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...