The Dollar's Third and Final Act

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The US credit
system is in the midst of its third credit crisis since the advent
of the Federal Reserve.

The first credit
crisis was a deflation that morphed into the Great Depression. (See
Rothbard’s: America’s
Great Depression
.)

The second
credit crisis manifested itself in the stagflation of the 1970s.
(See Rothbard’s: For
a New Liberty
Chapter 9.)

This credit
crisis began in 2000 and was greatly exacerbated by the housing
bubble of 2001 to 2007.

A good discussion
is Peter Schiff’s: Crash
Proof
and Crash
Proof 2.0
.

All three episodes
were the inevitable result of the prior credit inflation orchestrated
by the Federal Reserve System.

The seeds of
the Great Depression were planted during WWI and the 1920s.

The 1970s stagflation
followed the credit boom of the 1950s and 1960s that were fueled
by Johnson’s Wars and Welfare State and the Federal Reserve’s policy
of not letting the money supply contract in the 1970s.

The Credit
boom of the 1980s, 1990s, and early 2000s is haunting the markets
today.

The Dollar
survived the first two credit deflations.

This writer
believes that this credit crisis will be the Dollar’s third and
final act.

The best-case
scenario, in which the financial system and Dollar survive, is very
unlikely but it would be very painful for most investors.

Best Case Scenario
for US Markets:

Dow/Gold ratio
will trade 1.0, possible gold target of $10,000/oz.

Dow/Silver
ratio will trade 40.0, possible silver target $250/oz.

Severe credit
market conditions with interest rates over 10%.

Some companies
will survive, many banks and credit dependent businesses would fail.

The DJIA could
trade in a range of 5,000 to 10,000.

Likely Scenario
for US Markets:

The most likely
scenario is an inflationary Great Depression, in this writer’s opinion.

John William’s
outlines his expectations and I believe they are worth reading:
www.shadowstats.com

Peter Schiff
discusses this possibility in Crash Proof 2.0.

The US has
never experienced a credit bust that has followed this path.

Dow/Gold ratio
well below 1.0: gold target well above $10,000/oz.

Dow/Silver
ratio well below 20: silver target well above $600/oz.

Collapse of
the credit market. Interest rates only capped by fiat.

Collapse of
the US treasury market.

Most companies
fail.

Only the best
businesses with no need for credit survive.

Examples: CL,
XOM, KO, PEP, PG

Banking system
shut to depositors.

Nationalization
of many businesses and all pension assets.

Very unstable
political situation, collapse of US empire along the lines of the
USSR.

Additional
Thoughts:

The US economy
will suffer much more than most expect for several reasons.

1. The US economy
has no savings and has had no internally generated savings for at
least a decade.

The Dollar
has acted as the US economy’s pool of savings for two generations.
This pool of savings will not be accessible much longer and it will
be removed very quickly from the US capital markets. As a result
capital will be very scarce and the cost of capital will reveal
the malinvestment accumulated since 1980.

2. The structure
of the economy is built on services, consumption, and abundant foreign
savings. The capital investments are not in place to produce exports,
consumer goods, or capital goods.

3. In order
for the US economy to become productive, savings will have to soar
relative to consumption. Those savings will have to be invested
in productive investments. This restructuring of the economy will
take a long time. The greatest threat to this adjustment would be
persistent government deficits.

4. Government
spending will punish the economy unless it is quickly reduced on
a scale never seen in US history. If government refuses to contract,
the depression will be all the more severe and the economy will
become essentially a command economy.

In summary,
for the US economy to improve many unlikely things must occur.

Savings must
rise, productive capital must be accumulated, government must shrink
to a fraction of its present size in real terms, and the Fed must
stabilize the Dollar.

In order to
see a real recover in the US economy radical action will need to
be taken.

A renaissance
in thinking will have to occur.

Centuries ago
men realized that for there to be peace, Church and State had to
be separated.

In order for
civilization to survive going forward, the Market and State must
be separated.

The role of
government in the economy must be eliminated.

The age of
central banks and central planning must end.

Jeff
Fisher [send him mail] is
an independent investor and professional trader living in Austin,
TX. Formerly, he co-managed a successful hedge fund.

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