How does a currency collapse?
And the U.S. $?
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$867.
U.S.$ 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
• 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
Look back a couple of years and we saw the $ reigning
• 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
• 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
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
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
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
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