*****Ten Major Threats Facing The Dollar in 2009*****

Ten major threats are facing the dollar in 2009.

1) Foreign central banks selling US assets

Most of the nations which have been financing the US's massive current account deficits in recent years have either begun to sell their dollar reserves last year or are planning on selling them this year in order to support their currencies. These nations generally fall into three categories:

Oil Producing Nations

Oil producing nations have built up lavish spending habits and large dollar reserve in recent years as a result of profits from rising oil prices. Now that commodity prices have crashed, those profits are gone, and those Oil producing nations will have to bankroll their spending by selling their accumulated dollar assets. Saudi Arabia, for example, is projecting a 2009 Budget Deficit, which it intends to finance by selling off its US holdings. Russia, meanwhile, has already sold over 20% of its $598.1 billion reserves, and it can be expected to continue doing so this year.

B) Emerging markets that have been relying on capital flows to fund their trade deficits

Many emerging markets around the world have been running trade deficits in recent years financed by capital flows. The most prominent example from this group is India.

India's strong capital flows from tourism, software services, and remittances not only financed its trade deficit, but also increased its foreign reserves to an all-time high of 316.2 billion in May of 2008. However, due to the global slowdown and selloff in emerging markets, those capital flows have now reversed. India's central bank, for example, has been forced to sell off its US holdings to curb its currency's decline, and its total reserves have decreased by $62.2 billion. The central bank's dollar sales in October alone exceeded purchases by a record $18.7 billion. India now has $254 billion foreign reserves left, the majority of which will be sold this year to protect its currency.

C) "Developed" Nations

The US isn't the only "developed" nation in trouble. Other "developed" nations (ie: nations that have chosen to outsource the polluting and labor-intensive parts of their economies) are also collapsing. Japan, for instance, has seen a disastrous drop in demand for its goods.

Japan's Industrial production fell 8.1% in November from the previous month (the biggest drop in the measure since the government started releasing comparable figures in 1953). Demand for Japanese exports is vanishing: November shipments of automobiles plunged 31.9 percent and shipments of microchips and other electronics components fell 29.0 percent. Due to this disappearing demand, Japan has incurred a trade deficit for two straight months for the first time since October-November of 1980.

With their own economic problems to deal with, it will not be other "developed" nations like Japan which will fund the US trade deficit in 2009. In fact, should the dollar begin to collapse, these nations could even be forced to sell their dollar reserves to protect their own currencies.

The dollar implications of this should be clear

After years of bankrolling US consumption with the purchase of dollar assets, most nations are going to be net sellers of dollars in 2009. Just Russia, Saudi Arabia, India, and Japan alone have around $2 trillion in US holdings, and, if the current trade trends continue, America can expect foreign central banks to sell at least 1 trillion dollars this year. This begs the question: who exactly is going to be buying all these assets?

2) The worsening US Trade deficit

The US Trade deficit is worsening because, while imports to the US are falling, exports are falling even faster. Demand for the big ticket durable and capital goods produced by "developed" nations is plummeting much faster than demand for cheap consumer imports, causing widening trade deficits with nations like China. The US's increasing trade and current account deficits means that America needs to attract over 700 billion dollars this year to keep the dollar from weakening.

3) Treasuries

It is extremely important to understand that treasuries are the modern day equivalent of money under the mattress, and that, when a crisis confidence hits the dollar, treasuries will be redeemed for printed cash from the fed. This is due to the fact that the US can't allow treasury prices to crash, for fear of having the world's financial system break down and global trade collapse. So a sustained selloff in treasuries would therefore force the fed to expand its balance sheet by trillions to monetize much of the outstanding federal debt.

Why the government can't let treasuries collapse

Even if the government does not step in to support treasury prices amid a selloff, the end result will be the same. Allowing a crash in treasury market would make the financial system insolvent and cause runs on the bank. The fed would then have to print money to make good on the 6.5 trillion insured deposits around the country, the 1.5 trillion insured senior bank debt, etc... Since trillions of printed dollars would be hitting the marketplace in either case, the fed will choose the least disruptive option of putting a floor under treasury prices with printed money.

Selling treasuries is equivalent to printing money

It is deceptive to think that, because the government is borrowing to fund its deficits and bailouts, it isn't printing money. This is false. Treasuries should be seen for what they really are: "promises to print money".

4) Gold

Rising demand for physical gold is a threat to the dollar because it signals a growing loss of confidence in the paper currency. It is also key to understand that gold prices aren't rising because of the changing fundamentals of gold, but because of the changing fundamentals of the dollar. In other words, gold isn't rallying, THE DOLLAR IS FALLING.

Gold is history's oldest and most stable currency. Its utility is simply that it is rare, and for 5,000 years people have used it to store value for the future. All the gold that has ever been produced would fit in a solid cube of about 19 meters on each side, and this cube is only expanding by about 12 centimeters a year (2%). Since the value and supply of gold itself are fairly constant over long periods of time, the main driver of gold price fluctuations is the ebb and flow of confidence in paper currencies. Rising gold prices are, therefore, a signal of a weakening currency, which is why governments hate them and try to suppress them.

Right now, there is unprecedented worldwide demand for physical precious metals. As a result of this surging demand, gold futures have experiencing backwardation, a rare market condition where gold futures trade under spot prices. It is a signal that gold prices are headed higher and that confidence in our currency is fading quickly. When gold prices break above 1,000 again, the event should be recognized for what it is:
the herald of a dollar collapse.

5) China and the yuan

China is in a different situation that most other nations as it has a growing trade surplus, which stood at $40 billion as of November. As a result of
disappearing Asian demand for luxury items and commodity prices plunging, imports to China crashed 17.9 percent in November while its exports only fell 2.2 percent. This leaves China with a problem the US could only dream of: huge, unsustainable upward pressure on its undervalued currency.

In order to maintain the dollar peg, China would need to fund not only a large part of the US's gigantic trade deficits, but also the trade deficits of those nations around the world which are selling their dollar reserves. If imports keep falling at their current pace, China will have to buy close to 1 trillion dollars this year alone, which leads to yet another problem: right now,
China is not interested In any kind of risky US assets, and what "safe" assets does the US have to sell? (Please don't say treasuries. All dollar denominated assets are inheritably unsafe due to the currency's horrible fundamentals.)

Trying to prop up the dollar would end up destroying its currency without benefiting its economy, and China knows this, which is why you have Chinese central bankers on record as saying that,
"The US dollar is unlikely to be stable next year". Even more ominous for the dollar, China stealthily announced its plan to make the yuan an international currency on Christmas Eve last year. Whether intentional or not, by allowing Chinese exporters to settle their trades in yuan, China is taking a major step towards supplanting the dollar with the yuan as the world's reserve currency.

6) Never ending bailouts

Although many Americans such as myself are growing tired of America's never ending bailouts, it is important to brace yourself because there are a lot more on the way. Here are a few of the bailouts we will be seeing this year which haven't gotten much media coverage.

A) State government bailouts

State budget troubles are worsening. States have already begun drawing down reserves, and the remaining reserves are not sufficient to weather a significant economic downturn. Also, many states have no reserves and never fully recovered from the fiscal crisis in the early part of the decade.

The vast majority of states cannot run a deficit or borrow to cover their operating expenditures. As a result, states must close budget shortfalls by either drawing on reserves, cutting expenditures, or raising taxes. These budget cuts often are more severe in the second year of a state fiscal crisis, after reserves have been largely depleted. The federal government will eventually be forced to step in and offer states some form of assistance to prevent economic collapses and humanitarian disasters. This means another bailout.

B) Unemployment bailout

State-funded trusts which pay unemployment benefits are running out of money. The federal government has increased these funding problems through its repeated extensions of unemployment benefits, with the total run of the benefits now being 10 months. Since there is a massive, post-holiday wave of layoffs on the way, shortfalls in unemployment funding are going to come faster and be bigger than most anyone expects. In response to these shortfalls, congress will loan the states whatever is necessary to keep unemployment benefits coming, even if they have to print every last penny. After propping up financial institutions and indirectly paying their executives billions of dollars, they now have, politically speaking, no choice.

C) Pension Benefit Guaranty Corporation (PBGC) bailout

PBGC is an agency established by Congress to insure participants in defined-benefit pension plans against losing their pension in the case their employer goes under. Nearly 44 million Americans in more than 29,000 private-sector plans are protected by PBGC, and some 1.3 million workers are already covered by plans that have been taken over by the agency. Although the PBGC is financed from insurance premiums collected from companies and the assets it assumes from failed pension plans, it is a widely presumed that the federal government would bail out PBGC. if it became unable to meet its obligations for retirees.

There are several reasons to expect that PBCC might need such a bailout this year. First, PBCC is underfunded by $11 billion (based on very optimistic projections). Second, the economic downturn and financial market meltdown will likely cause PBCC to take over many private pension plans this year and most of these will be severely underfunded. Third, the agency's board decided recently to move a large share of the portfolio out of safe assets like Treasury bonds and into riskier assets like stocks. So, depending on how underfunded the pension plans it takes over next are and how badly its investment portfolio does, it is possible the PBCC might require a federal bailout by the end of the year.

D) Housing bailouts

Since a recovery from our downward spiral is unlikely until the housing markets stabilize, there is a good possibility that we will see another, bigger federal housing bailout this year as congress tries to jumpstart the economy. It is important to note that with every new bailout congress passes, it becomes harder to say no to such a homeowner bailout.

The true moral hazard of bailouts

Most commentators misunderstand the true moral hazard of bailouts. While bailouts might have an adverse effect on the future actions of individuals and businesses by encouraging risk taking, the real problem is their effects on future actions of the government. Specifically, each bailouts makes it harder to say no to the next bailout. This pressure to fund future bailouts is made far worse if those receiving bailout money are truly undeserving. After all, If the government is going to give $45 billion to Citigroup (one of the banks responsible for our current mess) and insure $306 billion of its riskiest assets, then how can it say no to bailing out the state of California or South Carolina?

This "me too" phenomenon will get much worse after the treasury market collapses, and the fed starts
monetizing the treasuries that were sold to fund the current bailouts. If fed printed money to bailout the banks, why shouldn't it print more money to fund unemployment benefits? Politically speaking, you can't bailout the irresponsible and then let the responsible sink, which means congress isn't going to be saying no to a lot of the bailout requests this year. Unfortunately, these bailouts will become increasingly meaningless because, when you bail out everyone, you bail out no one as you destroy your currency.

7) US budget deficits and (lack of) Tax revenues

The federal government is facing a record breaking budget deficit in 2009. According to the latest government figures, the deficit currently is expected to be $438 billion. For a reliable idea of what our 2009 deficit will look like, to this number we need to:

A) Add the cost of funding the on-going wars in Iraq and Afghanistan
B) Add the cost of recent programs such as the TARP
C) Add the cost of current and future bailouts for the auto companies
D) Add the cost of another stimulus package
E) Add the cost of the programs promised to us by the new administration

After subtracting a further 500 billion for lost tax revenues due to our collapsing economy, it is easy to project a budget deficit of at least 2 trillion. So far,
the deficit now totals $401.6 billion in just the first two months of this budget year, and, at this annual rate, the budget shortfall is already on track to exceed our expected number. All this isn't even taking into consideration our long term funding shortfall vis-a-vis baby boomers (the future of social security and Medicare is, unfortunately, clear: I would not expect it to be there when you retire (at least not anything like it is today)).

Our 2009 budget deficits will force the government to sell at least another 2 trillion treasuries this year. Taken together with planed sales by foreign central banks and the expected 1 trillion new bailouts mentioned above, at least 4 trillion treasuries will be sold in 2009. The question remains: who is going to buy them? The answer is that the fed will buy them with printed the money.

Don't worry about the children

For years Americans have worried about passing on our enormous federal debts to our children. Well there is good news on this front: you don't have to worry about the children anymore. America's massive debts aren't going to be paid for by a future generation. They will be paid for today through a massive devaluation of our currency.

What the dynamics of hyperinflation will do to the federal deficits

The current $2 trillion deficit projections being circulated in the media will prove woefully understated should the dynamics of hyperinflation take hold of the economy. A dollar collapse would cause our tax system to break down. Individuals whose income isn't keeping up with inflation will forgo tax payments to spend all their cash on food and basic necessities. Businessmen will find that by merely delaying tax payments, depreciation in the dollar will virtually eliminate their true value. Even the tax revenue that is paid will have lost most of its value by the time the government collects it. Meanwhile, the rising cost of everything will drive up the federal spending. The government, lacking adequate income to cover these rising expenses and unable to borrow due to the collapse of the treasury market, will be forced to resort more and more to money creation. If/when hyperinflation takes hold of America, do not be surprised to see 1% of government income come from taxes and 99% come from the creation of new money.

8) The "flight to quality"

During the second half of 2008, a "flight to quality" began as hedge funds sold foreign assets to meet redemptions requests. These forced repatriations by hedge funds combined with dollar's outdated reputation as a safe haven produced a record breaking rally in the treasury markets. This "flight to quality" is not something that hasn't seen before.

The phenomenon of investors blindly piling into an asset class while ignoring all warnings about the horrible fundamentals and deteriorating outlook has been so common lately that I am growing tired of seeing it. They are called bubbles, and the pattern is always the same:

A) Stock market, October 2007

In October 2007, stocks rallied to new all time highs while commentators made insane predictions about the Dow going to 20000. While this was happening, credit markets collapsing, growing mortgage default were threatened bond insurers with insolvency, and the off-balance sheet vehicles of financial institutions were imploding. Considering that the frozen credit markets are the lifeblood without which the economy can't function, these new highs made as much sense as subprime CDOs squared. It should not have surprised anyone that stocks collapsed.

B) Commodities, July 2008

In July 2008, commodities rallied to new all time highs while commentators made insane predictions about oil going to $200. All this was happening while thousands of factories in China were shutting down due to rising costs and falling orders. In the face of the world's plunging demand, the only reason that could possibly have justified $147 oil would have been a complete collapse of the dollar. That was not the case, and the oil bubble burst sending commodity prices plunging.

C) Treasuries and the dollar, January 2009.

The current rally in treasuries and the dollar is the latest in a long line of bubbles. Those same commentator which got it wrong on previous occasions are now predicting months of deflation and a new multi-year bull market for the dollar (worst prediction ever). Out of all the bubbles so far, this current rally in treasuries and the dollar is the most ridiculous. The fundamentals behind the dollar, as outlined in this article, are horrendous. There is simply no rational reason to believe the dollar will retain an ounce of value by the end of 2009.

Side note on how to deal deflationists

When faced with a deflationist (one of those individuals who believe in months of deflation and a dollar bull market), ask them this: who is going to finance our trade deficit and bailouts? If they say the world or foreign nations, then list off all the countries with trade deficits who will not be financing the US: Japan, India, Saudi Arabia, Russia, most European countries (with the possible exception of Germany), other oil producers, etc. If they insist on the notion that China alone will pick up the tab for everything, point out that during the great depression, when the US had massive manufacturing overcapacity, America shut down factories rather than extend credit to over indebted foreign nations.

A true "flight to quality" will soon begin

Dollar inflows due to hedge fund are over now, as is the dollar rally. As a true "flight to quality" begins, foreigners will start selling their gigantic holdings of US debt. With America's total external debt standing over $14 trillion, this move will cause the dollar's value and purchasing power to plunge.

9) A loss of confidence

Confidence is the single biggest factor in determining a currency's value, and periods of deflation, such as America has been experiencing these last few months, tend to undermine that confidence and create hyperinflation. Economic troubles, deteriorating debt ratios, and scary charts are a few of the factors resulting from a deflating economy that can lead investors to lose confidence in a currency.

US economic troubles

The US has boatloads of economic troubles ahead which are sure to eradicate what little confidence is left in our economy. Here are just a few of the negative economic developments to expect this year.

A) Post-holiday wave of layoffs

There is a wave of post-holiday layoffs in the pipelines. Since employers don't like to layoff workers right before or during the Christmas/New Year's holidays (bad publicity), there is a slew of pent-up job cuts about to occur this month. Chicago, for example, is
preparing for mass layoffs in 2009, and we are likely to see at least 1 million jobs lost in the first two months of this year.

B) Manufacturing sectors problems

After having outsourced its polluting and labor-intensive industries abroad, the US manufacturing sector has been left heavily concentrated in durable and capital goods. Orders for these types of big ticket items are set months, if not years, in advance. Even before Lehman brothers went under, new orders for these products were falling drastically. The full effect of last year's big drop in orders, including job and production cuts, will only be felt throughout the course of this year. 2009 is not going to look pretty for what is left of our manufacturing sector.

C) New state taxes and spending cuts

As mentioned above, State budget troubles are worsening. Even with the eventually federal bailout, states will still need to drastically reduce spending and raise taxes. When states cut spending, they lay off employees, cancel contracts with vendors, eliminate or lower payments to businesses and nonprofit organizations that provide direct services, and cut benefit payments to individuals. These cuts, like new taxes, drain an enormous amount of money out of circulation. This leaves business and individuals with less cash and thereby removes demand from the economy, causing state and federal GDPs to contract.

Deteriorating debt ratios

With federal debt growing and our GDP shrinking, our debt ratios are rapidly deteriorating. Especially with 2008 over now, economists are going to start putting numbers together and making estimates which will be truly scary. Although official figures aren't available yet, common sense can give us a good idea of what to expect. Take, for example, our net international investment position.

US's net international investment position = US owned foreign assets - Foreign owned US assets

America's net international investment position (what the US owes the world) has likely worsened enormously in 2008. For one, US stock markets have outperformed most foreign markets last year (easy to do since fed can print dollars to prop up the market), meaning that the valuation of US assets abroad decreased far more than the valuation of foreign owned assets at home. Hedge fund deleveraging and redemptions forced the selling of US assets abroad at those discounted prices, decreasing the amount of US assets held abroad and locking in the losses in crashing foreign stock markets. Furthermore, the misguided "flight to quality" which began in the second half of the year undoubtedly increased foreign claims on US assets as money flowed into treasuries. Finally, our trade and current account deficits likely increased foreign dollar holdings by at least $600 billion.

Taken together, these factors have most probably doubled the US's negative investment position in 2008, from 2.5 trillion to 5+ trillion. Since our GDP for 2009 will shrink below 10 trillion, the US now owes around half this year's GDP to the rest of the world. News that the US owes foreigners half its GDP will not exactly inspire confidence in the dollar.

Scary charts

Charts and other visuals can fully convey the magnitude of our current economic crisis in a way words cannot. With 2008 over now, expect to see some truly terrifying graphics depicting just how badly the US economy self-destructed last year. Here are two examples of what these charts will look like:

10) The dollar's former self

The US dollar in 1944

Following the end of World War II, the United States was a global powerhouse whose domestic industries were producing half of the world's manufactured goods. At this time, the US was also a creditor nation and held over half the world's foreign reserves. As the US was running a huge balance of trade surplus, these immense foreign reserves were growing fast. In additions to foreign currencies, the United States also held $26 billion in gold reserves, approximately 60 percent of the world's estimated $40 billion. Finally, the dollar was the only post-war currency fully backed by gold.

The strength of the US economy, the fixed relationship of the dollar to gold at $35 an ounce, and the dollar's full convertibility into gold at that price made the dollar as good as gold. In fact, the dollar was better than gold: it earned interest and was more flexible than gold. It was under these strong fundamentals that, in 1944, the Bretton Woods agreement was signed and the dollar became the world's reserve currency.

Today's dollar

The fundamentals backing today are just as amazing as they were back in 1944, except in a negative sense. The US has managed to outsourced its industry to the point of total dependency on foreign imports for its basic consumer goods, energy, and, to an extent, even food. The US can today claim the exalted status of the most indebted nation in human history, with every level of society (individuals, corporations, local/state/federal governments, etc) owing an unpayably large amount of money. The US capital markets have been tarnish by widespread financial failures, haphazard bailouts, and blatant corporate corruption, the latest being the Madoff's ponzi scheme. There are also growing doubts about how much gold, if any, are left in our reserves.

Perhaps the most damning indictment of our currency comes from this contrast between its past and current self.
How can today's dollar be anything but a joke when compared to its former greatness?

The dollar's status as the world's reserve currency

The dollar became the world's reserve currency through its strong fundamentals and by having the longest reliable history of increasing purchasing power. Today's dollar has long since lost both those qualities. Those pointing to the dollar's special status and expecting a new dollar bull market should realize that not everything about being the favored international reserve currency is positive.
The downside of being the world's reserve is that everyone is sitting on a great pile of your money, which they could decide to dump back into circulation.

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48 Responses to *****Ten Major Threats Facing The Dollar in 2009*****

  1. Anonymous says:

    what a lot of reserch and thought in explaining this disaster.

    Thank you

  2. Dave says:

    So does that mean your outlook on the dollar is bleak? :-)

    Seriously, I like your site because you really dig into the data and furnish a thorough analysis. I can find no fault with your analysis.

    What amazes me is why the dollar system is even still functioning at all. Why are all the parties still playing along? People ought to be shunning the dollar and dollar-denominated securities like the plague, but they are not. Perhaps they are just biding their time while they search for the nearest exit.


  3. Anonymous says:

    Eric, love your work

  4. Enrique says:


    Very good article putting together all the pieces you have been investigating during the last weeks. Thanks for the resume.

    Enrique from Barcelona

  5. Rob says:

    We sure don't hear any of this from the mainstream ( read-corporate ) media.

    Thanks for you insight!

  6. Magpie says:

    Thank you, and well put.

    In 50 or a hundred years I hope our future generations can look back and see, on the whole, what easily lead children the human race were and take responsibility for the planet and each other sustainably.

    And may I wish you the best of luck for 2009, it's going to be a ride, that's for sure ;) !

  7. Thanks for all your support!

    As to your question Dave about, "Why are all the parties still playing along?"

    The parties aren't playing along. China is internationalizing its currency. Arab nations are organizing their own (possibly gold-backed) currency. Europe already as the euro.

    I have a feeling we are headed towards a world dominated by these three currencies:

    1) The euro, backed by Germany's strong manufacturing base
    2) The yuan, backed by China's strong manufacturing base
    3) The Khaleeji backed by arab oil and gold

  8. JP Seabury says:

    So now ... what do we do about it?

  9. Anonymous says:

    I've never paid attention to financials in my life, but now, nearing retirement, I've been forced to pay attention and to salvage whatever I can. So I've been reading whatever I could find on the internet, trying to separate wheat from chaff (or gold from fool's gold). This article is in my top five--wonderfully analytical. It will certainly help me navigate the coming storm. Thanks.

  10. Anonymous says:

    Utterly terrifying, and at the same time utterly convincing. That's a bad combination.

  11. tibby says:

    You are correct about each sector of the world only being concerned with itself. I'm an expert at marketing with Trade Show booths / Exhibits and convention floor space. We work all over the world and it started in EU, spread to Dubai and now in the USA. Japan has been dead for 15 years.
    Unfortunately for business and manufacturers, the only solution is to find more / new markets and work with the strongest companies in each region. It's what we do at http://www.VectorDisplays.com We watch our customers and our vendor / suppliers BOTH. I'm on the front line and see it early in the regional cycle..... the upside is, we see the rebound early too.
    Tibby Brown WWW>VectorDisplays.com

  12. Anonymous says:

    So where do recommend I put my cash in? The Yuan? Just gold and other precious metals?

  13. Anonymous says:

    A good follow up discussion here and how China is too dependent on a strong US economy to devalue the dollar:


  14. I recommend buying physical gold.

    During normal, low inflation periods gold does terribly. However, during periods of crisis, whether deflation or hyperinflation, gold's purchasing power goes up.

    Gold is the ultimate crisis hedge, and I can't imagine any asset class doing better during a dollar collapse.

  15. Anonymous says:

    Thank you for such an insightful article.
    My question is this: we are retired teachers, we have purchased silver and some silver stock. will silver provide the same type (certainly not at the same level)of benefit as gold?
    It has been mentioned in almost everything I'm reading that one never sells gold but continues to hold it. Does that apply to silver also? If so, how is that leveraged to supply funds needed to live on?
    I'm obviously new to all this, as I assume many more people will be before long.
    I would appreciate any information that you could provide.
    Thank you

  16. Silver is a precious metal like gold and is a safe investment. I have a little silver myself. So don't worry, silver should do just as well as gold.

    When you read "that one never sells gold but continues to hold it", the writer is usually referring to gold as part of an investment, like stocks or bonds, and not as cash for everyday life.

    A note about moral hazard of hyperinflation

    It is very hard to give advice on what to do to prepare for hyperinflation. Here is comment from a message board that explains why:

    There is a real moral hazard situation that goes hand in hand with hyper-inflation. Mathematically, the smartest thing you can do during the onset of hyperinflation is to borrow out the wazzo. This presumes that the aging of the debt will make it trivial to pay off in the future, or even be "disappeared" by failure of the system. This is where people start getting strongly tempted to borrow today to buy Precious Metals in anticipation of tomorrow.

    I admit it is a temptation I deal with monthly. It's my own "tee-totaler eyeing up a bottle of booze" situation.

    Reasons that have kept me from doing it to date:

    1) I don't like borrowing. Never have, never will. Just the way I am. Some of the greatest angst in my life has come from fretting about personal liabilities, and the most relaxed times have been after I finally managed to get out from under the monkey.

    2) There's no telling exactly what the government/world will end up doing in response to a collapsing dollar crisis. The world may very well choose to arbitrarily "fix" or "freeze" all currencies to some set rate. They may invent an entirely new currency, say "screw the entitlement programs", and sidle right by catastrophe. My gut tells me the banks are ultimately at the helm, and they will not give up what they feel is owed them without a fight.

    3) My paltry PM stack may actually be enough to get me through the rough times. My goal has never been to be the rich fat cat who buys up entire subdivisions after the fall; I just want to be in a better position than the average bear. By buying PMs when and as I can, free of any debt obligation, I think I've got good odds to pull through better than most people, who wouldn't recognize a silver/gold coin at present.

    They'll learn.

  17. Anonymous says:

    Ahhh...PMs = Precious Metals. You have to remember that right now a large group of people who are worried, but know little about economics, are watching and trying to set themselves up to be reasonably better off than people who did not pay attention. Well I am at least...

    I appreciate your trying to put things in terms people can understand Eric.

    Are there clear warning signs coming before hyperinflation that us less smart people can watch for in the market?


  18. The warning sign I am waiting for is for gold prices to go back over $1000. When this happens, I am going to start stocking up on foods and basic supplies.

  19. Chan says:

    Thank you for excelent article.
    I have 1 question. Imagine that today Nike has 1 shoes factory in US. Nex week, they move the factory to China. So US GDP decreases and trade deficit increases, right? However we know that almost all earning belong to US companies (Nike, retailer etc.), so maybe situation is not bad as you think?
    Pls explain this issuse for me.

  20. Mark says:

    An excellent post. One point of contention, which is your recent comment on the Euro as a reserve currency.

    I am not sure that the Euro will survive this mess. My guess is that Germany will start to twitch the cost of supporting the European basket cases. This is a question of political will, and my **guess** is that the will to retain the currency is about to diminish.

    As such, if I was to advise on the Euro as a safe haven, I would suggest that people buy Euro assets that will default to the DM in the event of a Euro break-up.

    However, a very interesting post overall.

  21. Williams says:

    An excellent effort Eric. I was trying to do something like this during the last two weeks or so and I am glad I found this article now since it is gonna save me another 2 weeks of effort. You have covered many areas that I had not yet understood well. :)

    As per my research, you missed one major point and one minor point.

    Major point is that the money that has been pumped directly into US Banks may one day be utilised to give loans driving up the currently frozen money velocity in US economy. This could be the real nightmare inflation scenario, since it is more subtle and develops surreptitiously unlike the outright printing of money by the Fed. Or perhaps, you considered this and rejected it on the grounds that US Banks will never use the money given by Fed because they know they are broke even with it remaining in their treasuries :))

    Minor point is that commercial real estate in US is going to collapse in a much bigger way than the housing market. It is far more leveraged and the crash will be far more severe. I won't be surprised if Comm. RE and major retailers join the queue at DC for bailout money.

  22. Anonymous says:

    I'm in Georgia and am noticing just recently a greater demand for raw country land. Is anyone else seeing this?

  23. Anonymous says:

    Good read, thanks and agree. This is the reality, it's the illusion that one can't predict.

  24. Gelert says:

    Gelert said:

    Fascinating read, the world financial system built like a ‘house of cards’, cloaked in ‘emperor’s clothes’, hooked and dependent on consumption, hoping that the next financial fix will offset declining bodily global assets, clogged banking arteries, inflating prices, unsustainable lifestyles, and the onset of withdrawal symptoms and likely collapse of a flawed system.

    As governments flounder trying to give public spending IVs, financial injections and short term energy jolts to keep protectionist nationalism and flagging globalism alive, I wonder how long before the great minds of this planet start to develop an alternative and better circulation system not based on negative competition, damaging asset exploitation and employ-to-consume-to employ dependence caught in a negative spiral.

    All discussions will become irrelevant when the most important trends of rising population (consumption needs) hits the decline and instability of natural resources (water, climate change, fossil fuels and supply shortages). Order will turn to chaos and the only winner will be the arms bazaar. I suspect the best markets of the future will be weapons – and there the great ol’ USA military machine sadly has a definite economic and technological advantage!

    It seems that the fall of Communism hailed a false belief in capitalism, equally flawed and corrupt as we continue to witness. I long for more realistic global system, but this will take the biggest player on the football park, the dollar greedy American quarterback, to rethink the global game, alter the points (value) system and change the economic, social and environmental goals.

  25. infinity010 says:

    Thank You! Eric
    It was absolutely and sadly a marvelous read. I have not explored any of your other masterpieces, yet.
    Now, do you have any solution as to what and how many countries we'll need to bomb to get out this mess?


  26. Anonymous says:

    great read!

  27. Anonymous says:

    From what I've learned, this is a deliberate action by the "world power brokers" to cause the American dollar to lose it's value, in order to usher in the new currency, the "Amero". Which will be an internationally recognized form of U.S. currency. These Amero's are already being minted at one of the U.S. Mint's in Denver, CO. 2010, will, start the beginning of the dissolution, of the borders of Canada and Mexico, in order to form The North American Union. We will all share the same currency. Everyone will be required to convert to a National I.D. You think the unemployment rate is high now? Wait until there are no more borders!


  28. Numonic says:

    I disagree that the demise of the Federal Reserve Note was designed by the govt. The FRN and all fiat money was the design of the govt. which already took us off of sound money(gold & silver). What we are witnessing is the end to their reign because fiat money is inherently doomed to fail. I believe the beneficiaries of fiat money knew that their was a time limit on fiat money and did it just to milk it for what it was worth even if it was only a few decades. If the Amero is going to be made of Gold and Silver then what would be the point of going off the gold standard in the first place? No, I believe this Amero talk is an attempt to save the Federal Reserve Note. The Amero talk is most likely a distraction to have people believe that the Fiat Federal Reserve Note is worthy of being saved. It's akin to the IMF announcing to everyone they're going to sell their gold before they even do so. Only an attempt to lower the price with talk, the Amero is an attempt to save the FRN by making it seem as if the Amero which is supposedly made with sound money(gold & silver) is bad and the FRN made of fiat is good, which the opposite is correct. If the Amero is made of gold and silver, that would be better for the world because there is a shortage of gold and silver and unlike paper, gold and silver is hard and damn near impossible to over supply. No one will accept the Amero if it is not made of gold and silver. The only thing I can see the Amero being is like what the Rentenmark in Germany was to it's previous note. Because of the large devaluation of the Federal Reserve Note, the Amero will probably be 1 Trillion Federal Reserve Notes and that's as far as it will get, it will suffer the same fate as the Federal Reserve Note if it is still only paper and not silver/gold.

    This whole fascination with avoiding sharing the same currency doesn't make sence. We already share the same currency (fiat money) and when gold and silver were used as money the world shared the same currency (gold and silver). It doesn't make a difference what marks or drawings are on the pieces of paper because it's all paper and the same goes for if it were gold/silver. Maybe i'm missing something but sharing the same money is not the problem, it's what we use as money that is the problem. With gold and silver returning as money as it inevitbly will due to fiat money's inherent doom, the world will be better.

    Gold: the protector and creator of jobs


    I understand the issue of protecting boarders but I believe with gold and silver's return to money, that will be taken care of too. Everything will be okay. We are heading for better times as fiat money is collapsing.

  29. Kaz M says:

    Assuming your comments are correct, what type of investment/speculation would be good in coming months?

  30. Anonymous says:

    I do not believe those running the Central Banks, and those running the large commercial banks are stupid. I think they are very smart and I think all of this is intentional.

    The goal is a World Currency. A world dollar. One currency. All of this is to get us there.

    Cause confusion, cause pain and cause the people to accept anything, just like we have accepted a "Stimulus Package" that NOBODY read and was passed in 4 days.

    That was not "stupid". That was brilliant and now they will got for the ultimate prize. The World Dollar to solve all our problems with a World Income Tax, etc.

    There is no other logical reason for all that is happening.

    And as for GOLD? It will become illegal to own just like ownership of any type of gun.

  31. The Legacy says:

    Hey Eric, that was a fantastic article. Thank you.

    Now, I have a few scenarios I wanted to ask you about:

    1. Financially, a US hyperinflationary dollar would destroy the world's economy. For Canada, what do you think would happen to its currency?

    2. Politically, would a US civilian uprising against the government and big business be plausible?

    3. Militarily, three things; 1) What would happen to the 11 supercarrier navy, and the armed forces in Iraq and Afghanistan? Keep in mind that in hyperinflation, buying logistic items (fuel, food, parts) would be extremely difficult, and wages would be destroyed. Would those outside of the US be stranded? 2) If the above #2 were to occur, could it be plausible that a dissident who works in a US ICBM installation fire said ICBMs at domestic government targets? 3) What would happen to countries that the US acts like a buffer for? For example, North/South Korea, China/Japan, China/Taiwan, Israel/Arab Nations.

    4. Internationally, if the US fails, what will happen to Canada, Mexico, and South America? In the case of Canada, it is a even larger problem, due to our massive mostly unguarded border, vast resources, and economic co-dependency?

    5. Globally, who will be the next superpower? Or will we end up with numerous power blocs with globalization a thing of the past, and guarded borders a la Pre-WWII (except perhaps the European Union) become a modern reality?

    Fascinating, yet scary times we live in.

    Also, I suggest sending this entire infopost of yours to President Obama. It's obvious that his advisers are idiots. I don't think Obama is (and I think he takes his ideas from his advisers), but politicians have been 'politically inbreeding' for years on infighting and repackaged old ideas. To be honest, especially since he's technologically savvy, he may listen to you. Or, if he ignores you, then you can probably agree with me that the Constitution needs to be burned, and rewritten with modern realities in combination of its original good ideas.

    The US founding fathers, and the great Presidents of the early 20th century would be turning in their graves.

  32. stibot says:

    Legacy: of course Obama is aware of all of that.

    There was also reason why he was "elected": black man with a charisma has to become a president since there are needs to calm uprising people in further days.

  33. Bill Jencks says:

    Hi Eric...Just would like to run something by you. Like you I was pretty convinced that inflation or hyperinflation might hit the US Economy soon. Until I read this article - which is an in depth assessment of Bernanke's current strategy against the current financial crisis. You can find it here :


    Apparently Bernanke has been appyling this new theory - called "How to Fight Deflation in a Liquidity Trap - Committing to Being Irresponsible". And if you read GB Eggertsson's Theory, Bernanke appears to be following the theoretical remedial measures to the letter - he has been printing money like crazy, tax-cuts, buying stocks as assets and purchasing currencies - all of which I know he has been doing, presumably to encourage inflation.

    Are we therefore going into deflation and are we in a liquidity trap then?

    Historically, a deflationary economic situation lasts far longer than an inflationary one and is therefore far worse.

  34. The Legacy says:

    Far worse? First of all, people's savings go up, IF they are fiscally responsible. Secondly, companies could cut back on wages to cut costs to combat it. And third of all, it should go like this:

    1. Hyperinflation
    2. Deflation
    3. Inflation

    ...in severity to the economy.

  35. Bill Jencks says:

    Legacy...Thanks for your thoughts. The way I see it - the crisis will go like this:

    1. Inflation(already happened)
    2. Deflation(happening now)
    3. Hyperinflation(yet to happen)

    All this can be checked from the M1, M2 & M3 money charts and CPI chart(at http://www.shadowstats.com).

    And I don't think people are intentionally saving. People are hoarding cash as a safe haven(savings interest rates have also trashed), investment has deserted stocks and run to bonds, and financial institutions are not lending because of the risk of debt default from borrowers who might well possess toxic securities.

    From the CPI charts, the rapid rise in inflation has turned and is now dangerously heading south towards zero.

    Bernanke is apparently trying to stimulate inflation again using Eggertson's new theory. Trouble is, so far, it hasn't worked. And this will be Bernanke's last play against the crisis I think.

    The one weak aspect in of Eggertson's Theory is that it is almost completely an economic solution. Within this solution, there is no addressing the psychological imapacts of this crisis - So how do you change the current habits and attitudes of distrust and hoarding within the population and financial institutions which is now causing this rapid deflation?

    The only school of economics that does address this psychological aspect is The Austrian School of Economics - also called The Psychological School. But at the moment Keynesian and Monetarist tenets are being rigidly followed.

    Not a hope, since there is no mathematical formula or solution that can accurately simulate human action or behaviour during a crisis like this.

  36. Anonymous says:

    Can you expand on this?

    "Allowing a crash in treasury market would make the financial system insolvent and cause runs on the bank."

    If there is no demand for treasuries, then the government has no ability to finance itself through debt? And how does this specifically make the financial system insolvent as opposed to the government selling the treasuries. I'm not doubting, just trying to understand.


  37. Martijn says:

    A crash would mean that there is no demand for new treasuries, but also that the price of existing ones would drastically decline. Since large (institutional) investors that make up a large part of the financial system usually hold quite some treasuries a crash in that market would mean massive writeoffs for those folks, and hence leave the system insolvent.

  38. Anonymous says:


    Thanks -- I hadn't thought of that and now makes perfect sense.

  39. Anonymous says:

    This is now front page Wall Street Journal


  40. itrade11 says:

    This is a really great article. As we all know,the USD is the most important market to watch in 2010 and all of the other markets are reacting to it. Thanks for the forex education and insight.

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