Dollar shrinks in value as inflation takes hold

PUBLISHED : Sunday, 18 July, 1993, 12:00am
UPDATED : Sunday, 18 July, 1993, 12:00am

ALL over the world, people are worried about the deteriorating economy.

The G-7 countries and the US are intentionally creating inflation by monetising debt. This means that all major countries are creating money out of thin air. This is a simple, subtle way to cause inflation, which as Lord Keynes said, not one person in a million would even understand was happening.

The procedure in the US is that Treasury issues bonds, notes, and bills are bought directly by the US Federal Reserve System with no money involved, but by merely crediting the banking system with the cost of the bonds by a bank entry. The banks then draw the money; the end result is that the money supply is increased.

The added free money helps the economy temporarily. The banks can lend more and, hopefully, the economy is jump-started and pulls out of recession. It is a quick, easy fix. Where is the catch? The problem is that about 21 months down the road the extra money causes inflation and the more dollars that are pumped into the world, the less value the dollar has. The US obtains a big bang from inflation, since all the US debt is held in its own currency, and 64 per cent of all dollars are out of the US. Thus, whenever the dollar loses value, foreigners pay the devaluation tax.

For other countries, monetising their debt kick-starts their economies since they have more money to throw at problems. Japan is monetising billions to re-start its economy; Australia and Britain have been at the game for a long time, as have most countries. Germany's 1993 deficit will be a record US$43 billion, Britain is running deficits of US$1.5 billion per week and the US deficit has passed US$1 billion per day.

The end result of all this hanky panky adding to the money supply is that the exchange value of currencies will suffer and the inflation monster will get out of his cage.

Inflation, if it does emerge, is certain, historically, to drive the public to gold - the only real money in the world. To me, one thing is certain and that is that the majority of investors worldwide are losing confidence in unguaranteed paper currencies.

Golden profits in S Africa HOW can investors benefit from the advance in gold which has just started? The best investment you can make is stock in blue-chip gold mines, for reasons explained in Leon on Sunday last week. This column at that time itemised good North American gold stocks.

In my view, the very best gold stocks in the world are South African.

The advantages of South African gold mine stocks are many, such as: South African gold mines receive payment for gold in US dollars. They pay all their expenses in South African Rand, which is much lower. This gives them an immense financial advantage over mines anywhere else.

South Africa has two currencies. The normal currency is the commercial rand, which is used throughout South Africa. However, because of South Africa's unique problems, there is also a Financial Rand.

This sells at a discount of 44 per cent from the Commercial Rand. The purpose of this low-priced rand is to encourage foreigners to invest in South Africa. Foreigners can buy investments (such as property, stocks, bonds, etc) at a 44 per cent discount tothe price local South African residents pay.

The great advantage these two different rand price gives investors is that foreigners can buy in Financial Rand and still receive dividends or interest in Commercial Rand. This is a fantastic profit advantage.

Another great advantage of South African gold mining stocks is that they pay far higher dividend yields than those in any other countries. When reviewing the list of South African gold stocks it is not unusual to find stocks that pay 10 per cent or muchmore in dividends. Since the dividends are in commercial rands but you can buy the stock in financial rand, you can often receive a dividend in real terms as high as 17 per cent.

A Hongkong resident can buy South African Mining stocks through any South African broker. The easiest way is to contact the four South African Financial houses in Hongkong. They all have relationships with South African brokers and can handle the entire transaction for you. If you need advice, call the South African Consul in Hongkong.

Australia's potential AUSTRALIA is a vast country in area but low in poulation. I doubt if the true potential for gold has been exploited, and there is possibly much more gold than is known. It was only in recent years that diamonds were discovered, yet they have been there formillions of years.

The Australian Government has had much bureaucracy that made mining difficult, and most of the Australian mines pay a low dividend yield of rarely more than one or two per cent. Perhaps with a lasting higher gold price, if it comes, the industry can be expanded. Leon Richardson is a well-known financial commentator and investor