Is the U.S. Dollar Crashing?

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CaptainDan

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There's a claim made in the introduction of Michael Maloney's book called Guide to Investing in Gold & Silver. It's a claim that I've been hearing since I was born. Every year, more and more individuals add their voice to the chorus of folks who say the U.S. dollar is crashing. "It's right around the corner!" "We're all doomed!" It's not a difficult claim to make. All it takes is a cursory look at the national debt and current interest rates. Rates are at historic lows, debt is at historic highs, if inflation rises, which prompts a rise in interest rates, the United States government would default on their debt. For most years since 1978 (with a short break during the Clinton/Bush era), the debt to GDP ratio has been getting worse. The CBO says that if the current trajectory remains, by the year 2049, the percentage of debt to GDP will be just short of 160%. That's not good, but really, that's not the only metric we should be looking at. What's more troubling is how much money this nation is currently giving away to banks and investors as interest every year. I don't care how much debt is being held. What I care about is money that could be spend better elsewhere. Don't you find it strange how many people and politicians in this country argue about things they would like to see funded, but rarely mention the very thing that could supply them with the funds they crave? Look at the national debt interest folks. That should be the first place you look. You could have universal health care until the cows come home if you weren't giving away all of our money. But I digress.

I would like to introduce a hypothetical to this post. I'll get to that in a moment. First, in Mike's introduction, he jumps to a few conclusions that I'd like to address. He says that the dollar is on its way to crashing. He says that our national spending is unsustainable. He says that the price of gold and silver will skyrocket the moment the dollar sees trouble. He says that the relationship between equities and commodities is cyclical. He says that there's also a cyclical nature to fiat currency as it relates to hard currency, such as the U.S. dollar to gold and silver. Here's my question: what if Mike is wrong?

I'll admit that there is a cyclical nature to investing. I'll also admit that the price of gold has seen its ups and downs throughout history. The problem with Mike's claims is that some of them are targeting the U.S. dollar as if it's the same thing as a Zimbabwe banknote or the Venezuelan bolívar. It's not. the U.S. dollar is a reserve currency. While most people like to say it's not backed by anything, I beg to differ. In truth, we don't know if it's backed by anything. We're not bankers. We don't work for the Federal Reserve or the Bank of International Settlements. Maybe it is backed by gold. Or oil. Or the moon. Or real estate. Or real estate on the moon. Or patents. Or the productivity of the American worker. Or the potential earnings through the income tax system. Who knows? We certainly don't. To jump to a conclusion about something which we know nothing of is plain silly. People like to beat up on the dollar, but I must say, it's very resilient. Yes, I'm confident that it'll be replaced by something sooner rather than later, but it's impossible to know who'll benefit from that replacement. Will that new currency be stronger than gold? If so, the price of gold will go down. Who says that any replacement currency need be weaker than gold? What if the replacement is backed by the potential productivity of workers across the entire globe? What of gold then? The problem is, we simply don't know. I suppose that's the benefit of owning gold though - many view it as insurance against a weakening dollar, as I alluded to in my previous post. If you own some, you won't need to worry as much as those who own none. It's a small price to pay for that kind of security. And again, I want to remind you that I love gold and silver. I'm an ardent collector. No one could ever talk me out of my passion for owning gold, not even Warren Buffett.

If you accept my prediction that the U.S. dollar will be replaced, ask yourself what might instigate that replacement. Will it be inflation spiraling out of control? That seems to be the consensus. Although, I feel compelled to remind you that inflation has been flaccid for over a decade in spite of multiple injections of enormous amounts of liquidity into the economy on multiple occasions. Perhaps this latest COVID round will get that off the ground. These are some big injections. Will the replacement stem from a default on paying the national debt of the United States? Will other nations lose confidence in the dollar if its credit rating drops? I suppose that loss of confidence will cause a lack of value, which is certainly akin to inflation. Perhaps Mike is correct. Maybe there is more than one route to a devaluation of currency, no matter if it is a reserve or not.

Here are the hypotheticals I'd like to introduce that if accepted, may explain some of the erratic behavior we see coming from the federal government and the Federal Reserve. What if these skyrocketing inflationary periods only apply to smaller, more national currencies? Currencies that belong to Argentina, Zimbabwe, and Hungry? What if larger currencies are much more resistant to those increases? What if computers and algorithms are playing a much greater part in today's monetary policy than we're aware of? What if central banks around the world are able to react much more quickly to blips and crashes in the market? What if these same algorithms are able to predict what might happen and then compensate for those instances? Is this why the dollar has been so stable over the past 10 years with very little inflation? Are we seeing the success of Modern Monetary Theory? What if our nationalistic view of "national" debt is all wrong? We see things like foreign aid and loans to allies. Bail outs to global corporations and the like. What if the money foreign investors and central banks loan to the United States doesn't only go to funding the United States? What if the United States is sort of like a bank in and of itself, which loans American dollars around the world. Would the national debt seem so large to us if this were the case? Do we know the internal workings of the Treasury and the Fed? I think not.

I don't like working off faulty premises, or at least premises that we're not sure about. I don't like reading things like, "the dollar will collapse because our spending is unsustainable." Who says it's unsustainable? Who says that an entirely new economy isn't being born as I write this? What if space travel is right around the corner? Artificial intelligence? What if all nations on earth began digging caverns in mountains so we can all live underground? If any of these things were the case, the current amount of currency in the economy would be a drop in the bucket compared to what would be necessary. Can you imagine if there was no such thing as debt and banking? We'd all be living in mud huts if that were the case. There would be no internet. Can you imagine if currencies around the world were still backed by gold? There would hardly be any currency at all. There would be no capital, no expansion, no nothing. We'd be locked in the 1800s.

Look, I have no idea if I'm wrong or right here. I will tell you this though - before I jump to conclusions, I need more information. I need facts and very persuasive evidence that would lead me towards a rational conclusion. I've been listening to gold bugs for two decades tell me that the big one is right around the corner. I'll still waiting. So until I see that happen, I'll remain skeptical.

This post is part of a series: Guide to Investing in Gold & Silver by Michael Maloney
 
Is the U.S. Dollar Crashing? was posted on 06-03-2021 by CaptainDan in the Economics Forum forum.
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