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On May 5, 2004, I wrote an article entitled
Mexican Stand-off. In it, I outlined the likelihood that
foreign governments and institutional investors everywhere
would reach a point of fleeing the US dollar. We may be
looking at this situation quite soon.
The way it would happen would be that, many
holders of large USD positions would be facing each other,
waiting to see who pulls the trigger on the USD. Then all
would fire at once, blasting each other with their USD asset
sales, trying to salvage what remained of the real value
of their US treasuries, US stocks, US bonds.
I surmised that, with the super fast electronic
markets we have now, that, the USD could collapse in a matter
of hours, not days or weeks. The idea that circuit breakers
would stop this baby would probably fail because either
the markets would just overrun them, or ‘bum rush’
them, or, there would be a week of limit down days, followed
by another week of limit down days. End result? Possibly
a complete or almost complete USD crash.
In such a scenario, I surmise that only paid
off real assets will survive. At the inception of such a
collapse, gold and other precious metals would become essentially
unavailable, and off market.
The USD would crash so fast that no one would take any amount
of dollars for metal until either the USD stabilized at
some much lower rate, or, disintegrated into oblivion.
If you own a paid off house, a paid off car,
a few hundred ounces of gold and silver, they are all paid
off, and are not USD assets. In these positions, you are
insulated from a USD collapse, at least as far as these
paid off assets are concerned.
In my writing career, I have had a very great
battle with the paper world because I do not like ANY paper
asset associated with a USD value. It is my view, that all
paper assets would be creamed somehow, and even possibly
gold stocks in US markets, and that any massive collapse
of the USD would take down every investment vehicle because
of the incredible penetration of the USD into all markets
here and abroad. If you have USD financial accounts that
skyrocket 100 times in value, what good would that be if
you could not buy anything with all those dollars????
Practically everything that is real is priced
now in US dollars in their respective bourses.
Oil is traded daily in US dollars. Gold is priced preeminently
in US dollars. Most foreign trade that has any presence
in the US is priced in US dollars, and if there are other
prices abroad, it is only as a secondary price level to
the US pricing in USD because the US is such a huge component
of those companies sales.
The US comprises about 25% of total
world GDP. If there was a serious USD collapse, on the order
of 50% or more in a year, the US economy would see massive
inflation, oil would sky rocket, the stock and bond markets
would collapse. Prices of everything would at least double.
The US GDP would effectively be cut in half,
both due to a collapsing US consumer, the inflation effects
on net GDP, great losses in all US markets, the very great
oil price multiplier making the price of oil double, and
rippling through the US economy, and instead of being a
twice as large tax on production, would compound through
the many layers of production to consumer. Oil price increases
reduce the standard of living far beyond just the immediate
price increases seen from the refiners.
In short, since the USD is the economic common
link to world commerce, product pricing, commodities pricing,
factory price targeting, for everyone on the planet. If
that link breaks, the entire world economy will experience
massive market sell offs, plant closures, riots, shortages,
job losses, real estate collapses. Not only the US would
experience a financial catastrophe, the rest of the world
would inevitably be drawn in.
Now, all of our trading partners know all
this. This is one major reason the USD has held up all these
years with the US running $800 billion trade deficits, $400
billion fiscal deficits, and even with the US consumer also
going way into debt with over price homes, credit cards,
and so on.
So, our trading partners have two alternatives.
They can either initiate the flight out of the USD by selling
a large portion of their USD assets such as US treasuries,
or, they can hope for an orderly decline of the USD, and
just take the net write down of their USD assets. SO far,
they have been willing to take the latter alternative.
However, our trade partners are not a homogenous
group either politically, economically, socially, or economically
development wise. In fact, the only common thread of all
of them is trade with the US / US consumer. This brings
up a sticky situation. At some point, one or more of these
large trade partners will decide that their part in underwriting
the present system will come to an end. Their action could
result in all the others jumping into the mess to save what
they can and sell more USD assets before the USD crashed
into oblivion.
Our trade partners’ purchases of US
dollar assets like treasury bonds are not merely to support
the US consumer, or the US economy per se. They are more
concerned about a much bigger issue, the whole USD SYSTEM
of commerce world wide.
This system has tentacles everywhere, in every
world market and economy. To allow it to collapse would
mean an instant collapse of their economies and markets
as well. The ever mentioned purchasing power of the US consumer
is only part of this picture. The other, larger issue is
the USD system per se. What with so many commodities, goods,
assets, bourses, oil, and just about everything you can
think of being priced daily in US dollars.
To break the USD and try to go to an alternative
to all these tentacles would be an unmitigated disaster
for everyone involved in trade in the world, and everyone
who uses the goods of this trade.
Somehow, someone would have to come up with
a replacement for the USD system, before they were willing
to be the first Mexican to fire in the Mexican Stand-off.
They are not going to ‘fire’ willingly, no matter
how bad the US fiscal situation is, not unless they feel
they have an alternative system to replace the USD system.
Right now, there is no real alternative currency system.
However. There is a third alternative. The
third alternative is of market crashes on their own. Financial
panics on their own. Derivatives collapses on their own.
With all the interrelated tentacles of these, the USD just
might go ahead and collapse anyway, under the following
scenario:
First, market crashes. Real estate collapses,
derivatives collapses, bond collapses. All due to their
own complexities and over priced conditions. The present
synchronized state of all these markets being at peaks together
will only make this more likely. (see my article Massive
World Speculation Dominoes) Also the present synchronization
would also mean that when they let go, the outcome would
be so bad that we would imagine ourselves in the economic
end of the world. Something like the Great Depression of
the 1930’ that enveloped the world in ten years of
massive deflation. The US GDP in that one collapsed about
30%.
Flight out of the USD this time
In such a market driven collapse, there would
possibly be commensurate flight out
of the USD this time. This is because the confidence in
the USD as a worthwhile currency would be already gone,
in fact is already gone going into the next world economic
crisis.
SO, not only would we be looking at financial
panics world wide, but also at a situation where there was
already lost confidence in the US dollar, and flight out
of the US dollar would be thrown on top of the chaos. In
the great depression, there was flight world wide INTO the
US dollar! Not out of it!
So, the third alternative, a market driven
collapse world wide combined with flight out of the US dollar
system seems a distinct possibility. That,
my friends would be economic doomsday.
It is for these reasons that I am so adamant
about being wholly in real assets paid off in your possession.
Many times, I find myself seemingly swimming in molasses
because, even in the gold-bug community I have to compete
against so many exciting paper vehicles. For everyone like
me there are ten gold bugs that still hold onto the idea
that paper investment vehicles, in lieu of actual physical
possession, is the way to go.
If any of the above US dollar collapse alternatives
happen, I am very sure that investors trying to flee paper
assets into precious metals will find them essentially unavailable,
off market, or priced so outrageously that they won’t
be able to buy much. You would then be left with whatever
the market value of your paper investments had left, with
no alternatives.
In my newsletter, I track these macro
economic trends, and the gold and silver markets. I try
to get a big picture analysis that is ahead of the usual
financial and even gold bug commentary. Often, I have succeeded.
PrudentSquirrel readers are re-subscribing at a rate of
about 90%. The newsletter also looks at practical survival
and personal safety in case there is a big war or depression.
We consider personal survival as important as financial
safety. The newsletter us ULTRA conservative. Stop by and
have a look.
Christopher Laird
Editor-in-Chief
www.PrudentSquirrel.com
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The Prudent Squirrel newsletter
is a gold and economic commentary. It is a big picture analysis
of markets and gold that looks for new strategic trends. It
is more sector analysis than stock specific. It is a commentary
and is not investment advice specifically.
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