Devaluing the Dollar: a Warning

This has been on my mind quite heavily for some time, and I’ve come to a stark and simple conclusion: The days of the U.S. Dollar are growing increasingly shorter. And perhaps scarier than that is that most of us have no clue why that is such a bad thing.

Let me explain….

The U.S. Dollar is currently the world’s reserve currency, meaning that most nations hold Dollars in their foreign exchange reserves. These funds are used, in part, to offset liabilities, handle international trade, and, most particularly, to trade exchangeable commodities such as oil, gold, and even food. As you well know, most commodities are priced in Dollars, and this has a couple of effects, both good and bad. One of the principle effects is that the world economy largely hinges on the rise and fall of the Dollar.

For example, if oil is priced at $100 a barrel and rises to $110, you might be tempted to think that that only really bothers us. However, because oil is bought and sold only in Dollars, an importer such as China must first purchase Dollars and then purchase oil. Now assume that the Dollar suddenly loses value. Not only does China pay for the cost of increased oil, but it also eats the cost of the lost value of the Dollar. The same would be true if the Dollar suddenly rose in value. China would be on the hook to pay more money if it had to buy more Dollars, which is one reason why many countries keep such large reserves in the first place. It’s a hedge against the rise and fall of the Dollar. In essence, while the rise and the fall of the Dollar has an impact on us, it has greater impact on other countries.

For the last sixty years or so, the Dollar has been a bulwark of stability. It is because of this stability that the Dollar rose to replace the British Pound as the reserve currency, a position the Pound had held for, literally, centuries. And what happened from that shift? Well, England collapsed. In fact, around 1950, England was so close to outright default that only a bridge loan from the U.S. kept the country from collapsing fiscally. Around the same time, England was forced to devalue the Pound in order to meet their rapidly increasing debts. That single act caused the value of the Pound and the wealth of the entire country to collapse 25% virtually over night. It also solidly moved England from a position of being a super power to an also ran.

This is the danger that we are facing, and this is why what we are facing is so dangerous.

If you read and understanding nothing else from this entire post, understand this: the devaluation of the U.S. Dollar will lead to the end of the Dollar as the world’s reserve currency, and that simple act will immediately erase 25% of the value of this country. You thought the Great Recession was bad? The devaluation of the U.S. Dollar will plunge this nation into a financial crisis on par, if not significantly worse than, the Great Depression.

It is financial Armageddon.

So how is this going to happen? It’s already underway, and it’s caused by the incredible deficits and debts we hold as a nation. But let’s back up a bit: what is it that makes currency viable in the first place? Trust. The only thing that makes a bank accept a piece of paper from you as legal tender is trust. If the banks no longer trusted that the paper was worth anything, they wouldn’t accept it. In a similar way, the world has used Dollars as a means of banking (remember the Foreign Exchange Reserves we discussed earlier?). What happens when the world no longer believes that the Dollar is worth anything? Think about it.

Currently, China holds roughly $1.8 TT U.S. Dollars in foreign reserves. Japan holds $900 BB. What would happen if China and Japan no longer believed the U.S. could sustain and support those funds? Imagine how you would react if you had $1,000 invested in a company that was unable to pay you back. Would you keep your money there, or would you run? What will China and Japan do, then?

Now imagine that your $1,000 represents a significant portion of all the money in your city, say 10%. What happens if you suddenly decide that your $1,000 is no longer worth keeping in Dollars, and you decided to completely abandon that money in favor of, say, the Mexican Peso. So you go exchange your money. And because you control 10% of the city’s money, everyone notices. Many follow. What happens to the overall value of the Dollar in this case? Think of what that one change would do to the pricing of all products produced by that city, to trade in that city?

That’s exactly what’s going to happen.

Our debt loads are so great, that someday soon, someone in D.C. is going to realize that we have printers. And because all of our debt and the debt of most of the world is valued in Dollars, they are going to realize that we are the only country who can legally and literally print our way out of debt. And they are going to do so. They’ll do it knowing full well that they are going to devalue the Dollar, but they’ll do it because devaluing the Dollar is still better than defaulting on our debts. And the minute they do it, China, Japan, and all the other nations who hold our currency are going to abandon the Dollar. And the minute they abandon the Dollar, they’ll fled the market with Trillions of Dollars that no one wants. And what happens to the value of something that no one wants?

One day we’ll wake up realizing that our money is worthless. There will be no warning because any warning from the government would have the effect of destabilizing the Dollar before the government is ready to do so. You’ll just wake up to that disaster.

And many people still don’t understand why that is bad, so let’s move on from the devaluation….

Once the Dollar is devalued, the world will flee from it and replace it with, in my opinion, a basket of currencies pegged to several major economic powerhouses. The U.S. will likely be one of them, but only one of a basket of ten or more currencies. The IMF will be the backer of this currency, and the currency will probably be SDRs or a form of SDRs, a currency that already exists and is used by the IMF for international loans.

When the Dollar is no longer the reserve currency, the U.S. will no longer control its own destiny in regards to debt management. Currently we can pretty much print what we want, sell it, and find a buyer because everyone needs Dollars to conduct their Foreign Exchange. But when the Dollar is replaced by SDRs or another global currency, that demand will dry up instantly. In other words, we’ll go to sell our debt, and there won’t be any buyers. And when no one will by the debt, you don’t get to go in debt any more. At all. Kind of like when the bank turns you down for a loan.

The result will be one of two things: default or austerity. Both will have the immediate effect of trimming the national budget by several trillion Dollars. Social Security will disappear because the debt that is currently used to fund it will disappear. Our welfare programs, national defense budgets, health  care budgets, and pretty much everything else will disappear over night because we won’t be able to finance them. Our debt situation is so dire that within the next ten years, our forecasted tax receipts will not be enough to even sustain our current debt load. The interest on our debt will be greater than the tax receipts we pull in. And that doesn’t even count our actual obligations to Social Security, Medicare, and so on.

Sigh…. I could go on.

The evidence is there in plain sight, but most people don’t care to look or understand. Fortunately not all is hopeless. The truth is that we could save ourselves by voluntarily going into austerity now. But we won’t. The courage and power that made this nation great is lacking among us now in sufficient numbers to make the change. Too many of us are more worried about our own hand outs. We’re all willing to see other people give things up, but touch our benefits!?!? No you don’t!

And it’ll ruin us in the end.

My timeline? I think we’ve got two to three years. Five max. Can we be saved? Yes, but it takes serious leadership, sacrifice, and a willingness to do with out. It takes substantially more reduction and fiscal control than either the President or any other member of government has proposed to date.

Do I think we will pull up in time?

No.

I do not.

I think we are near universally blind in our optimism of it never happening to us. I think we are too trusting of a government who will not have a choice when that day comes. I think we are entirely too trusting in the arm of flesh and especially in the “almighty Dollar.”

Did you know that in post-WWI Europe, people used their money to wallpaper their houses because it was cheaper to use money than it was to buy wallpaper? That it took a wheelbarrow of bills to buy a loaf of bread? That businesses actually refused payment in the national currency because they couldn’t spend it fast enough before inflation would literally wipe it out?

You’d be surprised that I’m not a pessimist on the Dollar or this nation. It’s true; I’m a realist. And the reality is starring us blankly in the face.

So what options do you have? Many financial advisers, which I’m not one, would tell you to run to foreign stocks, to buy gold, silver, and other commodities. I look at that, and I see those people fleeing, as the scriptures say, from place to place. “Lo here, Lo there.” I see this type of person as someone hopelessly looking for financial truth, and I have to ask, “Why is money so important to you?”

Money matters only in as much as it makes possible the true joys of life and sustains us, but most of the true joys are free and most of us could be sustained on much less. Don’t waste your precious years chasing after lucre that, in the blink of an eye, collapses or fades. There’s so much more that is better, more valuable, more tangible, and more lasting.

In all that is coming, I come back consistently to the hope and preparation talked about in the scriptures. The prophets, both ancient and modern, taught us exactly how to be prepared for whatever the world would throw our way. If I were you, I would spend my time building and preparing as they’ve instructed us.

As President Woodruff once said in reference to the Second Coming and all its associated calamities, “I would live as if it were to be tomorrow–but I am still planting cherry trees!” The point is that many cherry trees take upwards of five to seven years to bear fruit.

If we would be happy then, we would prepare now. And while I still desperately hope that this nation pulls up from our coming fiscal crisis, I simply cannot believe that we will.

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One Response to Devaluing the Dollar: a Warning

  1. Pingback: Our Current Situation « the prodigal

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