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
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
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.