I’m talking about the US dollar, which soon will no longer be the world’s reserve currency. It will be replaced by Special Drawing Rights (SDRs), essentially a “basket” of currencies, and the impact on everything you used to take for granted about the USA-our military power, consumer prices, interest rates, housing, food, energy, pensions, health care-in short, almost every material or financial good that is tied to our currency-will be negatively affected. There will come a time in the not too distant future when we’ll look back on the 2000s and 2000 teens as the “good old days” much as Baby Boomers used to think of the 1950s.
Tip for those with ADD: Just skip the rest of the article if your eyes are already glazing over and go straight to the recommendations.
Of course, anyone can make a prediction and eventually be right, because “even a stopped clock is right twice a day”, as the saying goes. But there’s real reason to be alarmed now, as the underpinnings for the new currency as a replacement for the dollar are being hammered out as we speak, and in the latest G20 meetings hosted by China, I believe that Jim Rickards is correct when he says that the petrodollar is dead.
Why is the dollar being replaced?
The dollar was on a de facto gold standard until 1971, when Nixon closed the gold window and effectively brought an end to the Bretton Woods agreement. What replaced that was the petrodollar, held aloft as the world’s reserve currency not by precious metals but, in essence, by gunboat diplomacy, wherein the US demanded that oil be priced in dollars or else-or else we would use our CIA and/or military to conduct a coup in your sandlot of a country. But if you played ball? Well now, we’d be happy to provide you with our latest military hardware and share our intelligence with you so as to keep the rabble down and keep you in power. And since the one thing the entire world needs more than anything is oil, that ushered in the resurgence of King Dollar on the world stage.
And that worked so long as the supply of dollars was limited and the Arabs played ball with us. Unfortunately, as mighty and desirable as the dollar was, it still had to adhere to basic supply/demand fundamentals, and if you printed too many of them, eventually the value would be undermined. That would be a problem, especially if you were Saudi Arabia or China, and holding trillions of dollars in US debt. And it didn’t help any that the goatherds began taking over the world’s petroleum deposits, because those goatherds hate the USA and would rather toss our currency out if they could. But the death of manufacturing, the rise of the welfare/socialist state, and our recent descent into anarchy didn’t help the buck any either. When all you have to offer as collateral for your currency is “The full faith and credit of the US government”, you’d better be able to show some signs of sobriety in the way you handle your money, and your gunboat diplomacy better not look like Iraq. Or Afghanistan. Or Libya. Or Ukraine. Or Ferguson, for that matter.
The Solution? SDRs
So now, with the Middle East in flames, America’s Heartland in ruins, half of the country on the public dole, and the good ol’ USA printing money just as fast as it can, what’s the rest of the world to do? They’re not stupid. They can see we’ve debased our currency, they can see we’ve outsourced most of our industrial base, they can see our foreign policy is an abject failure, but they just haven’t had a decent alternative to US currency since the 1930’s. Well, that’s where SDRs come in. Now, the world’s biggest economies have gotten together and decided they’ve had enough of the Fed’s magic tricks and they’ll start settling transactions in a new currency that they’ve devised-a hybrid currency composed of Euros, Pounds, Yen, Renmimbi, and, yes, Dollars. In fact, they already have. You probably won’t ever go down to the grocery store and use these things like local money to buy milk, but believe me, they’re important, because in the near future that is how international trade will be settled-in SDRs.
Why should you care?
Because the demand for dollars is based on its status as an international currency-go anywhere in the world, make any deal, and dollars are what the world uses almost exclusively for everything. Want to buy that tractor factory in China? Use dollars. Oil from Venezuela? Dollars. Wheat from Australia? You got it, US dollars. It doesn’t matter who you are, what you do, or where you live, if you’re dealing internationally, you need dollars in the bank. You won’t get very far trying to invest in African diamond mines using Ukrainian Hrivnia, or Paraguyan Guaranis. In business, the international language is spoken in dollars, and that demand serves as a strong support for the value of the dollar.
What happens when you DON’T need dollars? The demand goes down. What happens to the value of anything when the demand goes down? It ain’t worth as much. Dollars, my friends, are heading lower. We’ve had a free lunch (well, cheap lunch anyway) courtesy of the petrodollar for a long time now, and it’s coming to an end. Eventually, when Nike goes to some sweatshop in Indonesia and says they want to order 100,000 pairs of shoes, they’ll be asked to settle the transaction in SDRs, not dollars. The Nike buyer will have to convert his dollar-based assets to SDRs in order to make the deal work, and that means he is selling dollars and buying SDRs. What happens to a commodity when there are more sellers than buyers? That’s right, the price goes down. The “price” of dollars is about to go down.
Not right away, of course, but the writing’s on the wall. Over time, I’d guess five to ten years at most, the dollar will drift lower vs SDRs and will assume its real worth, severed from its status as the world’s reserve currency: I’d say at about 1/2 to 1/3 of what its value is at present. What that will mean to the average American is that they’ll be paying more for everything. Much more. Of course, so will the government. So will everyone who has their life’s savings in dollar-denominated assets. Sure, you’ll still be USING dollars at the store (probably using a debit card rather than cash), but those dollars won’t go as far.
Not only that, but the cost of borrowing will go up substantially as well to compensate for the decreasing value of the dollar. Interests rates will surge. Fixed rates will be hard to come by. Housing prices will crater because cash will be king again. For the same reason, the car industry will be devastated.
The government will have to curtail spending. That will mean less military spending and less foreign aid, which will create an international vacuum. The world will become multipolar again. China will dominate the Asian sphere, the Middle East will be a sea of competing caliphates, and Russia will assert more control over Europe. Africa will, once again, assume entropic chaos. At home, it will also mean less welfare for the masses. There will be more unrest in the streets because of it.
Rising prices will be met by demands for rising wages and increased pension payments. That will happen, but each “raise” will leave the recipient slightly poorer than before because the pay can’t keep up with the inflation.
Unemployment will increase because consumers simply can’t afford to consume anymore…and what happens to workers in a consumer economy when that happens?
There will be widespread protests in the streets because of rising prices and shortages of food and other commodities. People will demand that the government do something. They will try wage and price controls, but they’ll work about as well as the last time. Then they will try rationing goods, but that will only make things worse.
Into that breech will step a strong man, and he will promise to restore order. He’ll tell the people they can have their dignity back if only they’ll give him a chance. Sure, they will have to give up some of their freedoms temporarily, but those will be restored as soon as order returns to the nation. He may try to start a war to draw attention away from our domestic troubles, but because of the dollar’s demise our military will be greatly weakened. A draft will be instituted to engage the energies of our youth away from the problems at home. I think you know where this is heading now…
Of course, much of this is speculation, but what is clear is that the dollar is doomed, and this is true whether SDRs replace the dollar or not, because the dollar has been so badly mismanaged that other countries have already lost faith in it. If SDR’s don’t replace our money, inevitably, SOMETHING WILL, and soon.
You may be asking at this point, OK, but what can I do about all this? I’m just an individual citizen, not an international Bankster! I’m glad you asked, because there is plenty you can do. In fact, here are:
7 Things you should do to meet the coming economic collapse
- Accumulate precious metals-In an inflationary or hyperinfationary environment, gold and silver will do well. At worst, they’ll maintain your purchasing power. At best, they might make you a little money or even save your life. Buy quietly, pay in cash, and keep your stash at home or in a safe spot that only you have access to. DO NOT put your bullion in a safe deposit box. DO NOT trust paper certificates as acceptable replacements for the actual metal. Anyone can do this. You can buy a silver half-dollar for around $7, for example A very good case can be made that this is a great time to buy PMs anyway, regardless of the dollar’s direction. Do it now. NOTE-As an aside, I also favor buying name-brand liquor like Jack Daniels or Grey Goose as barter items as well. If my worst-case scenario is wrong, you can still have a party! Along the same lines, ammunition will retain its value over time. Buy some not just for your own guns but also for barter.
- Diversify your skills-Make yourself valuable in some way outside of the industry you find yourself in. Try to develop a skill that you can do with your hands to actually produce or repair a tangible product. Mentor others if you have such skills already. Start a small business on the side. Learn a foreign language-Chinese or Spanish.
- Diversify your portfolio-in dollar terms, a typical investment portfolio may go up even in a highly inflationary period, but there are better ways to play this. Get out of US bonds. If you can tolerate risk, buy emerging market utility and energy stocks. Resource-based companies will do well. Buy Canadian banks. Buy Swiss Francs. Australia and New Zealand stocks should do OK. You can’t buy SDRs right now, but that may change. Money in the bank. I would even purchase a few Bitcoins just in case.
- Get out of Dodge, or be ready to-This can mean having a “bolt hole” where you can hide out for a while out in the country, or it can mean a total change in lifestyle by permanently moving there. It can even mean exploring ways to get a second passport. Whatever you do, unless you’re currently in some Amish community, you probably need to find a “bug out” location. The best scenario is where you’d live near other like-minded folk or relatives. Good states to investigate are Alaska, New Hampshire, Idaho, Montana, Wyoming, Texas. Good countries are Uruguay, Canada, and Chile in this hemisphere. Belize if you want to disappear completely. Wherever it is, it would be a good idea to stock your location with pre-positioned supplies.
- Buy farmland-Dump your rental, vacation, and investment homes and buy farmland instead. You can buy 100 acres in Uruguay for about $300K. It’s like buying Iowa farmland on the cheap. You can buy cropland and have someone else manage it or you can become a gentleman farmer yourself. Buy only what you see. DO NOT buy into a teak plantation that will yield “X” value in 5-10 years. Buy the wheat or soy farm that is yielding crops now. Resist the temptation to buy into a farming syndicate. Buy the land in your name or in the name of your company.
- Decrease your consumption-Now is the time to buy a smaller house, a diesel or electric car, eat out less, cut back on your spending in general. Learn how to save again.
- Buy Collectibles-especially fine art.
But there’s no reason to panic, or fall on your sword. I don’t expect a precipitous collapse of the dollar (though I don’t rule it out). I think this will be gradual process, with lots of starts, stops, and reversals along the way, but let me be clear-no country has ever gone into this much debt and recovered without a debt default. We may be “exceptional”, but we won’t either.
As bad as that may seem, there may be many positive side effects that may come from the dollar’s demise. We will be less consumerist. We may be forced to manufacture our own goods. We will value friends and family more. We will become more humble. We will get more exercise. We will be forced to solve our problems peacefully with our neighbors. We may even turn back to God for answers to our problems.
So, why am I telling you this? To prove I am crazy? No, you already know that. I am doing this, in part, as a written time capsule. I’ll come back to this years from now, like a dog returning to his vomit, just to see how wrong or right I was. But in reality I really do want to make a positive difference in people’s lives, and I truly believe there is an urgent need to do something to prepare for this. I hope you listen.
Great piece. A twofer. Really could have been two separate articles.
You did an excellent job of explaining the dollar’s demise, it’s history as a reserve currency, and how it’s replacement (possibly with SDRs) will happen and the result. Not a lot of clear writing on this subject (lot’s of “sophisticated, so scholarly it’s stupid” stuff). Well done.
SDRs? I’ve also heard gold backed currencies, particularly Remnimbi, could be the replacement. I’ve also heard that the Federal Reserve Note dollar will be replaced with a “Treasury Dollar” that will be used only domestically and be 30-50 percent the value of the current dollar.
I’m ready for your article on the Donald!
Hey thanks as always Dean!
You’re correct that SDRs may not replace dollars. It could indeed be Renmimbi, and the idea of a two-tiered currency has been floated before.
I am thinking SDRs will be the answer because they’re actually already in use as an international means of settlement, but more importantly because they have the seal of approval of the IMF and other important Bankster groups. Those bloodsuckers do not want to lose control of the money…it’s been their lifeblood since the (((Rothschilds))). They want to find a way to transition from the dollar to a new host currency without losing control of the situation, and SDRs are their answer. If the RMB becomes the sole international currency, it’s a problem for the current Bankster klass, because it would mean the shots are being called exclusively from Beijing, and (((they))) have virtually no presence there (though they’re working on it). Of course, the best laid plans of mice and men…
A two-tiered currency would work for a time, but ultimately the same mismanagement and weaknesses in the US economy would sink it IMO.
In any event, from the standpoint of the average Joe in the USA it doesn’t matter. We’re really just trying to predict which iceberg the Dollar Titanic will hit. The point is it’s going to sink regardless of what action is taken at this point. That is why even though I’m a Trump supporter I don’t really think it will matter that much who’s elected vis-à-vis the economy. They’ve whipped that poor horse nearly to death. Whoever becomes President will at best flog her for one last lap before she collapses. In all likelihood, the next President will be blamed for the Final Depression.
This would have been a good topic for discussion at the back of the boat. My concern is your article significantly overstates the role a reserve currency can have in keeping the US dollar higher than what it would otherwise be. Paul Krugman, a Nobel prize-winning economist wrote a short piece about this in August 2015 ( google Krugman International Money Mania) that explains the logic behind it. I can’t do it better than he.
Now that you have read It, I can see that you still remain to be convinced. (We’re onto our 2nd glass at the back by now.). Let’s take your example about Nike and the Indonesians further, for you have stopped too early in your analysis. Suppose that they do use SDRs to invoice and pay for the shoes. Yes, Nike has sold US dollars and bought SDRs. Nike has the shoes, the Indonesians have the SDRs. But what are they going to do with them – they are of little use in Indonesia ( just as, at the moment, US dollars are not much use to buy things in Indonesia). Answer – they sell the SDRs they received from Nike in exchange for their currency of choice, the Indonesian rupiah. The purchase of SDRs broadly offsets their sales – the only impact in some marginal sense is that the USD is a little weaker and the Indonesian rupiah a little stronger. The effect you are seeing here has nothing to do with the use of a reserve currency – whether it is USDs, SDRs or anything else you care to name – but the fact that Nike transaction has increased US imports and increased Indonesian exports. This is why there may be some marginal decline in the US dollar.
Third glass top-up: You may be right that the USD is heading for a reasonable depreciation in the future. But the role of it losing top-spot as a reserve currency will not play any significant role in its demise. Rather it will depend upon US economic fundamentals and how much confidence overseas investors (and indeed many domestic investors) will have in the US economy. The main thing the US loses from the declining USD use as a reserve or an international-transactional currency is a few billion in seigniorage.
Glad we finished the bottle before 11 – I’m off to bed. Good night!
Ha! Good to hear from you, John, and yes, we should’ve had this conversation on the top deck while the moon was over Ford’s Terror…:))
OK, Indonesian example. You’re right so long as the Indonesians didn’t need SDR’s for some other reason-such as, buying nylon and/or machine tools to make the shoes from a different country who wanted SDRs rather than Rupiah in exchange. In that case, of course they’d want to keep some SDRs on hand, if for no other reason to avoid short term transaction costs. But also, if the SDRs were the world’s reserve currency, wouldn’t the Indonesian CB want to keep some on hand? Just as SA and China hold their noses now and hold US $?
As for the reserve status having nothing to do with the value of the dollar-who am I to argue with a Nobel Laureate and a Central Banker like you? LOL
I guess what you’re saying is that the petrodollar explanation is just wrong. However, if that is the case, why did we seek to keep a lid on the ME for the last 40-50 years? Does the fact that oil trades in dollars have nothing to do with it? Sure, some of our effort was Cold War brinkmanship, but the USSR fell in the early 90s. I don’t think pure arrogance or hubris quite explains the effort, but keeping oil trading in dollars does. The only other explanation that fits is our “special relationship” with Israel, and a good case can be made that our Congress is little more than the Knesset on the Potomac. Still, I think that needs to be fleshed out a bit more.
Last, if the US $ loses its reserve status, I would imagine that China, SA, and other dollar holders would move to replace those dollars: whether with SDRs or something else doesn’t really matter. If that’s true, it would make it more difficult for the US to borrow, since those bonds wouldn’t have as many buyers. Isn’t that right? Sure, we could monetize the debt. We already do that, to some extent. But that’s dangerous IMO and really is a form of default. We could raise taxes or cut spending as well, but there’s little chance of that, either. I’m afraid I just don’t seed how losing that status isn’t a very bad thing for us, in much the same way it was for England.
In any event, I totally agree the value of the $ is tied directly to investor confidence and economic fundamentals.
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