40 Years of Dollar Destruction

Wrong title. Should be 'Celebrating 40 Years of Living Off the Rest of the World'

40 years ago Nixon told the world that the US would stop convertibility of the US Dollar to gold 'temporarily'.

The sharp people of the world then knew that those liars did not mean what they said - the 'temporarily' part of it. One of the result was the 'oil crisis' of the 1970s where countries with oil started demanding more dollars for their 'black gold'.

Well, 40 years later Nixon's 'temporarily' is still temporary. In that time however, their 'dollar' has lost 98% of its value in gold terms. After they 'won the war' and till 1971, they guaranteed the world that 35 of their 'beautiful gold' (that's the term chinamen call the US dollar till today) would be exchangeable for 1 troy ounce of gold. Today, an ounce of gold costs 1,800 US dollar.

In other words, anyone keeping their money in that currency for the last 40 years would have lost 98% of their wealth.

A year or so ago, their Treasury Secretary Tim Geithner told his audience in a Chinese university that China's US dollar holdings are safe. The Chinese students broke into loud laughter. Those Chinese students know their Confucius - that man had an advice whose popular English equivalent is 'talk is cheap, show it by your action'.

2,500 years ago, when Confucius was asked what would be the first thing he would do to improve public administration. Confucius said 'to ensure the correct use of terms'. Everyone was surprised. How could that be the key to the well running of a state?

His answer was something along this line (my interpretation only lah - me no handy bible to quote from) : When words do not reflect reality, people would be confused. When people are confused, business cannot be conducted in a fair manner. When business cannot be conducted in a fair manner, there will not be true justice. When there is no true justice, the state is doomed...

They deploy many tricks to keep that Dollar Bluff of theirs going - the longer it lasts the more they can live off the rest of the world.

Here is one of those tricks:

12 years or so ago, Joseph Stiglitz (then chief economist with the World Bank) wrote about how the IMF's 'standard formula' for helping to 'revive' 3rd world countries in financial crisis are actually meant to help creditors take advantage of those poor countries.

The standard IMF formula says that the only way out of financial crisis is to maintain a strong currency so that foreign investors would continue investing in those countries. To keep the value of their currency strong, countries must maintain sufficient foreign reserves so that those reserves can be used to buy back their currencies when their value drops. [A sharp kid with some history would quickly realise that the US itself does not follow that IMF standard formula - they don't hold foreign reserves and instead of keeping it strong, they had been continuously devaluing their currency throughout its 100 year history!]

The IMF loans were to be denominated in USD and have interest rates of 10% (because those countries have low credit ratings). Since those countries have insufficient reserves, they should use those USD loans to buy US Treasuries that pay 5% interest (because those papers are the best around and have very good credit ratings).

As result, those poor coutnries end up with a 5% interest cost for loans whose money they cannot use! (because those loans were immediately passed to the US government who ended up being the real user of those money!). [On top of that, the value of those foreign reserves would go down per above!]

From the perspective of the creditors, their so-called 'loans' come out of their left pocket and goes right back into their right pocket - 5% interest earnings at no risk of losing their capital!



Celebrating 40 Years of Dollar Destruction
By Sean Hyman, Editor,Currency Cross Trader

Dear Sovereign Investor,

This week, we’re celebrating the anniversary of the greatest heist in recorded history.

Exactly 40 years ago yesterday, President Nixon severed the dollar’s ties to gold forever.

It was a government game so the politicians could easily pay off their debts with “cheaper dollars” for the foreseeable future.

In reality, this one decision effectively stole all our dollars’ value for decades to come. And you and I are the ones still paying for this mistake.

Strangely this decision also created the $4 trillion Forex market...and eventually sent gold racing above $1,800 an ounce.

But these profitable side effects were not Nixon’s intention...

You see, up until 1971, each dollar was physically backed by gold.

Gold was $35 an ounce and every dollar in circulation could be redeemed for gold. So every dollar was backed by the power and security of gold.

But when Nixon removed us from the gold standard, that responsibility flew out the window - along with the dollar’s long-term value.

It’s the reason the dollar has lost massive purchasing power against other currencies in the last four decades (and gold has risen 51-fold against the buck).

And get this: the worst is still yet to come for the dollar.

I’ll explain how to protect your savings in just a moment. First, let’s take a closer look at how our dollar has lost that much in value.

The Greenback Is Backed By the “Hot Air” of Washington, D.C.

Given that the dollar has lost so much value, backing dollars with gold simply wouldn’t fly today.

In fact, it’s estimated that if you took all of the gold that has ever been mined in the world, it would only come up to about $5 trillion.Well we print trillions of dollars and run up over $14.6 trillion in debt all by ourselves in the U.S. (and that’s just one country of the world).

All these dollars are only worth something if the U.S. government says so. It’s backed by the U.S. government promise, “we’re good for it.” In other words, our dollars are basically backed by hot air straight from Washington.

But the harsh truth is they couldn’t back all of the dollars in circulation right now even if they wanted to.

Even worse, the more investors realize how shaky our currency is, the more they start looking elsewhere for more fundamentally sound currencies.

That’s one reason why the U.S. just raised our debt ceiling for the 75th time in 50 years. It’s also why the Standard & Poor’s just downgraded our debt.

Toss in the Fed’s nasty habit of creating money out of thin air anytime we need extra resources, bailouts and stimulus packages - and the dollar is in serious trouble.

The Government has Two Choices and Both are Bad...But Here’s What They Will Choose

Our economy is in shambles, and our currency is losing clout every single day. And we are no longer competitive with the rest of the world in terms of exports. We really only have two choices left to stay competitive with the rest of the world.

Either the government can allow “wage devaluation” or “currency devaluation.” In other words, they can let wages fall or let the currency drop in value.

Do you really think Americans will elect politicians that force them to take pay cuts? Heck no! So if the guys in Washington want to keep their jobs, they really only have one choice - devalue our dollars further.

As you can imagine, voters pay closer attention to how many dollars are in their paycheck than how much those dollars buy. (In fact, most Americans don’t even understand the concept of the dollar losing purchasing power anyway.)

That’s why it’s almost too easy for Washington to dilute our currency and accomplish their “cheap dollar” agenda.

A Glimpse Into the Future...

So here’s how all of this is going to play out. The U.S. will continue to stack on more debt and dilute the dollar by creating more money. Call it QEIII or just ridiculously low interest rates until 2013, but either way, this can only end one way.

The dollar is sinking in value, and central bankers around the world know it.

Therefore, they are “ever so quietly” shifting their central bank reserves slowly away from dollars and into currencies that aren’t being diluted, that have superior fundamentals.

Some, like China and India, are even buying up commodities for their reserves (like gold, silver, iron ore, etc.).

This practically guarantees there will be a constant shift away from dollars through the years - especially as our politicians believe the quick solution is “dollar dilution.” But no country in history ever brought themselves to prosperity by continually diluting their currency.

Therefore, you won’t really be able to “protect your dollars” because of the government’s overall agenda.

So what can you do? Well, you can protect your money - your wealth - by taking your money (dollars) and investing them in other currencies that aren’t playing the debt-stacking, currency dilution game.

You can also buy the traditional forms of “hard money” including gold.

Dollars...On Sale...50% Off!

Now remember when I said that our currency will have to be diluted even further?

One well-respected hedge fund manager ran the numbers and said that the dollar would have to be devalued by another 50% to make us competitive with the world again.

That means, if you’re paying $5 for your Starbucks coffee...you’ll be paying $10 in just a few short years. If you’re paying $400 for your car payment now, better get used to $800 payments.
Do you think “wage growth” is going to keep up with that? Hardly!

In fact, Ben Bernanke flat-out admitted last year that it will likely take five years or more to get our unemployment rate back down to 5-6%.

So if there is a glut of unemployed people, there’s no need for employers to raise wages when there’s an everlasting supply of employees willing to work for peanuts.

So the bottom line is: you’ve got to get positioned into currencies that aren’t “singing the same tune” as America.

That includes places like Switzerland, Norway and Singapore. All three have stronger currencies that can shield you from the dollar’s long-term destruction, and even provide some measure of safety as stocks drop.

So before the greenback devalues another 50% over the upcoming years...shift into something that will retain its value and grow through the years. And do it while the buck is still worth something!


Have a Nice Day,

Sean Hyman
Editor,Currency Cross Trader