Monday, September 29, 2008

It's about "confidence"

IMO, this bailout problem has a root cause: a lack of confidence.

Confidence in the US dollar is low. And the government is trying to prop up the dollar and rebuild confidence. But I took this from the NYTimes Online today (link no longer available):

“People are starting to think, ‘hang on, this is a rescue package but it’s designed to forestall a complete collapse, not stimulate a rally,’” said James Chirnside, who manages $65 million at Asia Pacific Asset Management in Sydney.

That pretty much speaks for me. And until we restore confidence in the dollar, the collapse will be looming.

Anecdotally, I have two stories to share on global confidence in the dollar:

First - I recall living in Vietnam. While I was there ('95-'98), people accepted Vietnam Dong, but preferred US Dollars. And for the most part, that's all I ever saw exchanged. But after I lived there a while and started learning the language and reading the newspapers, something caught my eye.

I was looking at "houses for sale" and noticed that everything was quoted in "vang" or "gold pieces." It kinda confused me. I wondered if it was a special name for a large "dong" denomination. So I asked a local friend about it.

He explained quite clearly that no one would ever accept such large quantities of Vietnam Dong or US Dollars. In fact, who would do that? Gold has value. No one knows what'll happen with that paper stuff.

Second - Last week I was speaking with an Indian colleague of mine. And since she grew up in India, I asked her about her home country. I said "if I was in India and offered someone dollars or gold (same value), what would they take?" She matter-of-factly said "the gold."

My point is that there's trust in gold. And while there's trust in the dollar, it's insignificant when compared to gold.

To get through this ongoing financial mess, there are many things that could be done in the short term. But in the long term, we need to return to sound money.

Tim White

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