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Now that the US election is over, we get to think about the Future. And, no matter how you look at it,
the entire world, the West particularly, is in for tough sledding
financially.
First, we will continue to
battle an emerging economic slowdown. Then, later, we will be battling world
currency instability – we already have signs of this now.
Even though gold and commodities
have taken a big hit because of a general liquidation in everything, there is
one thing none of us should lose sight of, and that is what happens when the
USD finally lets go.
Why the USD is presently
rallying
Just because the USD happens to
be rallying now (with weekly fluctuations) does not mean that its fate is not
bleak. There are many reasons the USD is rallying right now. They include
flight to cash in general during market liquidations in all areas, but also
cash hoarding because businesses cannot roll over the short term credit they
use to do payrolls and ongoing operations. Then we have the usual end of year
cash surge for businesses and financial institutions. Then of course there is
flight to the USD for safety, and then finally, other countries currencies
are adjusting to the slowing world economy, and the once hot foreign markets
are cooling and there is lots of money moving out of the
‘emerging’ markets.
But, we are going to be facing
two particular problems in 09 that none of us is really used to, that we
really have never seen. The world is going to have a severe recession
bordering on an economic depression. Essentially no one alive today knows
what that is like. Only the oldest of us have lived through that experience.
But then, on top of that, at
some point later the USD will finally collapse. This is not something way way
out there in the future. This issue is becoming a near term threat.
What has held the USD up and why
that’s going to change
The primary reason the USD has
held up so well in the last decades, in spite of ever worsening US trade and budget deficits that add to over $1 trillion a year combined, is that the US was an export economy’s dream customer. Because the US was such a good customer to
the world, they bought our US Treasury bonds, and lent trillions in other
ways to the US consumer. As long as the US consumer could carry that process
out, our trade partners could make bank on the US and USD.
However, once the US consumer is tapped out, and cannot effectively make a return on investment of our trade
partners, the rationale for the continuation of the USD goes away. All that
remains after that is a budget busted US Federal government. At that point,
why would our trade partners continue to buy all the US treasury bonds and such, and debase their currencies, if the US cannot be such a good customer
anymore? At that point, the USD will rapidly fall into a devaluation crisis.
None of us in the US has ever dealt with the twin threats coming our way in the next few years. The first is
a real economic depression. The second will be the demise of the US dollar,
or at the very least, its severe devaluation like 70% or more (at first).
I would like to point out that
in the last great depression in the US in the 1930’s, we did not have a
combination of a currency crisis with the economic crisis. The USD, although
it fell compared to gold, held up well. Deflation increased the value of
anything called cash, including gold.
This time, the outcome will be
different. This time, the US faces an economic depression AND a currency
crisis soon after. How far off is this?
Well, first, we are already well
into the beginning of the economic depression. The damage done to the world
credit and financial markets has been stunning since August 07. Over $35
trillion of value has been lost in the world financial markets. That has
spilled over into the real economy now, and we will start to see bigger and
bigger layoff notices. Economic demand will decline and we won’t see
any mere one year recession, like all the pundits say ‘we foresee 5
quarters of economic decline in the US…’
This time we are talking on the
scale of 5 years of economic decline and unemployment getting over 20%. The
Great Depression lasted ten years, and the US had well over 25% unemployment.
US economic production was halved!
The China situation
The rest of the world fared
worse. And, we hear that China has this great economic growth, still on the
order of 8% a year, a number any nation would kill for. But, China needs to ADD 15 million jobs a year merely to keep up with population growth, having
1.3 billion people!
So, this 8% growth in China is mandatory, not merely a luxury since China still has 800 million peasants in the rural
areas all clamoring to move to the cities for better pay. Even at the lowest
levels, Chinese city pay is three times the basic rural income which is
starvation wages.
And then consider that there are
130 million undocumented Chinese who flocked to the cities for work (not
residents of the city) who have nowhere to go now that their export dependent
economy is slowing rapidly. The recipe here is for a revolution in China if they cannot keep 800 plus million people working… and this is just beginning
to happen. And this issue is widely known to scare the hell out of the
Chinese government.
But, to avoid a revolution, they
MUST have 8% economic growth indefinitely? That is not going to happen. The
party is about over in China.
The point here of emphasizing China’s demographics is that, without big exports to the West, they cannot sustain
stability economically or politically. They are the poster child to what
happens when the export economies slow drastically when the US export markets slow significantly.
Not going to stop economic
contraction this time
But, getting back to the issue
of economic depression and the USD. The whole point here is that the world
economic engine is grinding to a halt and there is no way to stop it. The US
Fed and other central banks have found out they cannot reflate the world
economies this time, like they did after 2001 and 911 and the Tech bubble. This
time reflation efforts are failing. Things are slowing down too fast this
time, and that is combined with the imploding credit markets in every nation
of the world.
Without credit, the world
economies contract badly. Everything is credit based. Businesses need it to
merely do daily operations, and people need it for purchases. The only other
way is to have cash and pay as you go. The world economy is not structured to
operate that way (things don’t have to be credit based but our
world economy is inextricably addicted to it, and credit collapse equates to
a world economic depression if the credit does not come back right soon).
And the credit is NOT coming
back. Sure, we hear that Libor rates (interbank borrowing rates that is the
lifeblood of financial institutions for short term funding needs) have
improved. But, these lenders are not lending it out, they are merely covering
their own needs and hoarding cash, just like businesses are being forced to
since the short term credit markets are still frozen, and there is little
chance of that improving for a good while.
So what does all this mean for
the USD?
Now, what all this means for the
USD is that, as the world loses its economic engine and goes into an economic
depression, the highly abused USD will lose its reason to stay strong.
At some point all the US trade partners of the world will find the US is abusing the currency too much. With all the
bailouts now, that starts to become more certain. Then, as an economic
depression makes its way, the US fiscal deficits, which are already $1
trillion a year, will cause flight from the USD. At some point, our trade
partners will simply stop buying the US Treasury notes/bills. This is going
to happen, friends.
Then, the USD goes to hell fast.
Now when is this? Well, a few years ago I wrote several articles which stated
that, when the US consumer reached a point of not being able to give our
trade partners a return on their massive subsidies to the US government and
buy our bonds, then the USD game is over.
The only reason the USD has
managed to avoid a huge devaluation, and even a currency crisis, is because
since 1945 after WW2 ended, every time the US economy contracted the US was able to grow out of it. Or, in many cases the US was able to lower interest rates
(meaning borrow out of it) and stimulate the economy.
Now, that stimulation process is broken, to say the least. Lower interest
rates are not working this time. This time, we are not going to stimulate out
of an economic depression. This time we get a depression. Why?
Because, we have two
irresolvable problems to avoid a depression this time. This time, we are in
the same situation generally as what happened in 1929, and then the ensuing
world deflation.
The Two insoluble problems that
will lead to a depression and ultimately the final USD collapse
- Deleveraging cannot be
stopped, there is too much
- The USD is only supported
by a healthy world economy and is subsidized
The world is deleveraging in
totality and we have a breaking world finance bubble. I estimate that way
over $1000 trillion of world financial markets alone are deleveraging. That
number is calculated by adding up all the leverage out there, and the biggest
one is the derivatives of all types that are really only big HUGE leveraged
bets. They are nothing more than that. The BIS states that world derivatives
alone are over $1 quadrillion worth – that’s 1000 trillion.
Even if central banks move
heaven and earth with their now $7 trillion of infusions to every market
imaginable now, that’s a drop in the bucket compared to what’s
out there. So, the deleveraging will continue relentlessly this time.
Why did that happen? Quite
simply, the Western consumers got tapped out. They borrowed more than they
can sustain a return on. So, for example, we see the housing bubble collapse
and then all the mortgage bonds collapse, and then all the banks collapse
– get the idea? Then all the credit disappears everywhere and we get an
assured economic depression. And that will lead to 20% unemployment or worse
in the entire world – mark my words.
The overall picture is that the
world economic/credit bubble since 1945 has just burst before our eyes since
August 07. That is one huge bubble.
And, as they say, for every Ying
there is a corresponding Yang, or more simply, what goes up must come down. And
it’s coming down hard. And… we haven’t seen nothing yet
either. The down has a long way to go; we are merely in the first stages. And,
boy is the world already suffering.
So then, follow along here, the
next victim of this emerging depression will be the USD. As I said, the only
thing keeping the USD afloat with the massive fiscal deficits has been an
ever spending US consumer who bought trillions of dollars worth of exports. When
they get tapped out there is no reason for our trade partners to keep that up
is there? The USD subsidies (primarily our trade partners buying US bonds of
all types) will end this time around (this economic cycle).
How can we get out of this mess?
Well, first I have to say I
don’t think we will avoid a long, possibly ten years, depression. But
there are some ways it might be avoided.
First, if the US abrogated the $60 trillion of promises to Social Security and Medicare, maybe that would save the
USD. But that won’t happen. Probably, what the US will do is just pay it all, but with worthless dollars.
The second thing that might get
the world out of this impending economic depression and a collapse of the USD
later would be to forgive all debts. Possibly that would wipe out the USD too
anyway. But that would set the stage for a huge world economic recovery.
The trouble with debt
forgiveness is it never seems to happen. Believe me, I am not talking hogwash
about debt forgiveness. The Bible, for example, talks about how every 7 years
and every 70 years there is to be total debt forgiveness. It’s called
the Jubilee. The idea is a legitimate concept that can work and has worked.
You don’t think
that’s viable? Well it can work because all that happens is that the
lenders who offer credit have to factor in either payment in full or
forgiveness over a 7 year period. This can be done and would actually result
in the biggest sustained world economic boom ever imagined.
The thing that causes world
economic depressions are debt and financial bubbles. The two go together.
But, getting back to the fate of
the USD. The problem is, the lenders won’t forgive debt or make it
amortize in a short time. They insist on ever bigger debts. They do things
like making the bankruptcy laws far more stringent (recently done in the US). And thus, they guarantee that the world consumers ultimately will get tapped out (just
a matter of time) and then a world bubble collapse and economic depression.
The interesting thing that
happens is that there is ultimately dept repudiation in depressions anyway. Which
leads us to the USD’s fate in coming years.
I don’t think we will have
to wait for 30 years to see Social Security and Medicare to bankrupt the US. What will happen sooner is that, as the US enters economic depression this time, the
return on investment for our trade partners will disappear. The US won’t keep our trade parnters’ hundreds of millions employed, and they will
then stop buying US Treasury bonds. And then the USD devalues 70% in a year.
Maybe going to zero soon after that. The US is then bankrupted.
When can this happen?
Possibly mid way into the next US economic depression (not recession). And,
since I think we are now entering the beginning of a US depression, then if it lasts ten years, that means we have about 4 years to go for the USD to
finally give up the ghost.
Yes, I mean that. We have maybe
4 years left, maybe even only 2 years for the USD to remain anything at all.
What can you do about all this?
Well, aside from dealing with
the certain political and social chaos and those dangers when the USD
collapses, you need to move your money into a combination of other currencies
and also into paid off real things. It’s conceivable that some stocks
in real things like mines would do well too. But stocks and financial
products in general, like annuities, will be destroyed in value because, in
an economic depression, companies either go out of business or shrink.
And in a currency crisis (USD)
that Social Security check, that bank CD, that Treasury bond, that insurance
annuity becomes worthless. Sorry, but that is the reality.
So, to escape losing all your
income and losing all your wealth in a currency crisis, you have to have
money in other currencies, and also in paid off real things that are still
there after the currency is destroyed. Obviously, gold and precious metals
figure in here. The falling prices right now are quite beside the point. What
really matters is what happens in the next 4 or so years to the USD. That’s
the BIG issue.
The reason why gold and such are
dropping now is because of the general financial and commodity deleveraging. When
that bottoms, then gold will still be there. The only thing is, when this
world deleveraging bottoms, I don’t think much else will still be
there. The problem is how to survive it.
Anyway, we have ongoing
discussions of these topics at our PrudentSquirrel newsletter. Since our
beginning in 2005, we have grown constantly and now have more active paying
subscribers than ever. We also have an enviable renewal rate.
The Prudent Squirrel newsletter
is our financial and gold commentary. Subscribers get 44 newsletters a year
on Sundays, and also mid week email alerts as needed. We alerted our
subscribers April 20 that the USD was bottoming. The USD has strengthened
significantly since. The alerts include quick notification of important
financial news developments by email. Subscribers tell us that the alerts
alone are worth subscribing for.
I had one potential subscriber
ask me if the newsletter has much more content than these public articles,
ie, if it was worth subscribing. The answer is that the public articles have
less than 10% of our research and conclusions that subscribers see, not to
mention the subscriber email alerts of important breaking financial news. We
have anticipated many significant market moves in the last year, such as
imminent drops in world stock markets within days of them happening, and big
swings in the gold markets within days of them occurring. We have also made a
number of good calls on big currency swings, such as with the USD, the Euro
and the Yen.
Chris
Laird
Prudent
Squirrel
Chris Laird has been an Oracle
systems engineer, database administrator, and math teacher. He has a BS in
mathematics from UCLA and is a certified Oracle database administrator. He
has been an avid follower of financial news since childhood. His father is
Jere Laird, former business editor of KNX news AM 1070, Los Angeles (ret). He
has grown up immersed in financial news. His Grandmother was Alice Widener,
publisher of USA magazine in the 60?s to 80?s, a newsletter that covered many
of the topics you find today at the preeminent gold sites. Chris is the
publisher of the Prudent
Squirrel
newsletter, an economic and
gold commentary.
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