Saturday, April 19, 2008

Is the US Dollar Doomed?

19 April 2008

The idea that the US dollar is on the road to ruin is a familiar concept in the field of alternative economics and investment theory. It is by no means a mainstream concept - yet.

John Williams, whose work I have cited previously, has issued a warning that the US dollar could move into hyperinflation as soon as 2010.

Mr. Williams in this case is cited by Jay Taylor, who states in a recent article:

"Such a claim may seem incredible to most of us who have never lived in such an environment and have enjoyed the benefits of economic and political stability all our lives. To be sure, we have experienced some uncomfortable times like the deep but short-lived recession of 1981-82 and the double-digit inflation of the 1970 Carter Presidency. But I believe Williams makes a very, very strong case for hyperinflation with the dynamics driving it very much like that of the German Weimar Republic. Williams shows how it will be absolutely impossible for the U.S., as a massive debtor nation, to meet its trillions of dollars of obligations going forward, given: (a) foreign savers bailing out of the U.S. dollar, and (b) the obligations of the U.S. now exceeding even a 100% tax rate imposed on Americans!"

Let's allow Mr. Williams to speak for himself.

"The U.S. economy is in an intensifying inflationary recession that eventually will evolve into a hyperinflationary great depression. Hyperinflation could be experienced as early as 2010, if not before, and likely no more than a decade down the road. The U.S. government and Federal Reserve already have committed the system to this course through the easy politics of a bottomless pocketbook, the servicing of big-moneyed special interests, and gross mismanagement.

"The U.S. has no way of avoiding a financial Armageddon. Bankrupt sovereign states most commonly use the currency printing press as a solution to not having enough money to meet their obligations. The alternative would be for the U.S. to renege on its existing debt and obligations, a solution for modern sovereign states rarely seen outside of governments overthrown in revolution, and a solution with no happier ending than simply printing the needed money. With the creation of massive amounts of new fiat (not backed by gold) dollars will come the eventual complete collapse of the value of the U.S. dollar and related dollar-denominated paper assets."

While Mr. Williams' work is well-supported, and many of his premises sound, I do not expect the collapse he describes.

Rather, I expect the other nations of the world to join with the US in the inflation of their currencies (meaning engagement in blatant money-printing). Thus, while the US dollar will be dramatically devalued going forward, so too will the currencies of most of the economic powers of the world. (For more information about the potential for global economic disaster, click here.)

The relevant question, then, becomes whether the US dollar is more troubled than the currencies of its peers. Let me defer here to Richard Russell, the noted investment advisor based in nearby La Jolla, California, who lived through the Great Depression during his coming of age years in New York City.

Interestingly, Mr. Russell, who has no point to win other than describing the world as he sees it, presents a viewpoint that parallels that of Mr. Williams. Mr. Russell speaks in terms of "doom" for the US dollar, as follows:

"The US has put itself in the incredible position of fighting an expensive war with borrowed money. Even without the war, the US is living on borrowed money. Our national debt is in the process of surging well past the $9 trillion mark. The wonder is that the dollar is viable at all.

"I note that none of the presidential candidates are even talking about the debt -- or the $53 trillion in unfunded liabilities that we are facing (other estimates are higher). In fact, I believe we have gone so far in our debt and deficit situation that I just don't see how we're going to navigate out of it. The dollar, it seems to me, is ultimately doomed. The only question is timing, and here we're talking the impossible. It brings to mind Keynes' thesis -- 'The market can stay irrational longer than you can stay solvent.' In other words, even though the US dollar appears doomed, if you short the dollar, you can very easily go broke before the dollar finally succumbs (in fact, the oversold dollar may be in the process of advancing now).

"So what do we do? I've been thinking about this for a long time, and I realize that there is no perfect answer, no ideal defense. You see, for the first time in modern history there are grave doubts about the very viability of our money. Even during the Great Depression, nobody doubted the value of a dollar. The dollar was 'as good as gold.' The only problem was -- nobody had dollars. Everybody was broke. Deflation swept the land, and money was scarce. I could give you a list a yard long of things I could buy in those days for a nickel. Talk about nickels, I would use nickels to take the subway to school, and I would use seven nickels to buy lunch. A movie cost three nickels. Nickels were useful, dimes were scarce and dollars were treasures.

"Today it's a different story. Today there are too many dollars around -- but the world is questioning the viability of the US dollar. I understand there are places (China, for instance) where people do not want dollars. If they do receive dollars, they exchange them for another currency as quickly as possible."

How does Mr. Russell visualize the ultimate demise of the dollar?

He states, "My guess is that the trouble will start when the oil-producing nations start quietly unloading their dollars. China will likely do the same. Gradually, the word will emerge -- 'the dollar is a doomed currency.' Diversify as far as you can, and get out of dollars as quietly as you can."

Does Mr. Russell's prediction of doom for the dollar spell hyperinflation by 2010?

It's certainly possible, but hardly foreordained. While currencies can unwind quickly when their holders lose confidence in them, one lesson of history is that many twists and turns - including lengthy periods of reprieve - can usually be expected before such watershed events come to pass.

So, is the US dollar doomed?

I'm not going to argue with the likes of Richard Russell. At some point, the US dollar will certainly fail as a currency - though I think not so soon as 2010, and not necessarily in my lifetime - though recent opinion voiced in The Economist reaffirms the growing consensus that currency crises of grave proportions now appear foreordained for the upcoming decade.

Is it wise now to seek investment alternatives to the US dollar?

That has certainly been the case since at least early 2002, and gold has given no indication of unreadiness to continue bearing its historical burden as the currency of last resort in uncertain times.

So - hyperinflation by 2010?

Possibly, but in my view unlikely.

Ultimate failure of the US dollar, and grave crises for the US dollar as a currency over the coming decade?

Yes, in my view, the next decade will continue to be a difficult period for the US dollar. Whatever it does in terms of other currencies, its real purchasing power will continue to erode for the foreseeable future, and this will be detectable through the continued advance in the dollar value of gold..

The US dollar is clearly doomed. It is on an inevitable course to failure. But the death of the US dollar will prove a long emergency. It is a drama - with the current episode now in its sixth year - that will be told in terms of decades, not in terms of years.

($9000 gold as the US dollar collapses? Click here.)


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