Dollar
Collapse
Dollar Collapsing?
Bert Whitehead, M.B.A.,
J.D. © 2013
The market turmoil over the past
month has again raised the specter of global economic disaster. Several clients
have expressed concern about the volatility in the stock market, and the recent
increase in interest rates and corresponding drop in bond values. This is a
typical email I have received which succinctly addresses this concern, followed
by my reply:
Bert:Given the fact that I am no longer eloquent on any topic (let me think that I once was) I thought it better to handle this topic by email.The crux of the thing is the size of the national debt; the fact that I can't find anyone that thinks it can be repaid; the pending loss of the reserve currency status (already Russia and China settle trade between their countries in the Yuan).Not all doomsayers are gold dealers.Are we expecting a period of hyper-inflation or the extinction of the dollar?Can you point me to other sources that you are looking at?Thanks, (from a long time client)
Dear
Client:
I’ve
given this a lot of thought, and while it’s true that historically ‘fiat’ money (i.e., currency that a
government has declared to be legal tender, despite the fact that it has no
intrinsic value and isn’t backed by reserves such as gold) has never survived beyond a century. National
leaders inevitably try to use the power to print money as a vehicle to change
society to their liking, rather than controlling the money supply to reflect
increased productivity. Eventually there’s too much money chasing too few
goods, and hyperinflation renders the money worthless. The big question is, “How
much longer can this last?” We don't know the 'tipping point' when too
much government debt degrades the dollar.
When I
evaluate the alternatives, I don’t find a real solution. The
gold/silver/platinum markets are now dominated by speculators. There isn’t a
credible institution that could guarantee a stable enough price of any metal
that would be required if used to provide liquidity in a global market.
I don’t
see any other currency deep enough to support global trade, including
Japan. The Euro and Yuan would like to be the world reserve currency, but
Europe is in worse shape than we are, and a totalitarian government like China
would never be acceptable as the world’s banker – plus I think they will spin,
crash and burn before we will.
The idea
of a ‘basket of currencies’ is appealing to some, but I can’t see how stacking
up inept economies and their leaders is going to magically become the global
financial solution. The idea of Russia teaming up with China to bring
about a strong worldwide economy is ludicrous – perhaps they’re sincere about
making this a better world, but they’ve bungled it during the last hundred
years.
This is
not a given, but I don’t trust any other alternative I’ve studied. Financial
markets seek balance by testing the extremes, particularly when there are
sudden shifts in the economy. This is the norm, not the exception.
Stock
prices in particular have always shown a remarkable resilience over the long term.
The gravest error an investor can make is trying to time market shifts. There’s
never been a system to 'beat the market' that works as well as buying and
holding a well-diversified portfolio.
Prices
of bonds can fluctuate unpredictably, rising suddenly when interest rates fall
and then crashing when interest rates rise. The wisdom of owning Treasury Bonds
is that you can be certain of getting your money back at maturity. Regularly
laddering bonds over time enables an investor to protect a portfolio from loss
and enables a steady long-term cash flow.
I’m still
betting my money on the U.S., based on Darwin’s theory. It’s not about
survival of the fittest (although arguably we may be the most fit), but rather
survival of the most adaptable. And I think, as bad as things may be here,
our political structure and relative freedom still allows us to be the most
entrepreneurial and therefore the most adaptable nation in the world.
I
appreciate the editorial review contributed by Chip Simon, CFP®, an ACA
colleague of mine in Poughkeepsie, NY, and copyediting by Laura Webber.
