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
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
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
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
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
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
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
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
In my newsletter, I track these macro
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