After World War II, the dollar became the world’s preeminent currency. Convertible to gold at $35 an ounce, it was the backbone of international trade. Foreign central banks used it to back their own currencies.
Nixon removed the dollar’s convertibility to gold in 1971, rendering its value dependent on prudent management by its issuer. That issuer, of course, is the Federal Reserve—which conjures dollars into existence to support the US government’s spending habit.
The Fed has issued a lot of dollars since 1971, and even more since the financial crisis of 2008—thanks to Washington’s exploding debt levels. And it’s only going to get worse, as even the Congressional Budget Office (CBO) admits in its own forecasts.
What’s more, CBO debt estimates are notoriously overoptimistic; so while they are daunting, reality will likely be worse. To paint a realistic picture of future US debt levels, I added 20% to the CBO’s forecast, illustrated here:
You can see that US debt will continue its rapid growth that began in 2008. The question is who will fund this borrowing. Historically, foreigners have been a reliable source of US Treasury purchases. But with the US issuing so much debt, foreigners have become saturated with US dollars and so have slowed their buying considerably.
Other buyers of Treasuries have been anemic, too. The banking system holds about $500 billion of Treasuries and hasn’t increased its holdings in five years. With very low interest rates, private investors aren’t buying the bonds either.
That leaves the Fed, under its Quantitative Easing (QE) programs, as the only buyer in town. I expect that the Federal Reserve will continue to be the buyer of last resort and will purchase around $50 billion of Treasuries per month over the next decade.
Admittedly, even the Federal Reserve doesn’t know precisely what its policies will be. It could buy more or fewer Treasuries. But until there is another buyer, the Fed is stuck picking up the tab.
The most important part of this equation is how the Fed buys government debt: it creates new dollars out of thin air and swaps them for Treasuries. That’s called “monetizing the debt,” and it’s inflationary—much more so than when others buy Treasuries with dollars that already exist.
Foreigners Have Stopped Accumulating US Securities
I watch foreign investment in US securities closely, because small shifts are big enough to affect other US markets. In the last 12 months, foreigners have sold Treasuries at an unprecedented rate.
I include the US’s current account above because historically, countries that sell goods to America invest their dollar proceeds in Treasuries. China, for example, sends goods to the US, and the US pays for them with dollars. China then takes those dollars and buys Treasuries. That’s why foreign investment in Treasuries tends to closely follow the US trade deficit. Fracking has allowed the US to produce more energy domestically, helping to improve its trade deficit.
But foreigners are free to do what they want with their dollars. And recently, they’ve been doing anything but buying Treasuries—like buying American companies and Midwest farmland. It’s risky to have so many dollars and dollar-denominated assets in foreign hands, outside of US control.
Other indicators confirm that foreigners are selling US debt. The Fed holds Treasuries in custody for foreign central banks, and its custody holdings recently plummeted by a disastrous $100 billion in just one week. Announcements of sanctions against Russia seem to have precipitated that fire sale. Russia itself has decreased its holdings of US Treasuries from $165 billion to $126 billion. Why should Putin loan the US money when the US is sanctioning Russia’s use of dollars?
Again, since foreigners aren’t buying US government debt, the Fed will have to. That, in turn, increases the quantity of dollars, diluting the value of Treasuries those foreigners already own. Which eventually will induce foreigners to sell even more of their Treasuries, depressing the dollar’s value further.
It’s a risky game, and a potential vicious cycle.
The Dollar’s Importance Is Declining
The dollar has the unique and special privilege of being the world’s reserve currency, which grants the US several crucial advantages:
- All other currencies are defined by their exchange rate to the dollar.
- Most global trade transactions are denominated in dollars, including the most important commodity of all, oil.
- The US can borrow in its own currency and so can always pay off foreign debts by printing more dollars.
- The US can and has financed wars with dollars loaned to it by foreigners.
In other words, the dollar’s reserve status greatly enhances US power.
This allows the US to run up huge government and trade deficits that would be disastrous for most other countries. Case in point: US government debt is now over 100% of GDP, the level at which Greece became insolvent. The difference is that Greece couldn’t print euros to paper over its government debt, so it was on a much tighter leash.
Because oil is priced in dollars, other countries need dollars to buy oil, even from the Middle East. That’s the #1 reason the central banks of the world have accumulated dollars as backing for their currencies: because dollars are useful for international trade. Plus, the US Treasury market is the largest and most liquid market on earth, so for foreigners, parking money in Treasuries is a logical choice, at least in the short term.
All of those factors helped America dominate the global economy. But other countries are catching up—like China, which is now the clear-cut #2 world economy. The US’s relative economic power has declined sharply in the past 30 years.
Perhaps most importantly, the dollar’s reserve status is in steep decline too. In 2000, the dollar accounted for 55% of all foreign exchange reserves. In 14 short years, that number has dropped to 33%. By 2020, I project, it will drop to 20%. At that point, other large economies of the world won’t need dollars nearly as much for international trade. So America’s special privileges will continue to wane.
China is actively laying the groundwork for its yuan to become the basis for international trade. It already has developed dozens of bilateral agreements to trade with partners without using dollars. China is also acquiring over 1,000 tonnes of gold per year to support the yuan’s growing presence on the global stage. 23 central banks admit to holding yuan, and another dozen hint they hold the currency without officially declaring it.
Geopolitics Hurts the Dollar
The US has applied severe sanctions on Iran, forcing Iran’s customers to get creative in figuring out how to pay for oil without US dollars. They tried a number of novel solutions, including using gold via Turkey. But the US squeezed that channel as well.
Now the US is sanctioning Russia—a much more powerful country than Iran—and looks to be shooting itself in the foot. Putin has announced specific plans to move away from the dollar in Russia’s international sales of energy. Gazprom, the Russian energy giant, still prices its natural gas in dollars to sell to Europe. But with US sanctions making it difficult for Russia to do business in dollars, Gazprom has announced it will issue bonds denominated in Chinese yuan. Those two countries continue to grow closer economically, as Russia has the energy that China needs.
Further, Putin, along with the presidents of Gazprom and Rosneft, is actively working to conduct transactions in rubles, yuan, and even Indian rupees. Russia announced a $20 billion deal with Iran to trade oil for goods—including nuclear technology—without using dollars.
The other BRIC countries, Brazil and India, are beginning to wean themselves off the dollar too. The BRICs have set up a development bank and are looking to create their own interbank currency transaction system to replace the Western-controlled Swift program that has been used for decades.
All of these countries are after one thing: to decrease their dependence on the dollar. Using the dollar less in world transactions, of course, decreases the demand for dollars, which decreases its value. That would force America to seriously curtail its trade and government deficits, or else allow the value of the dollar to plummet faster than we’ve ever seen.
Japan, China, the Eurozone, and most other countries are all on the same path of creating money for short-term economic gain, so the dollar’s relative exchange rate vs. other currencies hasn’t changed much. The prices of important commodities like energy, agriculture, and precious metals have risen along with stock markets. While some of these are not adequately included in government measures of price inflation, we’ve seen some price inflation already. More is coming.
The bottom line is that the US is hurting its currency by using it as a political weapon. Shunning Russia only accelerates the trend of countries working to circumvent the dollar.
Long-Term Financial Implications
- A weakening dollar is great for gold.
- A weakening dollar means higher prices for all things, especially imported goods like oil.
- Higher prices will push up interest rates.
- As Russia expands its energy sales to China, the residual supply available for Europe will be smaller, driving European energy prices higher.
- Escalating international conflicts will lead to larger military budgets, increasing future deficits and weakening not just the dollar, but all currencies.
In essence, the new geopolitical strife is just another chapter in the same story that’s been unfolding for decades: the dollar’s hegemony is in decline.
As you may have seen in our documentary video Meltdown America, the snowball effect of economic crises (once they start downhill, they go faster and faster) is what makes them so treacherous. By the time the full impact is felt, most ordinary people won’t even know what hit them.
The prepared are spared, as they say. Diversification, across different asset classes and even different political jurisdictions, is essential to escape America’s coming meltdown unscathed, financially as well as physically. Right now, you can get our special diversification package—The Casey Report and Going Global 2014, for one low price.
The Casey Report, where you can read my and my co-editors’ analysis of current economic trends and threats, focuses on crisis-proof investments as well as shorter-term profit opportunities.
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I don’t think we could make it any easier for you to protect yourself. The US dollar is on the brink—don’t waste another minute to get started.
Dan again. Next up is Dennis Miller with a creative take on how to survive and thrive in a world where governments don’t play by the same rules you and I do.
11 Rules for Owning a Money Tree
We’ve all heard from our elders that “Money doesn’t grow on trees.” It’s simple kitchen table economics: If you want money, you have to work hard for it, earn it, and then you can buy what you feel you can afford. How much easier things would be if we had a money tree, or better yet an orchard, and our only effort would be to pluck off all the cash we wanted.
What most people fail to understand is that nearly every country in the world has such a money tree. It is owned and controlled by the government, king, central bank, or whatever they choose to call it.
Here in the US, our money tree has been creating a 100-year supply of money every year—and the government is lavishly spending this magic money. By the time you read this, it will be over $4 trillion, up from $800 million a few short years ago.
Throughout history governments have had a money tree at their disposal and taken full advantage of it. The fairy tale never has had a happy ending—neither for the peasants nor for the owner of the money tree.
The Money Tree Owner’s Manual
Buried deep in the vaults of every government, there’s a “Money Tree Owner’s Manual.” Had Edward Snowden shared this information, no country on earth would have offered him asylum.
As your humble scribe isn’t seeking asylum anywhere, I’ll share what Snowden couldn’t. Here are the rules:
- The peasants must believe the money has true value. If they do not believe in it (be it shells, sticks, or fancy pieces of paper), they will not work hard and be satisfied with receiving a piece of paper or trinket in return.
- The peasants must believe that you, the owner of the money tree, are acting in their best interest. If you tax them, you must convince them it is for their own good. Whether it is building roads, bridges, providing education or police for their protection, there must be visible symbols that prove you are looking after them.
- You must not allow competition from any other trees or crops. If your tree produces fancy paper, you cannot allow others to copy your paper to make it look like money. They must face stiff penalties for doing so in order to discourage competition. You cannot allow other fruits like gold or bitcoins to be used as currency; only using money from your tree is allowed.
- Keep your lavish spending out of sight. Peasants do not appreciate working hard and being heavily taxed to support the lavish lifestyle of their feudal overlords. History is full of examples that the symbols of luxury are the first to be destroyed in a revolution.
- Establish a vast and vicious army. Your reign is only as good as your army is intimidating. You must discourage others who wish to be king from attacking you and capturing your money tree.
- Keep the peasants in a perpetual state of fear. Use the media to continually frighten the citizenry—tell them how their very lives are threatened by those who want to conquer and kill them. That way, you have justification for all your many taxes. Peasants will pay dearly to those who offer protection from harm.
- Get the peasants to fight among themselves. Pit one class against the other. If you have a two-party system, let each blame the other for the problems at hand, even if they essentially both have the same goal: to serve themselves and their most influential members. In that manner, the peasants are less likely to unite and overthrow the king.
- Addict the majority of peasants to your handouts. The more dependent you can make the population on your handouts—as opposed to the results of their own work and effort—the easier it is to maintain power. As the old saying goes, “When you rob Peter to pay Paul, you can always count on the support of Paul.”
- Borrowing is fine. Go ahead and spend more than you take in through tax revenue. You are pledging the work efforts of future generations of your citizens to garner money for you to spend right now. But you will probably be dead before the bill comes due, so you need not worry. This can continue for decades as long as your creditors have faith in your money and ability to repay. Copious borrowing and spending is one of the fun parts of belonging to the government elite.
- Keep the illusion of stability as long as possible. When taxation or borrowing no longer work, it may become necessary to magically create money. The never-ending spending must continue. Inflating the currency, making the value of each piece of paper or trinket worth less is a non-violent choice—so you can pay your debts back with “cheaper” money.
- Use the power and might of your army and police force to protect the system. Flex your muscles regularly as a reminder to all peasants that they need to conform. Confiscation of wealth is an idea that can be easily sold to the masses. After all, what do the rich need all that money for? Redistribution of wealth is part of the rulers’ job. Without the benevolent government to lead, the peasants would never be able to survive. Always remember, you know best what your citizens need.
What Is Happening to the Middle Class?
The real issue is not that we don’t own a money tree, but rather the abusive behavior of the governments that do. You can look at most countries in the world and make the case that the leaders have abused the system. No matter how much tax revenue they take in, they are incapable of living within their means as everyday citizens do. They always have to spend more.
Peek at the US debt clock to see that our leaders have pledged over $1.1 million per citizen of our future earnings to borrow and spend. And the future doesn’t look any better. Our own Bud Conrad has taken data from the Congressional Budget Office (CBO) to show where we’re headed. By the end of this decade, gross federal debt will have reached $30 trillion.
Who knows for sure what the future will bring? The facts point to inflation, meaning the value of the money from the US money tree will radically drop (and possibly collapse at some point), following the fate of most other fiat currencies throughout history.
So What Can We Do?
Here are a few guidelines for those of us who don’t own a money tree, or ever will.
- Think and act independently. There is tremendous social and government pressure to go along with the crowd and see things their way. Survivors don’t get caught up in the hype. You don’t have to have an Ivy League PhD to understand what’s going on; the handwriting is very clear.
- Diversify. While you may always be a “subject” to one or the other government, the best way to protect yourself from their heavy hands is diversification. Own things like gold, silver, farm land, and investments denominated in money from other money trees. Spreading your assets across various forms of money and locations can go a long way to protect your buying power.
- Buy physical gold and silver. Gold and silver, throughout history, has been the only real forms of money. When the value of trinkets, shells, and paper collapses, precious metals are the best way to preserve your wealth. Make sure that some of your metals are held in places out of reach of your own, desperate government. While paper may cover rock in the old kids’ game, gold and silver win every time.
- Play by the rules. Like it or not, each owner of a money tree has a vast army to make sure you comply with their rules. Their goal is to protect themselves, even if it is at the expense of the hard-working citizens they are pretending to look after. There are still many legal ways to protect yourself that will allow you to keep the results of your labor.
- Be self-supporting. Don’t get caught up depending on the handouts from the government, or you will become an economic slave for life.
- Investigate all other orchards. If you find that other places in the world have better trees and less draconian rules for their working class, you may want to live there. You only live once, and keeping the fruits of your labor so you can provide for yourself and your family is called sensible economic survival.
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See original article here: http://www.caseyresearch.com/cdd/the-dollar-under-siege