Euro Stronger; Dollar Weaker: more of it to come

The euro has broken above 1.11 Wednesday in a reaction to the announcement of the size of the U.S. Treasury borrowing. This should have been the top of the news, but it was not.

Long time readers know we have been bearish about our dollar and bullish about the euro for several years. We continue to hold that view. For the rest of this year we expect the greenback to weaken against many currencies.

Where it will stabilize against the euro is uncertain; it could be much higher than the present level.

Recall a little history for guidance. Start with the official date when the treaty among the eleven original European Monetary Union countries was set. Then, the exchange rate among those eleven currencies became fixed which allowed for a computation of the theoretical exchange rate between the euro and the dollar. If you go back that far (mid-1990s) you can start to track the euro/dollar rate at 1.37. That means it would have taken one dollar and thirty seven cents in U.S. currency to buy the basket of the original eleven country currencies that were set according to the initial terms of the Maastricht Treaty.

The euro fell in value against the dollar immediately and continued as the virtual euro was launched. When the electronic euro started to trade the exchange rate was 1.18 dollars for each euro; that rate lasted only one day. Within the three year period that the electronic euro was used but the paper euro was still not deployed, the exchange rate fell to the low 80 cents range.

Since the paper euro was introduced, and since it became an immediately accepted currency, we have seen the euro start to strengthen against the dollar. Each euro costs an American about 25 cents more now than it did during the low period two years ago.

Today we have a situation where the European economic outlook is weak and the U.S. outlook is problematic. At the same time the borrowing requirement in the U.S. is exploding both directly and relative to European requirements. To measure this borrowing need we have to look at the public borrowing through European eyes. There they add the entire public sector to measure the impact on the debt markets.

Here we tend to distinguish federal debt from state and local. Our state and local deficits this year are estimated to be as much as 73 billion. We finance most of it on the backs of wealthy individuals because of the tax code which has created the tax-free municipal bond while limiting the ability of institutions to buy it. Add that to the 300 plus billion federal requirement which is taxable debt and one begins to see how big this issue has become.

All this means that foreign investors are now evaluating their allocations between the dollar and other currencies and deciding if they want to redeploy monies out of dollar holdings and into something else. The "something else" could be the Swiss or Norwegian or British currency but the biggest and deepest currency is the euro which is why we see these inflows into the euro and out of the dollar. That is why the euro is rising in price or, to say it another way, the dollar is falling. "Falling" or "rising" all depend on your viewing platform.

Bottom line. Our government is going to be engaged in record financing at a time when foreigners are likely to be increasingly reluctant to absorb more dollar debt at the current price (yield). The Fed can offset this of course and has unlimited ability to buy federal debt by creating the money to do so. We expect to see more of this Fed action as the treasury refunding unfolds.

Since the Fed is worried about the domestic U.S. economy first and foremost, it will benignly ignore the weakness in the currency. We expect Fed officials to continue to offer the idea that the currency value is in the hands of the Treasury Department and not the Federal Reserve. We also expect the Treasury officials to mouth the usual "strong dollar is in the interest of the U.S." line while quietly looking the other way as the dollar falls.

Longer term implications for the dollar denominated debt of the world's largest borrower (that means us) is not benign. Of course, we will be able to finance ourselves. The issue is price. And that translates into the yields that will be required to sell the new debt.

Bond interest rates will probably stay around present levels in the short term because the Fed will see that they do. Rest assured that the Fed will assist the Treasury in accomplishing the forthcoming financing. In the longer term bond interest rates are headed higher.

JWR contributor David R. Kotok is President and Chief Investment Officer of Cumberland Advisors, Inc. His articles and financial market comments have appeared in The New York Times, The Wall Street Journal, Barron's, The Bond Buyer and numerous other publications. He can be seen on CNN, CNNfn and CNBC. Comment by clicking here.
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America is giving itself away
Marty Nemko

First, Latino advocates such as the Mexican American Legal Defense Fund argued that the US should tolerate illegal immigration because illegals are willing to do the work American citizens won't. Legal residents of the US, notably in the African-American community, cried foul, reporting that Blacks apply for those jobs and are often turned down in favor of illegals. But the cries of the legal Americans were ignored, those of the Latino advocates heeded.

Next, Latino advocates argued that the US should provide illegals with health care despite a dangerous shortage of nurses and other health care professionals just to take care of legal US residents. And Latino advocates wanted the health care free, using taxpayer dollars, even though the beneficiaries were illegal and net tax receivers. Latino advocates argued, "It's unfair to make the children suffer because their parents did something illegal." The Latino advocates' argument was bogus--by far, most of the cost of health care is for adults, not children. And when conservatives agreed to provide health care to all children of illegals for free, Latino advocates would not accept that. Latino advocates persuaded liberals to provide health care for illegal adults for free--the tax dollars and health of US citizens and legal residents be damned.

Next, in Latino advocates' attempt to keep taking slices until it got the whole enchilada, it argued that the US should provide free public education to illegal immigrants, again arguing that the children shouldn't suffer because of their parents' illegal acts. Latino advocates won. All illegals are now entitled to a free public education, K-12, including special education, in the US at taxpayer expense. These students presence in classes forces teachers to slow down instruction, so legal residents' children's education suffers.

And in a truly Alice in Wonderland twist, the Latino advocates fought for Latino students' education to be at least half in Spanish! This "bilingual education" has been tried for decades and results are now clear that students in bilingual education programs end up speaking poor English. Indeed, California voters outlawed bilingual education in its public schools yet the Latino advocates have figured out a way around the law and, in many public schools, bilingual education is alive and well. The only imaginable reason why Latino advocates would still push for bilingual education is that they want Latinos to not assimilate but retain separate language and culture. The irony is that when these poor English speakers are "underrepresented" in higher echelons of employment, the Latino advocates will claim it's because of racism, when in fact, poor English skills, partly caused by the Latino advocates themselves, is the real reason.

Next, Latino advocates wanted illegals to have access to California public colleges, including its most prestigious, even if that means US citizens are denied slots! Again, the Latino advocates convinced our legislators to say yes. I wonder what Latino advocates would say to the many children of tax-paying US citizens who were smart and hardworking enough to get grades and test scores good enough to get into the University of California (e.g., Berkeley or UCLA) who were told, "Because we value diversity, sorry, you must attend a less prestigious college--often a community college-- so we can admit an illegal alien (Oops, 'undocumented immigrant') with lower grades and test scores."

To justify this apparent unfairness, it would seem that diversity would have to yield enormous benefit. But when one looks beyond the bumper sticker rhetoric (e.g., "Diversity is Our Greatest Strength") to carefully assess the benefits that illegals bring to a college, those benefits are paltry. In science classes, ethnic diversity is largely irrelevant. In lecture classes of all types, it is irrelevant--there's no time for students to provide input. In discussion classes and out of class, the only benefit is when an illegal alien makes a contribution that specifically is a function of their being an illegal alien. Is the value of such rare comments so enormous as to justify the egregious unfairness of denying much-higher achieving taxpayers' children slots at the University of California? Hardly, especially since many of the illegals are lower in achievement and certainly in English language skills, so professors must dumb down classes for all students. Diversity is our greatest strength? Yes, diversity of ideology is a strength--but such diversity when it veers right of center is anathema on college campuses yet the less valuable diversity provided by illegal alien students is made high-priority.

Adding to the absurdity, the US already has a gross oversupply of college graduates. There are dozens of applicants for even mediocre white-collar positions. According to a Rand study, there is a 40% oversupply even of PhDs in molecular biology, an ostensibly in-demand field. By giving a college education at in-state rates to illegal aliens, we only make finding a job more difficult for legal residents.

Even more absurd, Latino advocates lobbied our government to allow illegals to pay in-state tuition even though legal residents of adjoining states must pay three times that in-state rate! Again, amazingly, the Latino advocates won!

And that absurdity is about to go nationwide: Now a bill sponsored by Senator Dick Durbin (D-Illinois) would require all states to open all public college doors to illegal aliens, and allow them to pay in-state tuition!

What's next for California? Fabian Nunez, one of 12 children of a migrant worker and one of California's most aggressively pro-Latino legislators has just been tabbed to become the Speaker of the California State Assembly. He makes quite a tandem with Lieutenant Governor, Cruz Bustamante, who refuses to cancel his membership in MEChA, whose mission statement reads "For La Raza everything; for those outside La Raza nothing." Meanwhile, the percentage of California's population that is Latino is skyrocketing because of differential birthrate and uncontrolled immigration. There are now eight million illegal immigrants in California among a population of 35 million, and the Latino percentage is rising-fast. In the formerly largely white Calistoga schools, for example, 90% of the incoming kindergarten class is Latino. (We don't know how many of them are illegal; the schools are not allowed to ask.) We are rapidly becoming Mexifornia. It is too late to turn back. The population trend and lack of political will are inexorable.

Even Arnold Schwarzennegger has indicated he will support providing California driver's licenses to illegal aliens. This will clearly demonstrate that the US government is aware that an illegal is in the US and is sanctioning it--no clearer signal could be given to all 101 million Mexicans that the US borders are hereby open.

Therefore, illegal immigration will skyrocket even more, imposing unendurable pressures on the state. Already, California is bordering on bankruptcy. As Victor Davis Hanson asks in his new book, Mexifornia, "How can a state with Hollywood, Silicon Valley, vast industrial and manufacturing sectors, great ports, timber, oil, tourism, a vast agricultural industry, and ideal climate-- not to mention some of the nation's highest sales and income taxes be broke and paralyzed with billions of dollars of annual deficit?" The major reason is net tax-receiving illegal immigration and net outmigration of taxpaying individuals and businesses.

California is dying and our leaders are not only allowing it but encouraging it. Indeed, California is giving itself away.

Columnist Rick Narhos writes:

The most disturbing of the consequences of uncontrolled immigration is the grave possibility that California soon could secede from the Union, and the United States will become reclaimed Mexican territory.
According to the 2000 U.S. Census Bureau, 96.8 percent of the population in East Los Angeles, Calif., was Hispanic. Sounds like a demographic conquest to me.
And ambitions about the conquest have not been kept secret. According to www.americanpatrol.org, Mario Obledo, former president of the League of United Latin American Citizens; former California state secretary of Health, Education, and Welfare; and recipient of the Presidential Medal of Freedom by Bill Clinton, once said, "California is going to be a Hispanic state, and anyone who doesn't like it should leave. They should go back to Europe."
Mexican Consul General Jose Pescador Osuna once said, "We are practicing la reconquista in California."
But the rest of the country should not get comfortable. The possible secession of California because of the infiltration of illegal immigrants from Mexico may incite the next war between Mexico and America. The rest of the states will be forced to fight a demographic war.
According to www.immigration.gov, the estimated illegal population in Illinois alone hit almost 300,000 in 1996. This trend is prevalent throughout the country.
The demographic conquest of our country by illegal immigrants is in the not-too-distant future. And it may be a peaceful invasion. As the national newspaper of Mexico, Excelsior, once stated, "The American southwest seems to be slowly returning to the jurisdiction of Mexico without firing a single shot." I would go a step further and include not just the southwest, but the whole country.

Twenty years from now, we will look back to what we have wrought in California and increasingly elsewhere in the US, and we will shake our heads. I hope they'll be as kind to us as we've been to them.

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JWR contributor Dr. Marty Nemko holds a Ph.D. in education from the University of California Berkeley and subsequently taught there. 400+ of his published writings are at www.martynemko.com. Comment by clicking here.

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