Johnson: I just got back from the Global Currency Expo... The theme of the conference was how to position investments as the dollar crumbles after so much printing and so much debt issuance. ... the attendees ... listened to ... people talk about how the dollar will collapse. But then they had Harry and me bombard them with facts and statistics as to why it’s not true.
Johnson: You see, most every speaker there was using the typical check list to explain why the dollar is in dire straits. Has the government seemingly gone beyond the pale in terms of issuing debt to pay for profligate spending? Yep. Is the government – or its nefarious extension – printing money ad nauseum during a time of peace? Absolutely. Are there hard assets that can be purchased? Of course. Are there capital controls? None that can’t be overcome. Well there you go. The government’s killing the currency for its own ends and people of means can choose to leave the system. Nothing else to see or talk about here, the death of the dollar is a foregone conclusion… or not.
Johnson: Those rules, the ones about
debt, money printing, ease of capital movement, etc., are certainly
important factors in determining the health of a currency. But they are
not the only rules. There are others, which can trump – and have trumped
– these criteria, and that’s what we pointed out from the stage. While the U.S. is printing
money, it is not showing up in inflation-inducing borrowing. That’s
because the largest segment of our population, the boomer generation, is
now in their saving phase – not their spending phase. This is the same reason that
extraordinarily low interest rates are not causing a boom in borrowing,
and why those same low interest rates are not causing savers to flee
deposit accounts. The money they have is meant for another time –
retirement. So all of Bernanke’s efforts will fail to spark a meaningful
recovery and fail to spark inflation as well.
So, his argument here is that savers can prevent hyperinflation by saving, and that the baby boomers are a large enough saving force to do so. Unfortunately, saving large amounts of a failing currency may delay the collapse of that currency, but then the savers of the collapsing currency will be the worst affected by the collapsing currency, as their life savings will disappear before their very eyes.
Johnson: Just as important as the domestic situation is the current state of other large currencies. If an investor were to leave the dollar, where would he go? The euro, with its Cypriot bail-in and failing states of Italy, Portugal, Spain, Greece, and Ireland, along with 12% unemployment? Or perhaps to the yen, where the government of Japan has just announced plans to destroy its own currency? Boy, those sound like GREAT choices!
Well the simple answer is "Gold for saving, Euro for spending". It's somewhat ironic that a guy claiming to know how the world financial architecture works can write about the collapse of the US dollar and not once even mention gold. No wonder he cannot see any GREAT alternatives. Johnson also misses the point that the savings medium does not need to be the same as the transaction medium, nor does he understand the Euro. The fact that the ECB did not bail out insolvent institutions makes the currency STRONGER than if they had, and proves that they WILL stick to their 2% CPI mandate - ie, price stability in the short to medium term.
Johnson: Finally, there is the idea that the U.S. dollar is losing its status as the currency of reserve. This is bantered about a lot, and many smart people point to economic reasons why the U.S. dollar will be knocked off its perch. The typical reasoning circles back to the money printing and the debt, and often includes the prospects for future growth. All of that makes sense, but I’ll add another element – security. In particular, the ability to project power around the globe with bone-crushing force. We have it. No matter what one’s opinion of the wars in Afghanistan and Iraq, there is no doubt that they have allowed the U.S. military to develop into the most battle-tested and experienced fighting force on the planet. No other military has engaged in such warfare over the last decade
There is only a small degree of validity to this argument, in that the US can prevent a full on frontal assault on its dollar with military might. Iraq and Libya learned this the hard way. However the current attack on the US dollar is not a full frontal attack - it is a death by a thousand cuts. Keep an eye on the news and you will see bilateral currency and oil deals going on all the time. Keep an eye on the SWIFT data and you will see that the Euro already has more usage than the US dollar. Also, once it is obvious that its currency is failing, the US military will be completely useless, after all, how motivated will soldiers be if they start getting paid in monopoly money and they try to buy petrol with monopoly money. The collapse will be as swift as the Russian one.
Johnson: Along the way, we have developed unparalleled techniques for gathering intelligence (like drones) and surgical strikes (by special forces). What does this have to do with the reserve currency? Think back to how the U.S. dollar got that position in the first place – it was immediately after the Second World War and we were the strongest country to emerge from the conflict.
Er, no. The reason the US dollar was adopted as the international reserve was not because the US military was the strongest, it was because the US currency was the strongest, because it was backed by gold and the credibility drawn from the ultra productive US manufacturing industry. And where is that credibility today? Hahahahaha!!! That's where.
Johnson: Those who are counting down the glory days of the U.S. dollar are in for a big surprise… it’s going to get stronger.
The US dollar will collapse, just as all currencies have before it. In the mean time, it may temporarily get stronger, as investors trade via US dollars to get out of the derivative markets, bonds, etc into gold.
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