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The bell tolls
for the US Dollar because it is doomed. Like the Dodo bird, the US Dollar
will, within the foreseeable future, disappear into the history books in the
chapter on "Extinct Species".
This will be an
event of profound importance that will impact every being on the planet. It
will impact all corporations and businesses around the world. It is not too
far fetched to say that it will be the most important investment variable in the
years ahead. It will transcend fundamental and technical analysis. Such
analyses require a firm measuring device, but that measuring device will be
destroyed.
It is vital for
our mental, physical and financial health that we all understand what is happening
and why. I am only the messenger, so please be kind to me. I just call the
shots as I see them, so let me explain my reasons in more detail.
Let's start with
the following recent posting from Richard Russell's Dow Theory Letters web
site:
August 23, 2005 -- The American
Institute for Economic Research out of Great Barrington, Mass. 01230,
publishes an index for the dollar along with the dollar's purchasing power.
Every time I look at this index it makes me angry. Why? Here's why. When I
left the Army Air Force in 1945 the Institute's dollar index stood at 100. In other words, a
dollar bought a dollar's worth of goods.
By 1960 the
index was down to the point where the 1945 dollars that I'd been saving
bought only 61.1 cents worth of goods. The erosion continued. By the time
that Alan Greenspan took over the Fed in 1983, the index bought only 18.0
cents worth of goods. By 2003 the index bought only 9.9 cents worth of goods.
I don't have the latest figure for 2005, but let me put it this way -- the
dollar that the Army Air Force paid me in 1945 will now, here in 2005, buy me less than a dime's worth of goods.
So thanks,
Federal Reserve. Thanks Alan. Since my youth when I was 22, I've seen the
buying power of the dollar collapse over 90 percent. You see, the damn irony
of the thing is that we hear our government talk
about only 2 percent inflation today -- but they don't dare talk about what's
happened to the dollar over five, ten, twenty, forty years. They don't dare
even whisper it because it would sound God-awful. It would tell the American
people that not only are they being taxed by their government, but they are
being viciously taxed again by Fed-created inflation. - Richard Russell, Dow
Theory Letters.
Richard Russell
is indignant about the destruction of the purchasing power of the US Dollar, but why is there not a general outcry against what is
happening?
There appear to
be two main reasons, these being:
- The decline in purchasing power of the US$ has
been fairly slow and people have been able to adjust to it;
- There has been deliberate deception, distortion
and dis-information of the items that would
alert people to problems in this area.
The trend toward
loss of purchasing power of the US Dollar over the past 30 odd years has been
very gradual and people have adjusted to the annual changes. People seem to
have the ability to absorb and adjust to small, gradual changes in their
lives but react poorly to dramatic changes.
We all have the
problem of earning our daily bread, of simply managing our day to day lives. Earning
a dollar has been more important than worrying about the fact that the dollar
was gradually losing purchasing power. We simply adjusted to it. Our salaries
and wages were increased or we found ways of increasing our capital by taking
advantage of the declining purchasing power of the currency.
There is an
experiment that I cannot vouch for (I have never tried it) that involves
dropping a frog into a pot of boiling water. The frog apparently will leap
out of the boiling water. If the frog is dropped into a pot of cold water it
will happily stay there while the water is heated very gradually until the
frog is boiled to death. The frog simply adjusts to the gradual temperature
change until it is comatose.
I have been able
to conduct a different experiment which proves that we humans are no
different. We react violently to dramatic change but we do have the ability
to adjust to gradual change. I tried the following experiment on a German
autobahn where there was no speed limit. I was driving at a safe speed of
about 70 mph
when I suddenly speeded up to 100mph. The reaction from my wife was
instantaneous: "Slow down, you're going too fast!" I dropped the
speed back to 70mph and after a while started to very gradually increase the
speed until I was doing 110mph - this time without getting a reaction. My
wife had adjusted to the gradual speed increases.
The items that
are included under the "deliberate deception, distortion and dis-information" reason include the official price
indices, the gold price and the exchange value of the dollar. These
manipulations have all been dealt with extensively elsewhere and I don't
propose to spend much time on this issue. The disinformation will continue
for a while but once we enter the period of rapid change, the deception will
be obvious to everyone.
So we have
adjusted to the gradual loss of purchasing power of the US Dollar over the
last 30 years, but why should it not take another
30 years to lose a further 90% of its current purchasing power? Why
should things not continue as before?
The answer is
that the problems that have been building up in the US economy over the past many
decades have been brought to the point where they are approaching crisis
level. The expectation is that the creation of new US dollars to meet these
crises will accelerate very rapidly. We will have entered the period of rapid
change, when the depreciation in the purchasing power of the US$
will become exponential, and the changes will be so rapid that people WILL react
to this.
The problems
facing the US
economy all seem to start with the letter "D". They are:
DEBT,
DEFICITS (both Balance of Payments deficit and Federal Budget deficit), the
DOLLAR itself,
DEVALUATIONS (competitive depreciation of foreign currencies to protect their
export industries),
DEMOGRAPHICS (Baby Boomers reaching retirement age, under funding of pension
funds, social security etc),
DERIVATIVES (possibly the largest problem with the biggest numbers,
DEFLATION (which will cause the budget deficit to mushroom) and
DWELLINGS (as in Real Estate boom).
These problems
have been dealt with exhaustively elsewhere, so I will not comment further. Suffice
to say that the financial stresses that they will give rise to will be
"solved" by "throwing money at the problems" by resorting
to the electronic money creation process. The size of these problems
guarantees that the creation of new US$ will rapidly accelerate, causing the
decline in purchasing power to become exponential.
It is not a
question of IF the dollar is doomed
but rather WHEN sufficient people
understand what is happening and panic out of their US Dollars. In my
opinion, this should be within 10 years and possibly within 5 years, maybe
much sooner.
The following is
from a recent article by Robert Kirby:
Murray Rothbard, the brilliant student of Mises,
explained the genesis of the boom. "Why do booms, historically, continue
for several years? The answer is that as the boom begins to peter out from an
injection of credit expansion, the banks inject a further dose. In short, the
only way to avert the onset of the depression is to continue inflating money
and credit. For only continual doses of new money on the credit market will
keep the boom going and the new stages profitable. Furthermore, only ever
increasing doses can step up the boom, can lower interest rates further, and
expand the production structure, for as the prices rise, more and more money
will be needed to perform the same amount of work. Once the credit expansion
stops, the market ratios are re-established, and the seemingly glorious new
investments turn out to be malinvestments, built on
a foundation of sand.
"It is
clear that prolonging the boom by ever larger doses of credit expansion will
have only one result: to make the inevitably ensuing depression longer and
more gruelling."
Mises continues, "It is true, the banks (or the
governments) are in a position to prolong the boom for some time by injecting
progressively increasing quantities of bank notes and deposits into the
market. But the artificially created prosperity cannot last forever. Sooner
or later it must come to an end. There are only two alternatives: 1. The
banks do not stop and go on expanding credit at a progressively accelerated
pace. But the spell of inflation breaks once the public has the conviction
that the banks and the authorities are resolved not to stop. If no limit of the inflation and, consequently, of the
general rise of prices can be foreseen, a general flight into real values
starts. Everybody becomes aware of the fact that to hold cash and deposit
balances with the banks involves loss, and that he does better to buy and
store goods. Everybody is anxious to get rid of money and to exchange it for
some other commodities, no matter how much he must pay for them. Prices
are running away, and the purchasing power of the monetary unit drops to
zero. The national currency system cracks up. 2. As a rule, the banks do not
let things go so far. They stop sooner by restricting credit. Then the day of
reckoning dawns. The illusions disappear, people
begin again to see reality as it is. The blunders committed in the boom
become visible."
The fact is that
IT IS TOO LATE FOR OPTION 2.
We have been
told in no uncertain terms by Federal Reserve Governors that there will be no
deflation. Whatever funds are needed to avoid deflation will be made
available. The electronic printing press will be resorted to.
That
simply means that the US Dollar is doomed to extinction.
The bell is
tolling for the US Dollar but the bell is also
tolling for us. We need to make
some important investment decisions in the months and years ahead.
Gold is the only
commodity that has always been produced for ACCUMULATION and not for
CONSUMPTION. Silver used to be in the same category, but has recently become
more of an industrial metal.
The reason that
gold has been accumulated over the millennia is because IT RETAINS ITS PURCHASING POWER OVER TIME. It is
a haven where wealth can be stored during times when existing Government
money is being rapidly debased and losing its purchasing power - exactly the
situation we are facing over the next few years.
Currently the
price of gold is at bargain basement levels. Not only has the price been
manipulated downwards, but investors have to re-learn the benefits of holding
gold. This they will do rapidly as the events relating to the US Dollar
become obvious to everyone. We need to acquire some additional gold holdings
while the bargain prices remain. I suspect that, like all bargains, this
situation will not last much longer.
Alf Field
Disclosure and Disclaimer
Statement: The author is not a disinterested party in that he has personal investments
gold and silver bullion, gold and silver mining shares as well as in base
metal and uranium mining companies. The author’s objective in writing
this article is to interest potential investors in this subject to the point
where they are encouraged to conduct their own further diligent research.
Neither the information nor the opinions expressed should be construed as a
solicitation to buy or sell any stock, currency or commodity. Investors are
recommended to obtain the advice of a qualified investment advisor before
entering into any transactions. The author has neither been paid nor received
any other inducement to write this article
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