The Dollar's Third and Final Act


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.

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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:

Peter Schiff discusses this possibility in Crash Proof 2.0.

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

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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.

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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.