Tuesday, July 01, 2008

A Serious Word About Mr. Dung's Dong

By Bill Bonner

"I, Franklin D. Roosevelt, President of the United States of America, do declare that said national emergency still continues to exist and pursuant to said..."

With those mealy words, America's Depression-era president ventured from bad luck into treachery. The Executive Order he issued on the 5th of April 1933 confiscated Americans' private holdings of gold, then valued at $20.67 per ounce. Then, in January, 1934, the U.S. president fixed the price of gold at $35. All of sudden, Americans' dollars had been devalued by 69.3%.

Whether this act of nationwide larceny did the economy any good or not, we cannot say. It was not until after World War II that the economy fully recovered the spring in its step. And U.S. stock prices didn't return to their '29 highs until 1950.

But there is hardly an act of government so foolish or so maladroit that subsequent politicians won't provide an encore. This week, the government of Nguyen Tan Dung moved to center stage. Vietnam had recently become the world's largest importer of gold bullion. Investors and householders bought the yellow metal for the same reason people always have – as a way to protect themselves from paper. The paper at issue is called the "dong," the official currency of the Socialist Republic of Vietnam. Lately, the dong has been losing value against consumer prices at the rate of 25% per year.

A year ago, the typical Vietnamese investor might have turned to the share market for safety...and growth. But Ho Chi Minh's stock exchange fell every single day in May and is down nearly 60% since January. Or, he might have bought property. Alas, the recent downturn has hit Hanoi property like Richard Nixon's B-52s. Apartment prices in commercial centers, according to Morgan Stanley, have fallen in half so far this year. How about the dollar, another common refuge from shady money in sunny places? The dong has stayed fairly close to the dollar; but it must have felt as thought it was handcuffed to a leper. Since the Roosevelt era, the dollar has sunk from 1/20th of an ounce of gold down to 1/1000th. In dong or in dollars, the average price of gold so far this year is 250 above the average price in the same period last year – a loss of 37% in the value of the paper currencies.

But a year ago, the whole world was a sunnier place. Vietnam was so blessed you needed to wear sunscreen even indoors. It was the "next Asian miracle," with growth rates of more than 7% for the last decade. "Young, prosperous, and confident," was how The Economist described it. Wages were barely half those in China. And productivity was growing faster. Diem Bien Phu and the tiger cages had been forgotten; foreign investment was rolling in like new Mercedes off a transport ship.

But then, the monsoons began. And nowhere have the rains come down harder than in the streets of Ho Chi Minh City. The Vietnam stock exchange is the world's worst performer so far this year.

The Vietnamese have always admired Americans. When Ho Chi Minh declared independence for Vietnam in 1945, after the August Revolution, he plagiarized directly from Thomas Jefferson: "All men are created equal," he began. "They are endowed by their creator with certain inalienable rights; among these are life, liberty and the pursuit of property."

No wonder the state bank of the Annamites handled this latest crisis just as FDR and Richard Nixon managed similar ones in the United States. FDR reneged on America's historic obligation to its own citizens; after 1933, they could no longer redeem their paper money for gold. Richard Nixon stiffed the foreigners in 1971; henceforth, if the French wanted to trade their dollars for gold they were out of luck. Now cometh Mr. Dung, putting the gold importers out of business. He "temporarily" withdrew licenses for further imports, the FT reports.

In years past, if the U.S. economy sneezed, an Asian exporter like Vietnam would come down with a cold. Now, it's Mr. Bernanke's quack medicine that staggers the foreigners.

The problem for Vietnam is no longer that it is so backward, but that it is so forward. All nations must pay, more or less, the global price for rice...and bear the consequences of Mr. Nixon's dollar-based financial system. But some are more vulnerable than others. With imports and exports equal to 160% of GDP, Vietnam has one of the world's most globalized economies. So, when the Fed tries to stimulate the U.S. economy with loose credit, the extra liquidity drives up prices faster in Hanoi than in Houston.

The IMF puts average inflation worldwide at 3.9% for '07 and 4.7% for '08. But emerging markets suffer higher rates of inflation – almost 12% says the IMF. The reason for this is simple enough: emerging markets are big importers of raw materials, which they turn into finished products. And unlike the United States, their economies are still running hot – which puts upward pressure on labor rates. Also, food is nearly a third of family budgets in emerging markets; in the U.S. and Europe, it is only half as much. Since commodity prices and food have soared in dollar terms, so has the cost of living.

"Vietnamese investors have taken a rational decision that this is a hedge against higher inflation and a weak dollar," said a director of Dragon Capital, based in Ho Chi Minh City, to the Financial Times . The Vietnamese, seeing the handwriting on the wall, bought so much gold, imports of the metal into Vietnam more than doubled in the last year. While neither Americans nor Vietnamese can still redeem their paper currencies for gold at a fixed rate, up until this week, they could both trade in their dongs and dollars for gold, at a moving rate. Investors everywhere might want to make that rational decision too – while they still can.

Until tomorrow...


Joel Bowman
Rude Awakening