When a currency loses the confidence of its people, its fall becomes exponential, as has happened to the Zimbabwe $, where in 1982 one U.S.$ equalled 1 Zimbabwe $. Today around Z$200,000 buys one U.S. $ if you can find someone idiot enough to sell one for the Z$.

In day-to-day terms, the smallest note in Zimbabwe a Z$500 is the size of a U.S.$. The price of a single-ply sheet of toilet paper is more expensive at around Z$867.

The U.S.$ is nowhere near there, but clearly the U.S. Administration has no plan or even desire to rectify the U.S. Trade deficit. Consequently, we are seeing a growing number of Central Banks turning to the Euro for its reserves and away from the U.S.$.

Whilst most observers and particularly U.S. observers like to have tangible facts and numbers with which to mathematically gauge the present and the different possible futures, a collapsing currency situation is not as neatly gaugeable. Indeed it is driven in stages of ‘confidence’, which are rarely measurable in advance.

For instance we see today the move of the Pension and other long-term funds into the gold E.T.F.’ one finds there are no mathematically measurable factors with which to measure the pace of change to these funds. Yes, the number of ‘Road-shows’ the World Gold Council does affects this move to some extent, but how do you measure the spread of that knowledge and resulting investment in the E.T.F.’s outside of that? How does one measure the forces causing uncertainty and falling ‘confidence’.

It is an emotional progression, one that moves in lurches as particular incidents destroy confidence limb by limb. In such a climate a steady degeneration of confidence lead to an effect we shall call a "plateau - cliff" process.

• As confidence is whittled away the currency appears relatively stable.
• Then a particular event will occur that triggers a breakdown and the currency drops suddenly, like falling off a cliff, until it finds a short-term bottom and it holds that level for a period as though on a plateau. The process then repeats itself.
• The degeneration then accelerates, so the fall from the cliff to the next stable plateau happens more quickly.
• Then the height of the cliff [the fall] extends until it grows at an exponential basis.
• The final collapse will occur when the currency is completely discredited and used only by those unfortunate to have no other choice. Alternatively the currency is changed to a new one, one whose issue is backed by assets [Such as land - after the Weimar republic] and limited to a fixed relationship to those assets until confidence is restored by a healthy economy and a balanced Balance of Payments. This provides a basis in which to be confident about currency.

However, were the $ heading for a collapse, the U.S. $, a global reserve asset, nothing in the U.S. such as land or any other fixed U.S. asset would suffice. The asset would have to be accessible by its creditors, outside the States who would have to have a willingness to accept that asset in the case of a default by the U.S. The use of the $ domestically and internationally brings such problems that in the final extreme conditions the $ is inadequate as a global reserve currency.

But for the market to whittle away confidence in the $ would take some time. But we believe that it will happen.

• Look back a couple of years and we saw the $ reigning supreme.
• Then warnings were given against it as the Trade deficit began to grow.
• The Fed or the Administration then allied itself to the euro, giving it the respite it has enjoyed over the last year.
• Now there seems to be a breaking down of the $ of late and some Central Banks switching to the Euro out of the $. These were three distinct stages.
• The next stage is for the $ to fall heavily against the Euro and Euro oriented currencies.
• Next will come the defence of the $ until the weight of selling pressure exhausts the $ against other currencies [please note the U.S. has few foreign currencies left in its hands with which to defend the $, but the Fed put in place measures to allow it intervene in the international foreign exchanges.]
• This could delay the fall for some time, but history has shown that when a Central Bank defends a rate in the market, it gives in periodically and devalues. If insufficient it has to defend again and again.
• I have no doubt that Central Banks will use this defence to unload their dollars back to the States.
• At some stage the U.S. will have to impose Controls to prevent foreign capital from exiting the States and rejecting dollars coming home. These are called Exchange Controls.
• When this happens many currencies will begin facing the same problems as their reserves become suspect too and they cannot defend their own Balance of Payments deficits.
• At this point for the global economy to function adequately, a new “Global Currency” will have to be established and be supplied sufficient so as to regain global confidence. We cannot see this happening without gold in there to a greater or lesser extent. Of course this will have to be at prices believed by all nations, not just individuals!

During this process confidence in the currency will be the measuring factor, a nebulous, unstable element in itself. The process of the decay of confidence is described above. But confidence could well go down dramatically from the point we are at now with the $ in the monetary system. Soon the cliffs will extend until the defence of the currency comes, then a long plateau while the dollar is defended, until the heavy falls begin.

The international trading power of the States will dominate just how far the dollar will fall. Of course if the States manages to show it is in the process of balancing the Balance of Payments beforehand [which may not mean the complete elimination of the Trade deficit] the demand for dollars will probably overcome the supply. But inevitably that action will mean a huge recession for the States, which could prove an internal nightmare and cause a global recession of its own.

It is probable that the Administration would isolate the U.S.A. from the rest of the world by severe Exchange Control measures, which will create its own internal boom, sooner or later. We will produce an article, or series thereof, at the right time, on this subject.

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