The Twilight of the Great Dollar Standard Era

Back in 2005, when the first edition of The Demise of the Dollar was released (penned by our own Addison Wiggin), the book was mostly written in the future tense. In the two years that followed, however, even we were surprised at how things unfolded…and it became clear that an update to Addison’s bestseller was necessary. You’ll find an excerpt from the newly released The Demsie of the Dollar (and why it’s even better for your investments) below…

According to the press, the world’s prettiest face, Gisele Bundchen, wants to be paid in euros for U.S. modeling gigs, and in his new video, the rapper Jay-Z triumphantly holds euros – not dollars – in his upraised fist. The day after Thanksgiving 2007, anxious retailers started opening their doors before dawn to draw shoppers. Overseas visitors, meanwhile, are packing the streets of New York City, scooping up bargains. "I just saved $2,000 on this Rolex," said one shopper from Great Britain, waving her new watch at a reporter’s camera. And no one’s laughing now at the Canadian loonie, which reached parity with the U.S. dollar in September 2007 – for the first time since 1976.

Pretty faces, angry rappers, desperate U.S. retailers, happy shopaholic tourists, and Canadians who have finally turned the tables on us…we wondered what on earth is happening, as 2007 drew to a close and this new edition of The Demise of the Dollar goes to press.

Although Gisele has denied making any such claim about her payment currency of preference (and has stated that she is happy to earn salaries in a variety of currencies), the fact that this story spread like wildfire through media outlets from Bloomberg and CNBC to E! News and People speaks volumes. The dollar has little credibility on the streets of New York – or pretty much on any street around the world. The twilight of the Great Dollar Standard Era is upon us. The euro is now worth almost 50 percent more than the U.S. dollar, and in Great Britain, you can get two U.S. dollars for every British pound.

In 2007, the famous refrain in the poem by Emma Lazarus describing the flood of foreigners streaming to U.S. shores needs to be updated to "Give me your tired, your rich, your huddled masses yearning to shop free." Seven out of every $10 that fuels our gross domestic product (GDP), the measure of a nation’s productivity and hence security, comes – not from goods and services that we produce and sell – but from shopping. We’re addicted to cheap credit.

American consumers face the specter of losing value in their retirement savings, finding out they cannot live on a fixed income, and suffering from chronic hyperinflation. These changes are unavoidable. Today, the problem is compounded because the U.S. dollar’s value is falling. It all involves productivity changes in the United States. We have not competed with the manufacturing economies in other countries, and that is why our credit (i.e., our dollar) is suffering.

Any number of things could create a sudden, wrenching drop in the dollar’s value. Consider the following three possibilities:

1. Foreign countries drop their U.S. dollar reserves. We depend on foreign investment in our currency to bolster its value or, at least, to slow down its fall. When that thinly held balance changes, our dollar loses its spending power.

At a November 2007 meeting of the Organization of Petroleum Exporting Countries (OPEC)’s 13-member cartel, Iranian President Mahmoud Ahmadinejad, whose country already receives payment for 85 percent of its oil exports in nondollar currencies, urged other countries to follow suit and "designate a single hard currency aside from the U.S. dollar…to form the basis of our oil trade." "The empire of the dollar has to end," chimed in Venezuela’s Hugo Chavez; his state oil company changed its dollar investments to euros at his order – er, request.

Rumors are circulating that the Bank of Korea, after selling off $ 100 million worth of U.S. bonds in August 2007, is getting ready to sell $1 billion more, and if Washington forces trade sanctions, China, which threatened recently to cash in $900 billion of U.S. bonds, will probably follow suit.

In Russia, Vladimir Putin’s dream of a stock market to trade the country’s natural resources in rubles is not so far-fetched; in 2005, Russia, the world’s second-largest exporter of oil, followed South Korea’s lead and ended the dollar peg. And once again, Sudan is hinting that it will impose trade or financial sanctions against companies that do business with the United States – only this time, the words just might have teeth. As other countries follow suit, the dollar – and your spending power – drops. What does this mean? You will need more dollars to buy things than it takes today.

2. Oil prices increase catastrophically. We – and our real inflation rate – are at the mercy of Middle East oil. In 2005, we couldn’t imagine what would happen if the price of oil were to double – or triple; but that’s exactly what has happened in 2007 as oil kept flirting with $100-a-barrel prices. Our vulnerability is not imaginary. For example, if terrorists were to contaminate large reserves with nuclear radiation, the supply of oil would drop and prices would rise. We are all aware of our vulnerability and dependence on oil, but we don’t like to think about it. Rising oil prices affect not only what you pay at the pump, but many other prices as well: nonautomotive modes of travel, the cost of utilities, and local tax rates, for example. It all adds up to unquestioned "pain at the pump" for American consumers. By September 2007, gasoline averaged $ 2.78 a gallon – double 2002’s price. "Pain at the pump" leads to "pain in the pocketbook," as consumers know. You’re not seeing double in the checkout line at the grocery store – costs really are double. There was a 5.6 percent increase in 2007, compared with 2.1 percent for all of 2006.

3. The double whammy of trade and budget deficits. We’re living beyond our means. It’s as simple as that, and something is going to give. The federal budget deficit – annual government spending that is higher than tax revenues – adds to the national debt at a dizzying rate, making our future interest burden higher and higher every day. Our trade deficit – bringing more things in from foreign countries than we sell to the same countries – has turned us into a nation of spendaholics.

We’ve given up making things to sell elsewhere, closed the store, and gone shopping. But we’re not spending money we have; we’re borrowing money to spend it. In 2006, the trade and budget deficits doubled the deficits of 2001. Any head of a family knows that this cannot go on forever without the whole thing falling apart – and yet, that is precisely what we are doing on a national scale.

Even as our economy burns, our political leaders fiddle. They point to economic indicators to prove that our economy is strong and getting stronger. This information would be valuable…if only it were true.

Politicians like to measure the economy with esoteric indicators. For example, we are told that consumer confidence is up. Well, confidence is all well and good, but what if it isn’t accurate? Yankee optimism has achieved a lot in the past 200 years, but it alone is not going to prevent the current dollar crisis from getting worse and worse.

Does this mean that the United States is finished? No, but it does mean that our long history of economic power and wealth is being eroded from within. For example, look at how the reality has affected you in recent years. For most people, the real state of our economy is measured in one way: jobs. Sure, the number of jobs rises every month, but the complete truth is not as reassuring. We are losing high-paying jobs in manufacturing and replacing them with low – paying jobs in health care, retail, and other menial job markets. Our mantra of "Yankee ingenuity can accomplish anything" is gradually being replaced with a new mantra: "Would you like fries with that?"

As manufacturing jobs continue to move to China and India, and elsewhere around the globe, you would think we’d tighten our belts. But instead, we increase our debt to spend more.

Few people, even those who consider themselves to be savvy about finance, really understand things like the trade deficit, national debt, gross domestic product, inflation, economic indicators, and the like. The truth (one few investors want to hear) is that your local member of Congress is often just as illiterate about economics as most of us are, but the difference is that he or she has the power and position to make decisions that affect you. And he or she may be making the wrong decisions. You, like many other Americans, may have put aside income every month in a variety of retirement plans, long-term investments, and savings, in the belief that this is going to provide security in your old age. What are they going to be worth when you retire? Given the current state of things, you could find out that your retirement accounts are going to be worth next to nothing.

This is not the time to rush out and buy more stocks, for example, or to load up on new bargains in the property market. Quite the opposite. The subprime mess isn’t over. Foreclosures keep growing.

All is not lost, however. The Demise of the Dollar will provide you with the specifics about what’s really going on with the dollar and our economy, how foreign countries ultimately control our economic fate, and how our leaders are deceiving us by telling us that we’re in good shape.

Finally, we offer strategies you can employ today to not only protect your financial freedom but to prosper in a dollar demise.


Addison Wiggin
The Daily Reckoning

April 22, 2008

Addison Wiggin is the editorial director and publisher of The Daily Reckoning, and executive publisher of Agora Financial, a multi-million dollar financial research firm and publishing group based in Baltimore, Maryland.

"Let us assume that the unthinkable happens," our old friend Marc Faber begins. "China’s economy slows down sharply, or even contracts – and there are reasons why it could. Commodity prices slump and bring about economic hardship in the resource-producing countries. Imports of capital and consumer goods from Europe and Japan decline. We would then have the perfect setting for a global economic contraction with dire consequences for corporate earnings and asset prices."

We are on our way down to the Eternal City. The schools in Paris are out for Spring Vacation, so we are taking advantage of this break in educational tedium to learn something.

Elizabeth is an especially keen learner. She is sitting next to us on the airplane, reading a history of the early church. Soon, she will be asking questions about papal succession…schisms…councils…and architecture, vainly trying to improve us with bits of unwelcome knowledge.

But we are using this time in the jet stream to profit from a vacuum in the news stream. That is, cut off from our usual sources of misinformation, we have nourished our thinking with thought. And what we are thinking about is: what if we are wrong? (Since we are often wrong, time spent considering the alternatives is rarely wasted. Often, it ends as prophecy.)

Our theory is that the war between inflation and deflation leaves millions of casualties, but no clear winner – at least not for a while. Instead, prices for U.S. stocks, houses and labor are marked down…while commodities, oil, gold (and even some emerging markets) go up.

But we could be wrong in either direction. Either inflation or deflation could soon emerge victorious. Most analysts think inflation will be the clear winner – with big boosts, not only for commodities, but for the economy and stocks… and maybe even houses. They think the financial industry has bottomed out and will soon get back on its feet and begin inflating the whole economy.

The view Marc is putting forward is the opposite one – that deflation will be the clear winner, dragging the whole world economy into a slump, with lower prices for commodities as well as stocks and property.

Marc notes that much of the world’s earnings come from the energy exporters – Russia and the Arab countries – and finished product producers in Asia, notably China.

Both depend on the same foreign buyers.

In the weekend news, for example, we discovered that the emerging markets are now using more oil than the United States. They use more oil because their economies are growing – because they are still moving products to the United States. In a real downturn, the United States (and other developed nations) would stop importing so much oil…and so much merchandise from China, which would have the consequence of reducing energy consumption by China too. Result: lower energy prices and a worldwide recession…maybe even the worst worldwide depression in history.

What might be the consequences of such a depression? In the United States and Europe, probably nothing catastrophic. People in the developed nations live with a thick cushion under their derrieres. The bench might grow harder and less comfortable; assets would fall in price; earnings would decline (both for businesses and individuals); otherwise, life would go on as before.

In the emerging markets, on the other hand, billions of people now sitting precariously on the edge of modern life might get pushed off. The artificial boom – brought about by excessively low lending rates in the West – caused millions of people in the emerging markets to abandon their farms and move to the cities.

For the first time in human history, the planet now has more people living in cities than in the countryside. These people can no longer ‘get by’ as subsistence farmers. They no longer have any land to subsist on. Instead, they rely upon a sophisticated, globalized economy for their daily bread. And if that economy should break down, they could go hungry…or starve.

Already, there have been food riots in various parts of the globe – and this while the world economy is still growing! Think what they will do when the economy shrinks…when their earnings (which have been going up by 10% per year and more) begin to fall…when there are no jobs for them in the cities…and nothing to eat. Ah, dear reader, then it gets interesting.

We’re not predicting this. We’re sticking with our middle-of-the-road forecast…for neither worldwide prosperity nor worldwide ruin. But there are risks from both directions. And while most people expect a mild recession and quick recovery…almost no one expects the kind of global meltdown Marc imagines. We could see oil below $50…the Dow below 5,000…Wall Street wiped out…and 20 million US families busted.

But that is the good news. In the emerging markets it could be much worse – worse than the Great Depression of the ’30s. And there is also the political risk.

What do governments do when faced with economic collapse and social unrest? Hemingway described it:

"The first panacea of a mismanaged government is inflation of the currency. The second is war. Both bring a temporary prosperity; both bring more permanent ruin."

That is, they do just what Ben Bernanke and John McCain have already promised. They dump money from helicopters and "bomb, bomb, bomb…bomb, bomb Iran." Imagine if China’s, and Russia’s leaders are as simpleminded as America’s. Surely, they are…

*** News comes that one in fives soldiers in Iraq has mental problems. In the high command, the ratio must be even higher.

*** And our Pittsburg correspondent…with sad news from Zimbabwe.

"Pity poor Zimbabwe…." writes Byron King, referring to a story in the Times of London:

According to the paper, "South African dockers are refusing to unload a Chinese cargo ship carrying 77 tonnes of small arms destined for Zimbabwe."

"The arms, including three million rounds of ammunition suitable for AK47s and 1,500 rocket-propelled grenades, were ordered by the Zimbabwean military at the time of the March 29 election – which Britain and other Western powers have accused Robert Mugabe of trying to rig.

"The arms arrived at Durban, South Africa, on Wednesday aboard the Chinese-owned An Yue Jiang and must be taken by road to landlocked Zimbabwe, where the Government has been accused of arming rural militias before a possible run-off vote for the presidency. The opposition Movement for Democratic Change (MDC) has even accused Mr Mugabe’s Zanu (PF) of preparing for a ‘war’ against the people."

"Poor Zimbabwe," Byron continues. "So far from God. So near to Robert Mugabe."

The Times continues: "January Masilela, the South African Defence Secretary, said yesterday that the shipment had been approved this week by the National Conventional Arms Control Committee (NCACC), which he chairs. ‘This is a normal transaction between two sovereign states and we don’t have to interfere,’ he said.

"But opposition parties slammed the decision to grant the transit permit and the country’s main transport union said that its members would refuse to unload the cargo."

As if Marxian governance, brute thuggery, farm-sector collapse, massive inflation and economic calamity is not enough…

"Now their friends the Chinese are arming the militia with millions of rounds of AK-47 ammo," says Byron.

"Mugabe won’t go without a fight. The only good news is that he’s 84 years old.

"Do you wish what I wish?"

*** Technology…always making our lives better!

"I’m going to plug in my new iPod," said Elizabeth as we were driving back to the country. The following conversation ensued:

"Let’s see, you just plug this into the cigarette lighter, I think…."

"Better read the directions," said Edward.

"Where are the directions? I thought they were in the box…"

"I don’t see them."

"They have to be here somewhere… Well, maybe I can figure this out… It’s supposed to work through the radio."

"What do you mean, ‘through’ the radio…it just uses the radio’s speakers…"

"Yes, but it has to connect to them somehow."

"Maybe you’ve got to wire it in…"

"Wire it in? How would I do that? I’m not going to take the radio apart…"

"Wait…here are the directions…I found them…problem solved…

"Let’s see…you set the radio to a station. It says the station should have a lot of static…"

"We’ve been listening to static…that’s all we get anyway on that stupid radio.

"Oh, be quiet…I’m just following the directions."

"Well, I don’t hear anything…Mom, you changed the station."

"Oh, no wonder… There. Now, I’ve got the station set…on the iPod…and on the radio… Hmmm… Still nothing."

"Mom…you’ve got the iPod on pause."


"Why isn’t it working…?"

A half hour later.

"I did re-read the directions," said Mom.

"Well, you didn’t read them very well. It’s still not working."

Until tomorrow,

Bill Bonner
The Daily Reckoning