The US dollar is still in demand

Cash is king.

Ai yi yi…

Last week was the worst for investors in 3 years. Even gold melted down, as we thought it eventually would.

The only things to go up were US Treasury debt and the dollar. As expected, the Great Correction is doing its work.

So far, the stock market has held up as well as it has. But now it seems to be selling off. And gold is selling off too.

Rich people buy gold. They can afford to. They know the end of the dollar is coming — sooner or later. They can wait.

But the middle classes need dollars. Debtors need dollars. Consumers need dollars. Almost everybody needs dollars. In a correction, cash is king. And the king of kings is the dollar. Here’s CNN confirming what Dear Readers already know:

…the data [from the census] gave the first glimpse of what happened to middle-class incomes in the first decade of the millennium. While the earnings of middle-income Americans have barely budged since the mid 1970s, the new data showed that from 2000 to 2010, they actually regressed.

For American households in the middle of the pay scale, income fell to $49,445 last year, when adjusted for inflation, a level not seen since 1996.

And over the 10-year period, their income is down 7%.

“Economists talk about the lost decade in Japan. Well, with these 2010 data, we can confirm the lost decade for the American middle class,” said Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities.

Sure, it’s fair to say Americans at all levels of income, from rich to poor, were hit hard in the decade that started with the dot-com boom and bust, and ended with the Great Recession.

But according to the census data, those losses disproportionately hit the lowest 60% of Americans, while the richest 40% actually gained wealth, relative to the entire US economy.

The middle classes need dollars. They want dollars. Because it’s a currency — believe it or not — that you can still trust. No thanks to Bernanke, Obama, et al. Instead, our gratitude goes to the Great Correction itself. It’s doing the work of an honest central bank. It is making the dollar respectable again. Thanks to the Great Correction the greenback can hold its head up. Uncle Sam’s money is Number One.

How so? In a correction, almost everything goes down. And almost everyone gets scared that his investments and his savings (which he put into stocks on the advice of his financial magazine) will go down too.

Your editor says that in the long run gold will be a better place for your money than dollars. But everyone can’t wait for your editor to be proved right. Most people have bills to pay. And you don’t pay bills with gold. You pay them with dollars.

And imagine that you are a European or an Asian investor? What are you going to do with your money? Put it in a French bank or a Greek bond? Nope. You want something safer. You want a US treasury bond.

And as long as the Great Correction is allowed to continue…US Treasury debt will be a good place for your money. The trouble is, we don’t know when the feds might run in…like a bull in a china shop…and break all the teacups. So, here at The Daily Reckoning at least, we’ll stick with our gold through this correction, confident that when we come out the other side the dollar will be among the porcelain shards and gold will still be standing tall.

When we entered this Great Correction we figured the process would take a few years. We felt like a judge had just given us a prison sentence.

“Five to ten,” said your honor.

Now, it looks like it will take longer. We figured the feds wouldn’t be able to finance their deficits for very long. That would force them to hit the panic button and begin dropping dollars from helicopters. But what the market is showing us now is that this Japan-like phase can last a long, long time. Because the correction itself is making the dollar and dollar debt more attractive!

Get this: the yield on 10-year US Treasury debt is now lower than the yield on the S&P. The longer the correction goes on…the deeper it goes…the more people will want the safety of US notes and bonds. And the more they buy Treasury debt…the lower go the yields…

Meanwhile, stocks should go down…pushing up yields. That’s what happens in a correction. That’s what happened in Japan over the last 20 years.

Most likely, we’ll see yields of 5% on the S&P before this is over. That’s because prices will be cut in half.

Meanwhile, we’ll see yields on bonds go down to 1% or so on the 10-year bonds. This correction means business. It appears to be even more powerful than we imagined. It is not merely correcting a bull market and a credit bubble. We don’t know for sure, but it may be correcting an empire, modern government, the dollar-based monetary system…and who knows…maybe an entire civilization.

We’ll just have to wait to see how far it goes.