A few weeks ago, I was sorting through some old files from early in my career. I came across a newsletter promotion I received in 1985.
The headline was eerily similar to those I still see today: “Get Your Dollars Out of the USA Before Uncle Sam Gets Them Out of You.” The copy that followed predicted an imminent collapse in the value of the US dollar, along with hyperinflation.
Of course, neither of these things happened in 1985, nor in the next 31 years. Given this personal history, you can understand why I’m more than a little skeptical when I read breathless pronouncements of impending gloom and doom.
Instead, I take a longer view. While I also believe that a US economic catastrophe is inevitable for reasons I’ll discuss in a moment, I don’t know when it will occur. But it probably won’t be tomorrow, next week, or even next month.
Keeping this background in mind, about two years ago, I had a consultation with a client who was heavily invested in the Iraqi dinar. He’s hardly alone – hundreds of people who are heavily invested in the dinar and other exotic currencies have contacted me over the years. I call them “Dinarites.” They believe a “global currency reset” is imminent, an event that will spell the end of dollar domination and the “revaluation” of exotic currencies like the dinar.
My client was confident that the dinar he had purchased would be worth many times his purchase price within a short period of time. And even though his sole income source was a monthly Social Security check, he wanted to create an international structure to protect the immense wealth he was certain would soon be coming his way. Indeed, the investing club he purchased dinar and other exotic currencies through was marketing an offshore trust arrangement for a cool $20,000 – about a year’s worth of Social Security payments for my client.
I spent most of my time in the consultation trying to talk them out of spending the $20,000. After all, this sum represented virtually every dollar of his savings that he hadn’t already invested in exotic currencies. In doing so, I received an education in what motivates Dinarites to buy exotic currencies.
The argument – or at least one strain of it – goes like this:
The G20 group – essentially, the world’s wealthy industrialized nations – now recognizes that the fiat money system overseen by central banks is unsustainable. Along with their respective central banks, the G20 nations now have a secret agreement in force to undertake a “global currency reset.” The reset will instantly eliminate the US dollar’s status as a global reserve currency, resulting in a catastrophic loss of value.
No one knows the date the reset will take place, just that it will at some point in the future.
Once the reset occurs, a basket of currencies from commodity-producing countries will take the place of the US dollar and become the reserve currency. The basket’s value will be reinforced by the commodities produced by the countries whose currencies are included in the bucket. And the value of those currencies will soar, since they will be part of this new system.
Iraq has a weak currency. It also has huge oil reserves. The idea is that the dinar would become part of that basket.
But how likely is such a global currency reset to happen?
Unfortunately, I have a hard time seeing it play out in that way. Although it will happen (and is, in fact, already underway).
Now, it’s true that having reserve currency status is a big deal. Because the terms of the 70-year-old Bretton Woods Agreement made the US dollar the world’s reserve currency – at the time, as “good as gold” – the US essentially sets global monetary policy. Foreign banks, businesses, and governments have no choice but to hold trillions of dollars to facilitate trading and settle debts.
According to the Bank of International Settlements – the central bank for central banks – about 87% of foreign exchange deals conducted around the world involve the dollar. Over 80% of international trade finance is conducted in dollars as well.
Reserve currency status creates huge demand for dollars worldwide. That’s a big advantage for the US, because it allows its government to build up enormous budget deficits without eroding the value of the dollar or raising interest rates. Indeed, over the last few years, the dollar has been by far the strongest currency in the world.
Ending that system overnight via a global currency reset would create a global crisis dwarfing the 2007–2009 financial collapse. Think of it: Banks, pension funds, and individual households holding trillions of dollars would suddenly find their holdings nearly worthless. A global depression on an almost unimaginable scale would begin, followed by revolutions in virtually every country.
Do you really think the leaders of the world’s wealthiest nations would secretly conspire to launch an initiative like this? I don’t think so.
It’s also true that developing economies like Iraq benefit from a weak currency. Prices of their exported goods are more competitive on global markets than they would be if the currency was strong.
So what is the more likely scenario for the reset?
Understandably, plenty of countries don’t appreciate being forced to use US dollars in international transactions, much less hoard dollars to settle debts. Efforts are thus underway to whittle away at the dollar’s effective monopoly on global trade and finance.
For instance, China has signed agreements calling for the use of its currency, the yuan, in financial exchanges with numerous major countries including Germany, Russia, and India. Japan and India have signed a currency deal linking their currencies closer together. Saudi Arabia and other oil-producing states in the Middle East plan to end dollar-for-oil exchanges and instead settle deals with a basket of non-US currencies and gold.
It will be years, perhaps decades, before these efforts come to full fruition. In the meantime, I see no reason why the dollar won’t remain “king of the hill.”
But there will eventually be a reckoning, because the US truly is bankrupt. If Uncle Sam were a corporation, it would have been declared insolvent decades ago. The General Accountability Office’s audited financial statements show that the federal government has a net worth of negative $18.2 trillion. (Yes, with a ‘t.’)
These numbers are just the tip of the iceberg of the federal government’s dismal fiscal condition. Using figures provided by the Congressional Budget Office, Bloomberg has calculated a “fiscal gap” amounting to an incredible $222 trillion.
The only reason the US can maintain debt on this scale is because of the dollar’s reserve currency status. And when it’s finally lost, how likely do you think it is Congress and the president will resist the temptation to tap retirement accounts, bank savings, and anything else they can get their hands on to pay the bills?
Moving money into assets that the politicians in your country can’t steal from you is the only way to protect yourself. At home, that means stockpiling cash, gold, food, and other tangible assets. It also means making investments outside the US. An offshore bank account, international real estate, and precious metals in a secure private vault are all good ways to begin.
And while I’m not predicting an imminent demise of the dollar, that’s not to say there couldn’t be a better time to start making preparations.
Mark Nestmann
Nestmann.com
