she thinks the dollar should fall – against the Chinese yuan in particular. The yuan, she believes, is artificially high, thus keeping Chinese imports artificially cheap and thus making American workers artificially unemployed.

We stop and think. We wonder. What species, what kingdom, what phylum, do these people belong in? Pelosi walks on two legs just like we do, so she must be a vertebrate. She breathes in and out. She is said to be a warm-blooded mammal. But then, what is wrong with her brain?

Every currency in today's magnificent faith-based international monetary system is managed; it is therefore manipulated by its managers. It is therefore artificial, for nature alone never could have created a piece of paper like the US dollar and set it up to be worth precisely $650 to the ounce of gold. Both the dollar and the yuan were artificially created and now are artificially valued by manipulations of all sorts – including central bank lending rates, margin requirements, currency market interventions, capital restrictions, trade barriers and so forth. Worth 650 dollars today, an ounce of gold could be worth 670 tomorrow; who knows.

All these artificial inventions – combined with the natural movements of the markets themselves, driven as they are by the delusions, misapprehensions, and profound ignorance of investors – are what determine the current price of money. For an economist to say that one is 'too high' or 'too low' is the sort of guesswork the markets laugh at. But when a soon-to-be Speaker of the US House of Representatives says such a thing it is the gods themselves who must roll on the floor and clutch their stomachs.

We listen carefully to get an opinion from the currency markets. What do they think of the woman? 'She is a moron,' comes the whispered wisdom.

Madam Pelosi's judgment concerns not the 'correct' price of the currency – if there were such a thing. Instead, it is merely a vain wish; she believes the world would be a better place if the yuan were not so cheap. Why so? Because then US goods would be cheaper for the Chinese to buy...and Chinese goods would be more expensive for Americans to buy. This would have the effect of reducing the US/China trade imbalance. But how would people be better off? Every increase in the yuan would turn up as an increase in Wal-Mart's prices. Every Day Low Prices would be a little less low the day after the yuan went up. Who pays these prices? Well, the same people who vote for Nancy Pelosi.

Again, we turn to the currency markets for a judgment:

"Don't worry, the yuan will go up against the dollar...but Americans won't like it very much.

"The currency market is telling us that the dollar is going down. Bernanke and Paulson are telling us that the dollar will remain strong. Meanwhile, the bond market is telling us not to pay any attention to Pelosi, Bernanke or the currency market. Bond yields are generally falling. If inflation or a falling dollar were a genuine threat – bond investors don't see them

Forget the falling dollars," say the bond buyers. "What is falling is the US economy.

"The bond market may have a point. GDP growth declined from 2.6% in the second quarter to 2.2% in the third. Last week came news of the first setback for manufacturing in the US in 3 years. US housing is soft and getting softer, apparently. And now – thanks to the falling dollar – oil is on the rise again, up 7% in the last 2 weeks. Gasoline at the pumps is rising. And the yield curve is still inverted – traditionally a good advance indicator of recession.

Under these circumstances, it is unlikely that the Fed can support the dollar with higher interest rates. So, if the dollar continues to fall – look out below!

Oh ! The state of the US Dollar...

Meanwhile, the dollar has bounced. Is the worst over for the greenback? It has been on a slide for the last four years - down about 25% against therest of the world's money since February '02.

Has it now bottomed out? We doubt it. There are problems, imbalances,absurdities, irregularities, and contractions that must be cured.Foreigners hold more than $13 trillion worth of U.S. dollar assets - andmust continue to add to their holdings at the rate of $800 billion per year. For the time being they do so with no gun to their heads. And yet,every one of them knows that the dollar is in a vulnerable position. It rests on the 'faith' of the world's people...a faith that could be shaken at any minute.

Today, for example, brings news that Iran will try to diversify more ofits international commerce away from the dollar - following a trend thatis now well established. Half the world seems to want to back away from the greenback.

And soon, the biggest American financial policy makers - Ben Bernanke and Hank Paulson - will journey to China. They must tell the Chinese to let the yuan rise, says Nancy Pelosi and the other dough-heads. What does that mean? It means that the Chinese would stop adding to their U.S. dollar assets - bonds, stocks and cash. And what would that mean, dear reader? It would mean that the dollar would fall.

Of course, the foreigners are trapped. If they sell the dollar...or merely stop adding to their holdings...the dollar will fall. But so will the value of their huge dollar holdings.

"A 30 percent drop in the dollar, could cost foreign investors an easy $3 trillion in lost purchasing power, not to mention the loss to U.S.citizens who own over $46 trillion in dollar net worth assets," writes Richard Benson. "Our leaders must find a way to lower the U.S. Trade Deficit, or risk the dollar losing its unique position as the World's Reserve Currency.

"America's currency problem is a very sad day for the Republic. It used to be that the Federal Reserve policy was set simply with domestic economic policy in mind. In years past, we could virtually ignore the dollar in setting monetary policy because it was totally secure in its role as the World Reserve Currency. But today, because of our country's profligate fiscal and over-easy monetary policies, the dollar has been undermined.

"What is ahead for the dollar? We don't know. But we see a lot of downside risk...and little upside potential. It could go way down, in other words.It is not likely to go way up.

- Addison Wiggin