2005 may witness the beginning of the end of the U.S. dollar as the world’s reserve
currency. That could mean skyrocketing prices, major business failures, and
recession. However, by acting now, you can protect your assets and make
large profits from the collapse of the dollar.
Is a dollar crash now inevitable? It looks more and more likely.
During the past three years, the dollar has fallen over 25% against major
currencies like the euro and Swiss franc.
If that isn't enough cause for concern, in just the last few months
America's major creditors – Chinese and Japanese central banks, which together hold $906 billion of the $1.1
trillion in treasury notes held outside the U.S. – have made it clear they will not continue their support
of the dollar.
In the future they'll keep assets in other currencies such as the euro or in
gold. That could strongly depress the value of the dollar. OPEC has also been slowly moving out of the dollar and
into euros and gold.
For many reasons, the dollar will almost certainly fall rapidly during the
next few years and could even crash suddenly – with little or no warning – at any time.
That will have severe consequences for stocks, real estate, pensions, gold,
and even U.S. foreign policy, which runs on dollars. Thousands of companies and millions of families could even
be financially wiped out.
The recession that followed the dot.com and telecom crash and 9/11, was
just a warm-up. The crash following a dollar collapse, would be much more severe, and could cause stock and real
estate prices to fall by 50% to 80%.
At the same time, everything we import – from oil to computers to
fruit – would go up in price two- to five-fold. That means the 32" TV you can now buy for $500, would cost
$1,000 to $2,500; and a gallon of gasoline would cost $5 to $10 a gallon.
In this article, you'll learn how we got in the situation where a dollar crash
(fast or slow) now seems inevitable. I'll also show you what that crash will mean for your investments, savings, and
real estate. Most important: I'll also show you how to protect yourself from a dollar crash and even turn it into a
personal financial windfall.
The U.S. Credit Bubble
The falling dollar is not a recent phenomenon. Between August 15, 1971
and December 31, 2004, the dollar fell by a staggering 80% against major hard currencies like the Swiss franc.
What happened on August 15, 1971? That’s the date when President
Richard Nixon closed the so-called "gold window," removing the last shred of gold backing for the U.S. dollar. Up
until then, the dollar had been at least partially backed by gold, restricting the ability of our central bank, the
Federal Reserve, to inflate our money supply. But with gold backing completely removed, all internal limits were
gone, and the dollar decline began.
The bitter truth is that without gold or some other real commodity backing,
there is nothing to stop any paper currency from becoming worthless. Indeed that has been the ultimate fate of
every unbacked paper currency in history, including the first U.S. currency, the continental, and the
renowned Confederate dollar. Governments are always tempted to create lots of currency, since it’s easier and more
popular than raising taxes. Only gold or silver backing can restraint them.
Removing backing from currency facilitates virtually limitless credit
expansion, initially creating the illusion of prosperity. Indeed, in the 34 years since Nixon closed the gold window,
the U.S. has been on an unprecedented credit and spending binge, and during the past few years, the Federal
Reserve has been issuing new currency at the rate of $1.5 trillion a year (mostly electronically), or about $10,000 a
year for every working American.
This enormous credit expansion has enabled people to buy bigger homes,
cars and TVs, and enjoy lavish vacations and lifestyles. But it has also created unprecedented – and
unsustainable – debt. The only reason we have gotten away with credit expansion for this long without a
crash is because the U.S. dollar has been the world's reserve currency since the end of World War II. That has
allowed the U.S. to export our inflation overseas, and get cheap goods in return.
So how low could the dollar go?
An 80% Drop in the Dollar?
Peter Schiff – CEO and chief global strategist of Euro Pacific
Capital – summarizes the present dollar problem well. In his recent Forbes "Doom of the
Dollar" (1-10-05) he writes:
"The basic problem is that Americans don't produce enough and don't
save enough."
"We are using dollars that we print to exchange for goods that we don't
produce. We have to borrow from abroad as there are no domestic sources of savings, so the value of those dollars
will continue to fall."
"The dollar will fall a lot lower than it already has – dropping by
perhaps 50% against the Japanese and Chinese currencies… Americans will have to consume a lot less and save a
lot more. Spending on cars, clothing and electronics will all drop dramatically."
Other analysts believe the dollar will fall even further, perhaps as much as
80% or 90%.
If this dollar drop takes place over many years, it may be manageable. The
problem is that any one of a number of events – such as foreigners dumping the dollar, another major
terrorist attack on the U.S., or a U.S. or world recession – could cause the collapse to occur rapidly, even in
a matter of days.
That would result in a stock market crash, skyrocketing oil (and other
commodity) prices, massive recession, widespread bankruptcies, massive layoffs, bank failures, and a real estate
implosion, rendering millions of Americans virtually penniless overnight.
In fact, the crash will likely be global, for the simple reason that we are
now experiencing the largest-ever, global financial bubble.
The Global Financial Bubble
For hundreds of years, much of the world had a single currency: gold.
Gold was used as currency and to settle debts between nations. Paper currencies originated as warehouse
certificates for gold and its cousin, silver.
However, that all changed in 1933, when President Roosevelt ordered all
U.S. citizens to turn in their gold and silver to the government, under threat of a $100,000 fine and ten years in
prison. In effect, Roosevelt seized all of the gold in America (except for rare coins, which were exempted), and for
the next 41 years it was a crime for private citizens to own gold.
Despite this outrageous confiscation, nations continued to settle their debts
with gold. That also changed, following World War II, when a new system, known as the Bretton Woods System
(named after the town where the conference was held) was created.
Under Bretton Woods, the U.S. dollar was designated as the world's
reserve currency, replacing gold. A system of fixed exchange rates between currencies was created. Only the dollar
was convertible to gold, and only by foreign central banks. Other currencies could be converted to dollars at fixed
rates. Because foreign currencies fluctuated in value against each other, in practice exchange rates had to be
continually adjusted.
Initially, European countries experienced a serious "dollar shortage," and
found it difficult to build up dollar reserves. Economist Henry Hazlitt argued that the problem was that European
currencies were initially overvalued and the dollar undervalued. But rather than adjust the exchange rates, the U.S.
instead flooded Europe with dollars (at U.S. taxpayer expense) in the form of foreign aid and loans.
So the Bretton Woods system ended up rewarding countries that
depreciated their currencies. The result was global inflation on a massive scale. At one point, a 4 x 8 plot in
downtown Tokyo – the size of a dining room table – cost US$1 million.
After a flood tide of inevitable devaluations, the situation was reversed,
and dollars became overvalued. This enabled America to import more than it exported, paying for ever-
growing imports with treasury securities created out of nothing.
As Richard Duncan explains in his recent book, The Dollar Crisis:
Causes, Consequences, Cure, 'Under this arrangement, Americans are now freed from the ponderous
burden of saving and the onerous requirement of first producing in order to later consume. Their consumption is
offset by a growing indebtedness of the private sector and the Fed to foreigners. This state of affairs is
unsustainable, and will come to an end with a deep fall in the exchange rate of the dollar relative to other
currencies.'
"It is only a matter of time before the United States will not be
creditworthy."
In the meantime, we have the bizarre situation in which it has been in the
short-term interest of the U.S. government to keep the dollar weak, so that Americans can consume ever more
without saving, thanks to foreigners buying our debt. At the same time, it has been in the interest of China, Japan
and other governments to buy our debt to keep their own currency weak and their products cheap, enabling
Americans to buy lots of them creating booming economies. But it’s all an illusion.
As Duncan explains, "In 2001, China’s surplus with the US was equal to
7% of China's GDP. China's GDP growth that year was 8%. Without its trade surplus with the US, China's
economy would have grown at a much slower pace – if at all." In 2003, the US account deficit "was the equivalent
of almost 2% of global GDP. To put that into perspective, global GDP grew by less than 2% last year. So were it
not for the US deficit, it is quite likely that the global economy would have actually contracted."
What Could Pop The Global Credit Bubble?
Debt bubbles ultimately must end because they eventually result in goods
(like dot.com stocks or US real estate) becoming so overpriced that no one can afford them.
As Duncan explains, during the height of Japan's real estate bubble, the
gardens of the Imperial Palace in Tokyo alone were valued at more than the entire state of California!
In recent years, the enormous inflation of the dollar has been manifested at
home by a huge stock market bubble, which wiped out over $4 trillion in stockholder equity between 2000 and
2003, when it collapsed. Now we are seeing that inflation manifested in huge increases in real estate prices. But
when the dollar crashes, it will take overpriced real estate along with it as well as many stocks.
So what could spark a dollar crash, as opposed to a slow decline? There
are many possible triggers, including:
Dollar dumping. The dollar falls so fast, that other countries no longer continue to buy our debt.
Precisely because China and Japan hold such huge dollar reserves, a drop in the dollar means they are losing
huge amounts of money. Thus a 10% dollar drop on the $905 billion in dollars they’re holding means they are
losing over $90 billion dollars! At any time, some surprising event – such as a larger-than expected dollar
decline, surge in oil prices, or another U.S. terrorist attack – could spark panic selling of dollars, crashing U.S.
financial markets.
Deflation. Dollar denominated assets (like real estate) are going up so fast, it eventually becomes
obvious to everyone that they are overvalued. People then start to dump them and prices drop. Deflation could
also be triggered by a chain of bank failures, which would also cause a credit implosion.
Hyperinflation. To pay government bills, dollars are printed so fast, price increases get out of control,
and the dollar becomes worthless.
Higher interest rates. Higher interest rates raise the cost of doing business, triggering a cascade of
cutbacks, layoffs, falling salaries and decreased demand for foreign goods.
Default. As debt keeps mounting, interest charges become more and more burdensome. At some
point, the interest on debt will exceed the ability of the U.S. to pay. Uncle Sam then defaults on debt payment.
(Interest on the national debt already consumes 20% of the federal budget, and will consume 50% in 20 years,
if present trends continue.) Banks, pension funds, insurance companies and many individuals get financially
wiped out. (This is precisely what happened when Argentina defaulted on their bonds in December 2001.)
Further, when the recession hits, it will not just be confined to the U.S. but
will be worldwide. As the dollar collapses, imports from China, Japan, Europe and much of the world – which
provide much of what we consume – will become prohibitively expensive. So these economies will also implode.
How long will the recession last? Duncan states, "Economic cycles generally exhibit a considerable
degree of symmetry… [The] recession is likely to be as extreme and prolonged as the economic boom that
preceded it."
That means the global recession could last as long as 14 years, and it could
begin this year.
Eleven Ways to Protect Yourself
And Profit From A Dollar Crash
#1 Get out of debt. The first step to protecting yourself is to get out of debt. Interest rates could soar,
making it impossible for you to pay your credit card bills, and your car payments, and your mortgage. At the same
time, salaries could plummet.
Today, credit card companies can legally double your interest charges with
just 30 days notice. So liquidate your credit card debt first. You may also find yourself in big trouble if you have an
adjustable-rate mortgage.
#2 Reduce your expenses. Ask yourself this question: Could you afford to continue to live in your
present home if your mortgage rate went up 30% or your salary fell 30%? If the answer is no, now would be a good
time to sell and move to a less-expensive home, or even to rent for a few years, until housing prices
come down.
Also avoid other expensive purchases, such as a luxury vacations,
expensive electronics, or high-priced furniture.
#3 Dump your gas guzzler. Even without a dollar crash, gasoline will likely be $4 - $5 a gallon within
three or four years. So unless you're a multimillionaire, don’t drive very much, or really do use that SUV for
backwoods driving, dump it now and get something easier on gas. You might even consider a good used car, such
as a Toyota or Honda.
#4 Make sure your bank, S&L and insurance company are safe. Many banks will be extremely
vulnerable if interest rates soar, particularly those with large real estate portfolios. But some banks are much safer
than others.
The best rating service I know of is Weiss Ratings in Florida. They
provide ratings of banks, S&Ls, HMOs, stocks, brokerage firms, insurance companies, and mutual funds. Their
stock ratings are much more conservative – and much more accurate – than Moody’s or Standard &
Poors. Here’s complete contact information:
Weiss Ratings
15430 Endeavour Drive
Jupiter, FL 33478
1-800-289-9222, Fax 561-625-6685
www.weissratings.com
#5 Make yourself indispensable at work. If the dollar crashes, thousands of businesses will fail and
most others will lay off workers. One of the only ways to keep your job in that climate is to make yourself
indispensable at work by taking on new responsibilities, learning new skills, and making sure you get along well
with co-workers.
#6 Start a recession-proof business. Another good way to protect yourself from a dollar crash, is to
start a recession proof business, such as an auto repair shop (new car sales will plummet in a
dollar crash), liquor store (sales go up in a recession), or home repair business.
#7 Invest in strong foreign currencies. Strong foreign currencies, like the Swiss franc, the
Australian dollar, and the New Zealand dollar will likely go up as much as the dollar goes down.
However, avoid Japanese and Chinese currencies. As major U.S. trading
partners, their economies will be hard-hit in a dollar crash.
#8 Buy precious metals and mining stocks. If the dollar crashes, gold will retain its value. In fact, if
the dollar goes down by 80%, gold will go up by at least this much, and probably much more, as nervous investors
bail out of U.S. stocks and government securities.
Even better, as we saw in 2002-2003, a 50% rise in gold bullion prices can
mean a 500% or 1,000% rise in select gold mining stocks.
#9 Invest in oil and commodities. Continuing large increases in oil and commodity prices are one of
the most predictable consequences of a falling dollar. That also applies to foreign imports.
By definition, when the dollar goes down, the price of just about
everything goes up, particularly imports.
We continue to recommend buying the following natural-resource and
"commodity" stocks and mutual funds – previously recommended here – as good buys. Prices are as
of 2-25-05:
Alliance Resource Partners (ARLP, Nasdaq). Price 75.01. Stop-sell 68.
Dominion Res. BW Trust (DOM, NYSE). Price 40.35. Stop-sell 35.
Exxon Mobil Corp (XOM, NYSE). Price 63.26. Stop-sell 56.
Fidelity Select Energy (FSESX, Mutual Fund). Price 49.74. Stop-sell 43.
Mesabi Trust (MSB, NYSE). Price 18.65. Stop-sell 15.
Occidental Petroleum Corp. (OXY, NYSE). Price 71.36. Stop-sell 64.
Teck Cominico Class A (T.Tek.A, Toronto). Price 46.39. Stop-sell 40.
Teck Cominico Class B (T.Tek.B, Toronto). Price 45.76. Stop-sell 40.
#10 Get some assets outside the U.S. If the dollar crashes, it's likely that the government will place
further restrictions on your legally transferring assets out of the U.S. Under IRS regulations, you are required to
disclose any checking or savings accounts outside the U.S. with $10,000 or more in them, either individually or
collectively.
Fortunately, there are still several ways of doing this without triggering
IRS reporting requirements, including:
Perth Mint Certificates (PMCs)
These are warehouse receipts for gold, silver or other precious metals held
for you in Australia. Since they aren't bank accounts, they don't fall under the IRS disclosure rule.
You can buy these certificates in the U.S., with a U.S. check, money order,
wire transfer, or cash. Your precious metals are then held for you in your name in a depository in Australia. The
minimum order for a Perth Mint Certificate is $10,000.
When it's time to cash in your PMCs, you can either (1) have your gold
and silver mailed to you anywhere in the world, (2) have it mailed to a U.S. precious metals dealer, who in turn
gives you a check or cash, or (3) fly to Perth, Australia to pick it up or cash it in.
Perth Mint Certificates are insured both by the Australian government and
Lloyds of London. You can purchase Perth Mint Certificates from these dealers:
Asset Strategies International
1700 Rockville Pike, Suite 400
Rockville, MD 20852-1631
1-800-831-0007, 1-301-881-8600
Fax 303-881-1936
www.assetstrategies.com
Dillon-Gage Metals Division
15301 N. Dallas Parkway, Suite 200
Addison, TX 75001
1-800-375-4653, 1-972-386-2901
www.dillongage.com
#11 Learn how to invest in options and commodities. As witnessed by our very successful options
trades last year, you can make 100% returns in just weeks with options. Options also enable you to make large
profits in bear markets. However, to take advantage of these profits, you must know what you are doing. Here are
some recommended books to get started:
Hot Commodities by Jim Rogers. List $25
McMillan On Options by Lawrence McMillan. List $70
The Option Advisor by Bernie Schaeffer. List $65
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> Death of the Dollar
