Illusions of Prosperity

The Daily Reckoning PRESENTS: For some time now, we’ve been warning our dear readers of the dollar’s imminent collapse – and finally, we’re not alone. In this excerpt from his book, The Coming Collapse of the Dollar, James Turk explains why fiat currencies are doomed to fail…


“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million can diagnose.”

– John Maynard Keynes

During the ?nal two decades of the twentieth century, the U.S. economy was the envy of the world. It created 30 million new jobs while Europe and Japan were creating virtually none. It imposed its technological and ideological will on huge sections of the global marketplace and produced new millionaires the way a Ford plant turns out pickup trucks. U.S. stock prices rose 20 fold during this period, in the process convincing most investors that it would always be so.

Toward the end, even the federal government seemed well run, accumulating surpluses big enough to shift the debate from how to allocate scarce resources to how long it would take to eliminate the federal debt.

As the coin of this brave new realm, the dollar became the world’s dominant currency. Foreign central banks accumulated dollars as their main reserve asset. Commodities like oil were denominated in dollars, and emerging countries like Argentina and China linked their currencies to the dollar in the hope of achieving U.S.-like stability. By 2000, there were said to be more $100 bills circulating in Russia than in the U.S.

But as the century ended, so did this extraordinary run. Tech stocks crashed, the Twin Towers fell, and Americans’ sense of omnipotence went the way of their nest eggs. The federal government is borrowing $450 billion each year to ?nance the war on terror as well as an array of new or expanded social programs. The dollar, meanwhile, has become the world’s problem currency, falling in value versus other major currencies and plunging versus gold. The whole world is watching, scratching its collective head, and wondering what has changed.

The answer is that everything has changed, and nothing has. The spectacular growth of the past two decades, it now turns out, was a mirage generated by the smoke and mirrors of rising debt and the willingness of the rest of the world to accept a ?ood of new dollars. Just how much the U.S. owes will shock you. But even more shocking is the fact that we’re still at it. Like a family that has maintained its lifestyle by maxing out a series of credit cards, America is at the point where new debt goes to pay off the old rather than to create new wealth. Hence the past few years’ slow growth and steady loss of jobs.

So why say that nothing has changed? Because today’s problems are new only in terms of recent U.S. history. A quick scan of world history reveals them to be depressingly familiar. All great societies pass this way eventually, running up unsustainable debts and printing (or minting) currency in an increasingly desperate attempt to maintain the illusion of prosperity. And all, eventually, ?nd themselves between the proverbial devil and deep blue sea: Either they simply collapse under the weight of their accumulated debt, as did the U.S. and Europe in the 1930s, or they keep running the printing presses until their currencies become worthless and their economies fall into chaos.

This time around, governments the world over have clearly chosen the second option. They’re cutting interest rates, boosting spending, and encouraging the use of modern ?nancial engineering techniques to create a tidal wave of credit. And history teaches that once in motion, this process leads to an inevitable result: Fiat (i.e., government-controlled) currencies will become ever less valuable, until most of us just give up on them altogether.

Now, what does a collapse in the value of the dollar mean for your ?nances? Many things, mostly bad but some potentially very good. First, it hurts people on a fixed income, because the value of each dollar they receive plunges. Ditto for those who are owed money, because they’ll be paid back in less-valuable dollars (hence the disaster about to hit many banks). Bonds, which are basically loans to businesses or governments that promise to make fixed monthly payments and then return the principal, will be terrible investments, since they’ll be repaid in always-depreciating dollars. For stocks and real estate, the picture is mixed, with a weak dollar helping in some ways and hurting in others.

The only unambiguous winner is gold. For the first 3,000 or so years of human history, gold was, for a variety of still-valid reasons, humanity’s money of choice. As recently as 1970, it was the anchor of the global financial system. And since the world’s economies severed their links to the metal in 1971, it has acted as a kind of shadow currency, rising when the dollar is weak and falling when the dollar is strong. Not surprisingly, gold languished during the 1980s and ’90s, drifting lower as the dollar soared, and being supplanted by the greenback as the standard against which all things financial are measured. But now those roles are about to reverse once again.

In the coming decade, as the dollar suffers one of the great meltdowns in monetary history, gold will reclaim its place at the center of the global financial system, and its value, relative to most of today’s national currencies, will soar. The result: Gold coins, gold-mining stocks, and gold-based digital currencies will be vastly better ways to preserve and/or grow wealth than dollar-denominated bonds, stocks, or bank accounts.

That, in a nutshell, is the story.


James Turk
for The Daily Reckoning
August 31, 2006

Editor’s Note: James Turk has specialized in international banking, finance and investments since graduating in 1969 from George Washington University with a B.A. degree in International Economics.

He is the author of two books and several monographs and articles on money and banking. He is the co-author of “The Coming Collapse of the Dollar” (Doubleday, December 2004).

In addition, James Turk is the Founder and Chairman of Since 2001, thousands of individuals and companies have used GoldMoney® to buy gold to protect their wealth from today’s financial uncertainties. Many of them have also found GoldMoney’s patented process of digital gold currency payments to be an ideal payment solution for online commerce.

Learn more about GoldMoney®.

“When popular opinion is nearly unanimous, contrary thinking tends to be most profitable. The reason is that once the crowd takes a position, it creates a short-term, self-fulfilling prophecy. But when a change occurs, everyone seems to change his mind at once.”

– The Crowd – Gustave Le Bon

Today, the crowd is convinced that U.S. housing is going to make a soft landing.

After all, it’s still America isn’t it? And everything in America has been soft or getting soft for almost as long as we can remember. Manners have become relaxed and virtues pliable. Waistbands expand. Chairs are plush. The dollar itself is turning to mush and the economy is endlessly forgiving.

In America, a person may still run up a fortune in debt. Indeed, in the last four years, Americans have run up debt enough to eat up the whole GDP pie, yet they no longer fall on hard times. Instead, they bounce off downy ones, right into the cushioning arms of cheap credit. At least, that’s been the story this last quarter of a century.

But in the past two years, that simple plot has added a little twist. The Fed has now raised rates to “normalcy.” And having seen things slouch so absurdly for so long, we find we no longer know what shape they were supposed to be in the first place. After all, it’s now “normal” to spend more than you make…and to mortgage and re-mortgage your house, with no intention of ever paying it off. It’s “normal” now to pay daily bills with credit cards. And it’s “normal” for the richest country on the planet to borrow money from the poorest, just to make ends meet. So, why shouldn’t it be “normal” also for house prices to shoot up like the Google IPO? With inflation, why would they do anything else?

But America is a big country and builders can throw up houses faster than people can put down the money to pay for them. Inflation might be up, but wages aren’t. And when wages can’t keep up, sooner or later, the builders have to slow down, housing inventories have to be whittled down, and housing prices have to fall in step with falling supplies to match the real demand.

Now, in a healthy economy, the whole thing could go plumb down the chute and pose no problem at all. But for an economy with an abnormal dependency on housing – for jobs, money and consumer spending – the slightest recovery to normalcy might be abnormally painful.

Normal, economist Robert Schiller tells us, is housing prices that are about 40% below where they are now. But since everyone thought housing prices would rise forever, we got one of Le Bon’s self-fulfilling prophecies. People bought houses not to live in, but to make money; the abnormal became so normal it began popping up everywhere.

But, as Le Bon puts it, “everyone seems to change his mind at once.”

The normal will soon be back in style…even in America. And when it does, the gentle, soft landing Americans believe is their due, may go out the window. Instead, housing will come down like the Hindenburg…and the economy with it.

More news:


Jonathan Kolber, reporting from Denver, Colorado…

“Assuming that Space Adventures and other companies with similar missions achieve their goals and avoid systemic catastrophic failures (even one or two such failures will probably not derail this phenomenon), we can expect space tourism to become a steadily growing industry in the years ahead.”

For the rest of this story, see today’s issue of The Sleuth.


And more thoughts…

*** Addison reports from Cannes, with the latest on his visit with the Good Doctor:

Dr. Richebächer has an impressive collection of books. In his study, which doubles as his bedroom (overlooking the beach at Cannes lengthwise, mind you) there are shelves that reach from floor-to-ceiling and stretch the length of one wall. These are his books on economics and economic history, primarily in German or English. And he knows them like the back of his own hand.

During one discussion we were having on productivity, the Good Doctor had a minor brainstorm, paused, hobbled over to his shelf, selected a signed copy of a book by Friedrich Hayek and turned directly to a page in which Hayek reviewed David Ricardo’s theory on productivity.

In his living room are two equally large shelves he’s reserved for general history, philosophy, literature and more biographies. These books are in English, German…and French. He has definitive works on the Chinese and Russian revolutions; biographies of Marx, Lenin and Trotsky; studies of Latin American history and the Roman Empire. The books reveal a penchant for German literature and the history of her princes and kaisers. If you needed to learn anything about the World Wars, Thomas Mann or wished to travel around the Mediterranean, you would find ample resource betwixt these pages. Open any book on the shelves and you’ll find annotations by subject in the doctor’s own large script.

From having read these books, or by studying any of the thousands of pages of data and research that line the rest of his open shelf space (periodicals published by the IMF, the Federal Reserve, The Bureau of Economic Analysis, and countless academic journals), we assume he’s fairly accurate when he makes statements

“It’s not surprising that the Anglo Saxons have developed the credit/debt system of banking. They’ve always been this way. In history, the Anglo Saxons are the chief plunderers of the world.

“And they don’t see consequences. Germans, French, Japanese, and Chinese – they all have high savings rates. The British, Americans, Canadians, and New Zealand – they all are close to zero or below.

“We [we, being the French and Germans, as he is a little of both] grow up knowing we are poor. Above the door of the house in which I grew up, there was a sign that read ‘ora et labora’ [Latin expression for pray and work]. If we do not work, we will continue to be poor. And life will be very difficult.

“This is also the ethos of the Puritans who came to the northern part of America. But where has that ethos gone today? The Anglos have not been concerned with tomorrow because they are not concerned with building long-term wealth. They want quick riches. Damn the torpedoes. Full speed ahead!

“Rabid consumer spending on credit is no different. Only now, they are plundering the future. And their influence on the economies of the world is farther reaching than ever before. They may not be concerned with the consequences of their behavior today, but it will have a lasting impact on the global economy.”

*** Mortgage rates have gone down for the last five weeks in a row. The yield on a 30-year T-bond is only 4.93% – an amount less than the latest figure for consumer price inflation.

What gives? Bonds seem to be in a bull market (as yields fall, prices rise). In June 2003, we saw what ought to have been the end of the long, 25-year rise in bond prices.

But what’s this now? Is there more to this bull market?

Maybe. Falling bond yields could be signaling an economic slowdown…and lower rates ahead.

Does that mean you should buy bonds? We don’t know. Do you feel lucky?

*** “I hate to see another summer pass away,” said our neighbor yesterday, in a reflective mood. Patrice, a cattle breeder, had come over to admire our gypsy wagon. The thing has taken shape over the summer…slowly. Now, it has a roof and walls, but the insides have not been begun yet.

Damien found an abandoned trailer and stripped out the key features – the sink, stove and hot-water heater. He brought them over while Patrice was visiting.

“Here is everything you need,” he announced proudly. “You just have to figure out how to put it together.”

“Damien, this looks like junk,” said Patrice.

“No, it’s perfectly good. I couldn’t believe the guy was throwing it away. I thought it would be just what you need in a gypsy wagon,” said Damien.

“And, look at this…it’s a gas heater.”

Patrice glanced over at us. We were thinking the same thing – the thing didn’t look like a gas heater. It looked like a pile of junk. But Damien picked up the pieces and began to show how to put them together to make a heater.

“Here,” Damien continued, “this goes in here…and this attaches to this…I think…or maybe this is supposed to get screwed into this thing. Let’s see, I took it apart; it’s not hard to put it back together.”

In a few minutes of tinkering, Damien had taken what appeared to be a pile of junk metal and turned it into…a bunch of junk metal parts connected to each other.

“Damien, maybe you should just put a wood stove in the gypsy wagon,” suggested Patrice and returned to his thoughts.

“There is something about the summer that is so special…a type of magic, really,” Patrice said. “I wait for it all year round, and then, when it’s over, I can’t help but feel a little nostalgic. It’s the end of August, now…the wind is already chilly.

“And what do we have to look forward to? A whole year of work…winter…gray days…cold. And when it is over and summer is here again, we’ll be a year older than we are now.”

“Don’t talk like that,” said Damien, taking him by the elbow. “It’s too depressing. C’mon, let’s get a drink. You’ll feel younger…and this thing might start to look like a gas heater.”

The Daily Reckoning