In debates over the fate of the U.S. dollar there appears to be a need for clarification.
While since last spring the dollar has declined about 15% in value compared to a basket of other major currencies, on the domestic front a dollar today buys about 30% more common stock than it did two years ago at the peak, and the dollar also rose substantially in value vs. real estate during the same period.
This distinction is critical because for most people the value of the dollar in terms of foreign currencies is probably not a day-to-day concern. Any change the dollar’s purchasing power in terms of domestic assets, however, is very important both now and when planning for the future.
Tens of trillions of dollars of credit-from-nowhere now in existence fuel demand for goods and services, bidding up asset prices across the entire world economy. This mountain of credit was built on three pillars.
- Fractional reserve banking.
- Government debt issuance.
- Packaging of collateralized debt obligations (CDOs) into "securities."
The third pillar, CDOs, required a phenomenal collective delusion for sustenance, and that level of delusion is gone. It comes around once every several centuries, so we probably shouldn’t hold our breath awaiting its return.
The banking pillar is full of cracks as the banks’ overreliance on real estate loans is increasingly recognized. With their weakness revealed, banks cannot offset credit destruction due to collapsing mortgages and multiplying loan defaults.
Amazingly, the pillar of government debt issuance remains the strongest. This revolving door of taxes paid, massive borrowing, and government payments (direct and indirect) to nearly every citizen is now the sole whirlwind supporting the greatest faux economy since John Law’s Mississippi Scheme or the South Sea Bubble. Whereas it required all three pillars to leverage the growth of credit to these dizzying heights, only one remains to hold the forces of credit collapse deflation at bay.
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As long as collective "suspension of disbelief" provides the music, this vast game of musical chairs continues. The above-cited trends, however, leave us sharing the sense that when the music stops there will be very few chairs left in the game for the multitudes to find a seat. We know that this catastrophe, when it arrives, will make instant losers out of the vast majority of people residing in the USA.
So what is a prudent person to do to preserve capital in our chaotic times? No one knows for sure.
The money supply sustaining prices at current levels is made up of a little currency plus an ocean of credit. The credit supply is teetering on a three-legged stool where one leg is gone, another is on the verge of disaster, and the last is mainlining anabolic steroids in an effort to look like Atlas holding the world on his shoulders.
Obama, Geithner, and Bernanke don’t remind me of Atlas. Neither does their Uncle Sam.
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If one believes that the failure of the Federal Debt system is imminent, then one should be preparing for TEOTWAWKI. In this event, prudent preparation includes quitting the job, selling the house, moving the family to a temperate rural area and converting all assets to guns, food, ammo, farmland, livestock, barter goods, and books on how to live an 18th century lifestyle.
The trouble is that preparing for TEOTWAWKI renders one in a very poor position should things not be quite so catastrophic. People are incredibly resourceful and the history of communism shows us that even unsustainable systems don’t necessarily collapse all at once.
If the federal government system survives for a period of time after the Federal Reserve banking cartel crashes (or more likely, is seized by an Act of Congress), instead of an immediate dollar collapse, surviving dollars would soar in value. Ironically, the closer any dollar credit exists to the U.S. Treasury, the longer it may survive. The idea in this case would be to hold the last surviving dollar credits, stepping off that boat to the dry land of hard assets when all vulnerable credits have disappeared and asset values have declined about as far as they’re going to. Then will be the time to flee dollars in fear of the appearance of ever-larger denominations of currency, the hallmark of currency hyperinflation.
Can people lose faith in the banking system but maintain trust in Uncle Sam (and the legal tender illusion) for a time, despite the unsustainable binge of central government borrowing and certain train wreck of entitlement programs? To me the answer is yes, they can.
No one knows the future, but a resumption of the domestic surge in the value of the dollar (attended by price declines for stocks, real estate, and other assets) is among the possibilities, and each person must decide which among those paths to prepare for.
I’m grateful to Robert Klassen for providing editorial assistance for this article.
September 26, 2009