Is there a looming US dollar collapse? A currency collapse, such as the Soviet Union collapse, has been mentioned as the precursor to a US dollar collapse. But is this a real possibility?
For starters let us state categorically that anyone, including us, that says they can exactly predict things like a US dollar collapse, is probably smoking something that could get them in trouble.
Still - there are many trends happening that have thoughtful people worried. So it might be useful to review what the issues are in a US dollar collapse.
Credit System 101
As a starter, understand that our financial system is built around debt.
Ever since 1971 the U.S. financial has been divorced from any physical standard, such as gold. What we have instead is a Federal Reserve banking system in which money is formed through the issuance of debt. Let me repeat that - money is formed through the issuance of debt.
By issuing debt the Federal Reserve can increase the demand of goods and services. And the more debt there is the more money is printed. This may sound strange to you if you have never studied how it works but in fact through most of the last 35 years or so this system has worked pretty well.
It has worked well because our economic system has steadily grown, and as long as it grows the overall cash flow increases and the average borrower can thus pay that debt back with interest.
But this is where the growing concern about Peak Oil comes in. The growth of this economy, and in fact the growth of the world economy, is believed by many people to have been fueled by the rapidly growing availability of cheap energy from fossil fuels. We have said it before - everything, including people, agriculture, manufacturing, and distribution of goods and services, runs on energy. Cheap energy multiplies the efforts of humans and fuels growth of the economy. There is considerable evidence that every time the cost of energy spikes, whether for political or supply-demand reasons, the economy feels the effect very quickly.
And this is where the concern comes in. When the oil supply cannot keep up with demand, driving up the price and limiting the availability of cheap energy, what happens?
A good argument can be made that in the last few years when oil production seemed to begin to flatten out and prices rose, things begin to happen - the economy stalled, wage growth slowed, unemployment increased, and defaults on debts started. When a significant part of our budget spending goes to underlying energy costs and those energy costs rapidly increase, something has to give. That something we normally call discretionary spending. For the U.S. economy a significant part of spending and economic growth is discretionary.
Maybe a picture would help here. We can show this in a sort of dynamics flow chart:
This is an admittedly over simplistic way of viewing a very complex system. But the basic notion is that the cyclic loop showing that a slow down of growth leads around the loop to less money being spent on all types of goods and services with the result that layoffs put more and more people into a situation in which they cannot pay off their loans and the banks that made too many dubious loans begin to experience more and more loan defaults, which puts them into a condition in which they react by making future loans harder to get, further slowing growth.
The rising cost of energy also hits many companies so hard on the cost side that they begin layoffs independent of declining discretionary spending. What is different now is that trigger outside the loop (peak oil) which starts the slowing growth by removing the thing that has been helping growth all along - cheap and abundant energy. It not only slows growth initially, but that energy effect gets more severe every year.
Why can this be so bad?
There is vastly more debt in our modern financial system than assets to pay them back. If there was not much then we would just let it unwind a bit and clean out a few bad loans, put our house in order, then figure out how to move forward in a bleaker future.
But we cannot get off that easy. We have a long way to fall. And in addition to the obvious debts on loan defaults there are a large number of derivative contracts outstanding, which most of us do not even understand, but we saw what they did to AIG. There are many more shaky ones.
Who is to blame for all this debt?
Government debt, business debt, and personal debt. We have met the enemy and they are us.
There are people who do understand all of this who are very concerned that the worldwide banking system could collapse and that would include a US dollar collapse. And many of them are concerned without even taking peak oil into account, because they are economists and do not consider resource depletion as an important issue.
At some point in this big shell game it will become obvious to all the players that more debt cannot be issued as a stimulus package to get the world out of this problem. At that point things really could begin to unwind because all players will realize it is not possible to pay back their debts and the default lists will balloon, leading to a US dollar collapse.
Alternative Views
It is time to pause and acknowledge that the above view and explanation is not only oversimplified but one that many good people think it just flat wrong. Three countering arguments often come up and can be simply described as follows:
Peak oil is a myth. We will find more oil with all of the new exploration technology and if not we will replace cheap oil with alternates.Cheap energy is not that important to economic growth - many modern businesses rely more on knowledge (or software or something else) and higher energy prices will not slow them down. Only heavy energy intensive industries will suffer if peak oil happens, so a new economy will emerge based on new realities.
Growth is great but not required for our present system to keep on keeping on.
We obviously disagree with all three counter arguments, particularly the first one. But the global financial - business - agricultural - human system is so complex and interrelated we acknowledge there is room for debate and that debate has to take place. Accordingly we are going to publish alternate views on this site. Not in a forum framework with the accompanying flame wars, but in reasoned articles from all sides.
Articles on the generic subject of economic and financial futures,including US dollar collapse, and a look at other examples, such as the Soviet Union collapse, will appear below. Most of them will be ours and will reflect our biases. But other authors are encourage to write - and we will publish them and acknowledge the authors.
Never mess with the FED! Even if you are US Dollar. What Maestro started General Bernanke
has taken to the new level with choppers and a lot of heavy armor with Quantitative Easing.
No prisoners will be taken, it is deadly serious now.
Quantitative Easing does not work or does it? You need to answer what is the real target. Officially it was supposed to bring the Yields down and Mortgage rates with it. It look like it worked for a while, but from April, 20th Long Term rates are rising! They are out of FED control - suspicious foreigners must be stoped to buy Treasuries all together and Treasury Bubble is bursting pushing Yields higher despite FED buying. Inflation is back. With record low Short term rate at effectively zero controlled by FED and rising Long term rates controlled by buyers of IOUs we are in negative Real rate territory again. Welcome to 2002 again: Gold will flourish, Silver will fly. On another note according to Jim Puplava interest payments in March with record Budget Deficit of almost 200 billion dollar were at 20 billion dollars. With rising Yields monthly payments of interest will double very soon deteriorating the situation further.
Here we can see why we have raised our Crash Alert to Pandemic level: US Dollar is in a Waterfall mode after a Bearish Flag resolution. Now the dollar is below not only MA50, but also below so important MA200 and it has slid through this important support without any thoughts about a bounce. The real idea of QE is to debase the US Dollar by any means and bring inflation back, it is the only idea left to survive for a while and inflate the debts out. Real taxation will be rising and it is an old trick of all governments based on FIAT currency: with inflation you will have always to pay taxes based on nominal values even if the real purchasing power of your income or realised capital gain will diminish in real terms.
And on a weekly chart US Dollar now is under MA200 with Confirmed Head and Shoulder Bearish Reversal and Green Fellow has a lot of room to fall further before first hesitation.
