By Patrick A Heller – Liberty Outlook Newsletter
People have a psychological aversion to thinking about matters outside their experience, especially if the subject would mean something negative for the future.I’m like most people, where I have a tendency to talk around the fringes of a scary scenario, but don’t really want to dwell on it or face up to the implications of the bad result becoming reality.
For years, I have talked about how the value of gold and silver were destined to rise as the value of the US dollar has declined.I’ve even mentioned a few times that is was possible that the US dollar may collapse someday. But, what the failure of the US dollar would mean to my life, to my family and friends, and to everyone else in this country, was so frightening that I didn’t even want to think about it in depth.
As US government actions have continued to push down the value of the dollar over the past few years, it is time to face up to the reality that the US dollar is failing and will probably collapse.
There are just too many problems threatening the survival of the US dollar to avoid the subject any longer. Let’s review several of the greatest risks.
Problems That Could Lead To Collapse Of The Dollar
1) In years past it was typical that the Federal Reserve would purchase maybe 10% of new US Treasury debt issues.These relatively modest purchases enabled the Fed to structure some of its foreign and domestic transactions by using “off the shelf” reserves.
With the sharp decline in domestic and foreign buyers of US Treasury debt, coupled with the huge increase of debt issues to finance current mind-boggling federal deficits, the Federal Reserve is now forced to purchase about 70% of all new US Treasury debt issues! In the process, the US government has become the largest creditor of the US government.
So long as the US government is the major creditor of itself, it has significant influence in depressing the interest rate that the US Treasury pays on its debt. However the US government cannot continue this level of creating paper assets indefinitely. At some point, the US government will run out of the ability to suppress interest rates on US Treasury debt.
As the shell game comes to an end, the US government will have to pay far higher rates in order to entice other parties into holding such debt. As interest rates soar, the value of the dollar will plummet.
2) The huge federal government deficits started long before the Obama administration. President Obama has simply magnified the deficits to previously inconceivable levels. The rapid growth in the federal government debt over the past three years has scared former major purchasers of US Treasury debt into cutting back or eliminating future purchases.
After the US Government, China holds the second largest amount of US government debt, around $1.15 trillion. For the past few years, it appears that China has tried to offload the risk by using this debt to pay for purchases of commodities and foreign companies.
Early this month, the Chinese government announced (with almost no media coverage in the US) that it would seek, by the end of 2011, to make it possible for all imports and exports to be settled in Chinese yuan. China has already made significant strides in this plan with bilateral treaties with several of its major trading partners, like most Far Eastern nations, Russia, and Brazil.
As the US dollar continues to be displaced as a unit for international commerce, more dollars will be returned to the US to be exchanged for goods or other assets, further impoverishing the US government.
Japan holds the third largest pile of US Treasury debt, around $885 billion as of the end of 2010. The horrific triple tragedy of the major earthquake, tsunami, and nuclear power plant problems has inflicted hundreds of billions of dollars of losses on that country. To recover, the Japanese government will need to liquidate some of its assets, with US Treasury debt being the prime candidate.
Almost certainly, the Japanese will reduce or eliminate new purchases, and will probably have to put some of its current US government debt holdings up for sale in the secondary market.
Middle Eastern and other Arab nations which, along with China and Japan, hold about 44% of all outstanding US Treasury debt, are facing major domestic problems. To try to forestall further civil unrest, some countries are spending billions of dollars.
To come up with the funds for these programs, you can be sure that some US Treasury debt will be resold and future purchases will decline. Domestically, a major buyer of Treasury debt is unloading its position. PIMCO, the world’s largest bond investment firm, has completely sold US government debt held by two of its funds.
3) With the Federal Funds rate near zero, the US government has boxed itself in. By artificially suppressing interest rates, the US government is preventing the US economy from clearing out malinvestments and moving toward a solid economic recovery. Instead, by giving the erroneous impression that the economy is in better shape than it really is, investors continue using the excess liquidity created by the low interest rates to make additional poor investments.
The US stock markets are only performing as well as they are because people don’t know where else to place this excess liquidity. At the end of 2001, it took more than 35 ounces of gold to “buy” the Dow Jones Industrial Average. Today it would cost less than 9 ounces to do so.
4) Last fall, the Federal Open Market Committee announced that they considered the optimum level of consumer price increases to be around 1-1/2 to 2% per year. According to the US Bureau of Labor Statistics (BLS), consumer prices at the time were barely increasing by 1% annually. Therefore, the Fed announced that it was considering actions to further increase consumer prices.
The BLS statistics were bogus then, and are still unreliable today when it just reported that annual consumer price increases are now greater than 2%. If accurate, the BLS statistics show that consumer prices increases rose by 92% in just the past few months (from 1.1% to 2.11%)!
John Williams, at www.shadowstats.com, used the US government’s former methodology for measuring the increases in consumer prices and calculated that they are now about 10% higher than a year ago. These increases in consumer prices are paralleling the increases in wholesale commodities.
If price increases are returning to levels at or above previous record heights, that is one more reason to expect a major drop in the value of the US dollar.
5) Record US Federal budget deficits, both as measured in absolute size and as a percentage of Gross Domestic Product (GDP), are rising rapidly. This is the exact process by which previous currencies have become worthless though hyperinflation.
A lot of people might think that just because the country mired in this mess is the United States, hyperinflation will never occur here. Sorry, but the cumulative effects of bad governance can ruin any
6) The US government’s expansion of foreign military actions is a huge drain on the national economy. President Obama sought office with promises of getting the US out of two wars. We are now in three war zones. Military expenditures are now on the order of $1 trillion per year, which exerts enormous pressure for hyperinflation.
7) President Obama has dropped all pretense of fiscal responsibility. He recently signed an executive order to exclude interest payments from any calculation of balancing the budget. With expanding US government debt, total interest costs are soaring.
Today, interest costs equal about 9% of all federal tax collections. Within five years, expect interest costs to be 30-40% of tax collections. No government thus far has seen interest costs reach 40% of tax collections without hyperinflation and a failure of the currency.
8) Several individuals and organizations are working to develop a new standard world reserve currency to displace the role now fulfilled by the US dollar. From the president of the World Bank, the International Monetary Fund, and the G-20 Group of Nations (which will soon be meeting again on this topic), there is growing support for something besides the US dollar to be the new reserve currency.
9) In times of international crisis, the value of the US dollar normally rises as investors flee to safe haven assets. After the Japanese catastrophe of March 11, however, the value of the dollar fell!
On March 17, the G-7 Groups of Nations announced that they would have a coordinated effort to push down the value of the yen on March 18, which should have the effect of pushing up the values of other major currencies.
At the open of the Japanese markets on March 18, the dollar temporarily climbed in value by 2%. Then it fell steadily for the rest of the day to settle at its lowest value in 15 months. If anything demonstrates the current weakness of the dollar, this does.
While all of the foregoing points tend to be related, it would not be necessary for all of them to get worse for the dollar to collapse. There are already a number of experts who judge that the United States has already passed “the point of no return.” This group includes David Walker, the former Comptroller General of the United States. It also appears to be the position of at least on regional president of a Federal Reserve Bank.
Prepare Now For The Collapse Of The US Dollar
As much as I dread thinking about it, now is the time to take steps to prepare. Think about the civil unrest seen in Greece, Spain, Ireland, Portugal, and countries in the Middle East and North Africa. Look at the huge demonstrations that have occurred at many state capitols in the US this year. Then multiply that by at least ten times and imagine it happening in your own hometown.
If (when?) the dollar fails, you will need an alternate form of engaging in trade. My guess is that US 90% Silver Coin is the most likely replacement for widespread commerce. Other forms of bullion silver coins and bars as well as bullion gold coins and bars are also likely to play a role.
The most valuable forms of gold and silver to own would be those you have in your immediate possession. If you store them in a safe deposit box, you might want to try to find a bank close enough that you could walk to it.
But, simply owning gold or silver will not be enough. Imagine the erratic disruption of normal production and distribution channels. What would you do if you could not easily get food, water, electricity, gasoline, internet, or telephone service? Then, prepare solutions to manage all of these problems.
The best steps would be those that will be beneficial even if the US dollar survives. For instance, if you have the space, now would be a good time to stock up on nonperishable foods–and beat future price increases in the process. If you have health issues that you have been dragging your feet to manage, you might want to take care of them sooner rather than later. You also might want to brush up on or learn some skills for doing more things by yourself rather than buying them in a store, over the phone, or on the internet.
Most you can take to prepare yourself for social upheavals are beyond my expertise. I’m sure you can find useful information on the internet and elsewhere.