Guest Post: The Coming Currency Crisis

Tyler Durden's picture

Submitted by Bud Conrad of Casey Research, first published in the July 2006 International Speculator, and worth a reread for anyone who has not seen it previously.

The Coming Currency Crisis

Poor Ben Bernanke. The greatest financial train wreck in history is going to happen on his watch, and it will be mostly his predecessor’s doing. But not the work of Alan Greenspan alone. The Washington elite and their compulsively clever counterparts around the world have set the US (and global) economy up for a currency crisis of gargantuan proportions.



To explain why this seems inevitable and unavoidable, let’s look at the data. First, there are the deficits. They’re big, and they’re three.

Deficit 1 – The Government’s

The lamest deficit excuse, a story left over from the 20th century, is that government can use borrowed money to stimulate the economy. It can’t. While it’s true that government can spend borrowed money to encourage particular favored activities (the ones with the right political connections), the borrowing dampens the rest of the economy by depriving it of capital.

What’s worse is that the favored activities are usually of the wasteful, rat-hole variety: wars; regulatory agencies; fatter subsidies for uneconomic farming; more complex Medicare programs; and bigger budgets for public schools that don’t teach and for colleges that teach whining. Meanwhile, commercial projects that add real wealth get cut off from the capital they need or have to bear the added costs that come from the government competing for investor funds. And so the government is left with more debt to pay and a smaller economy for its tax collectors to feed on.

It’s not rocket science. Arithmetic is the same for a government as for the guy driving a Mercedes on a Volkswagen budget: Spending more than you make, let alone more than you will likely ever make, leads to ruin. The only difference is that it takes governments longer to get there.

And if we’re not there yet, we are getting very close. The US government has run up a truly horrific debt of $8.2 trillion. That’s $28,000 for every man, woman, and child in America. By itself, the debt would be a serious but not catastrophic problem for the economy. But unfortunately, it is not a stand-alone problem. It feeds other problems, including – among others – inflation.

Debt and Inflation

Just how is the government’s budget deficit inflationary? The answer is partly political and partly economic.

The political part is simple. Government debt makes inflation attractive for politicians. Inflation is a slow-motion default – a default on the installment plan – that reduces the real burden of servicing the debt and leaves more resources for the politicians to play with. Inflation is especially attractive for them when the debt is owed to foreigners, who don’t get a vote. Politicians bemoaning inflation, those responsible at any rate, cry on the outside while laughing on the inside.

The economic part is more complex. Because the deficit handicaps all the industries that aren’t being bottle-fed by government spending, much of the economy will tend to languish – which is a signal for the Federal Reserve to expand the money supply. It is the increase in the money supply that directly causes inflation.

And there’s a second chapter. The government finances its budget deficit by selling IOUs. In the case of the US, the IOUs are primarily short term, especially US Treasury bills. From an investor’s point of view, the T-bills are an interest-earning substitute for cash. So a government deficit decreases the demand for dollars themselves – and that reduction becomes a second, independent source of price inflation.

If the US were alone in the world, that would be the end of the story. All the T-bills (and T-bonds) would be sold to people in the US, so that the government deficit would be offset by private saving. The deficit would give the economy nothing worse than a low-grade fever – chronic but unspectacular inflation accompanied by a stunted growth rate.

But the US isn’t alone in the world, and it isn’t just another country, so there is more to the story. It is the US’s singular role in the world economy that will turn US deficits into global economic disaster.

The world functions on a dollar standard and has done so since the end of World War II. The USD is accepted as cash in most countries. Many millions of foreigners rely on it as a second currency and use it as a store of value. And the US dollar is the world’s de facto reserve currency: It is used by central banks to back their local currencies. The volume of dollars and dollar-denominated assets accumulated by foreigners during the reign of the dollar standard is staggering and without historical precedent. Any move away from the dollar would be… well, problematic.

Deficit 2 – The Public’s

Americans used to be savers. Not any more. Chart 1 shows a stark picture. As recently as 1990, Americans on average saved about 7% of their income (which allowed them to buy up much of the debt the government was issuing). But the savings rate fell over the 15 years that followed, hitting zero in 2005. Unlike in China, where the average savings rate is said to be 20% (some unofficial reports have it as high as 40%), or even in some European countries where it is reported at 10%, the savings rate in America is now negative.

(Click on image to enlarge)


The debt Americans have been building up isn’t just a number that sits on a balance sheet. And it isn’t spread evenly through the population and through the economy. It is concentrated in one area, residential real estate. And it is concentrated in an unstable fashion – thanks to the government’s efforts to stimulate the economy.

After the equities boom faltered and the US economy showed signs of weakening in 2000-2001, the Fed started cutting interest rates and worked its way almost to zero. Americans borrowed and spent as never before. Anyone who didn’t own a house borrowed to buy, increasingly with no money down or with interest-only loans. Those who already owned a house borrowed against it to buy furniture, cars, boats, yard-wide televisions, and trips to Hawaii. And the process didn’t stop with just one round. Empowered by ultralow mortgage rates, people bid up the prices of existing houses, allowing their owners to draw even more spendable cash at the refinancing window – or to use their equity to bid on an even more expensive house, or even second and third homes, in the process taking on even bigger mortgage commitments and pushing home prices ever higher.

So it’s not just the US government that is in debt, but also individual Americans who have racked up $8.7 trillion in home mortgages (many with adjustable rates that are now rising) and $2.2 trillion in consumer credit ($36,333 per person).

Bub-Bub-Bubbling Along

We all know there’s been a housing bubble. But with interest rates now rising – the Fed has hiked rates without a break in the last 16 FOMC meetings – what comes next?

The housing boom is over. Prices have softened in many areas and in others prices are beginning to decline. The reason? Interest rates have risen to a point where mortgages no longer look like free money. The refinancing market, which is a good barometer of how high or how low rates “feel” to the public, shows this in emphatic fashion in Chart 2. Borrowers have gone on strike, and without borrowing, the best the US real estate market can do is to tread water.

(Click on image to enlarge)

Yes, the housing boom is over, but the story of the housing boom isn’t. The mortgage debt is still there, saying “FEED ME” every month. If interest rates keep going up…

1. Home buyers will cut back on what they are willing to pay, so prices will decline.

2. Homeowners will see their equity shrink and then disappear. Mortgage lenders will swallow huge losses as many home owners default.

3. Homeowners with adjustable-rate mortgages will be squeezed; and

3a. Many will be forced to sell, so prices will decline; and

3b. The rest will cut back on consumer spending in order to keep their houses and so will push the economy toward recession.

The Federal Reserve has been letting interest rates rise because it is concerned about the prospect of inflation. But the unraveling of the real estate market, if interest rates keep rising from here, is so automatic, so ugly, and so obvious that the Federal Reserve must know what the consequences will be if they push rates much higher. The Fed might choose to tolerate a little more inflation rather than risk a deep recession. Too bad that’s not the only decision they face.

Deficit 3 – At the Water’s Edge

The US government is running a chronic deficit, going deeper and deeper into debt. The US public is running a deficit, going deeper and deeper into debt. So where is the credit coming from? The short answer is that it’s coming from nearly everyone who isn’t an American and isn’t dirt poor.

The longer answer is that the US has been able to tap into a river of foreign credit by virtue of the third deficit: the trade deficit. Foreigners, in the aggregate, sell about $2 billion per day more of goods and services to Americans than they buy from Americans.  The Americans, in the aggregate, make up the difference by selling investments to foreigners, most conspicuously US Treasury bills. Chart 3 illustrates this two-way street and shows how rapidly the traffic has been growing.

(Click on image to enlarge)

Why This Can’t Go On

If you have a very good credit rating, you may be carrying credit cards with limits of $10,000, $20,000, or perhaps much more. But however good you may look to lenders, there is a limit to how much they are willing to lend. And however good the US may have looked to lenders in the past, there always were limits to what it could borrow. The difference between then and now is that today the US is straining those limits.

Two elements determine how far foreigners will go as lenders to the US. The first is akin to a credit test. The second is a portfolio consideration. It is becoming increasingly difficult for the US to satisfy either of them.

Foreigners will accept T-bills and other dollar-denominated IOUs only so long as they believe US borrowers can make good on their debts. The concern is not primarily about explicit defaults. It is about the likelihood of a slow-motion default via inflation. It is a concern about the future value of the dollar. Confidence that the dollar will hold its value is strained with every increase in the US budget deficit (which increases the US government’s incentive to inflate) and with every increase in the overall level of US debt to foreigners (which encourages the public’s tolerance for inflation).

It would take a phenomenally slow person, say, a central banker, to have much faith in Uncle Sam’s good credit when the US can’t pay its current bills by a very wide margin – and has trouble saying “no” to new spending plans. But even the faith of a central banker must have its limits.

Perhaps the central bankers haven’t yet seen Chart 4, showing the Government Accounting Office’s latest projections of US federal government red ink. Based on straightforward assumptions that (i) regular income tax rates continue; (ii) the alternative minimum tax is adjusted; and (iii) discretionary spending grows with GDP, the projection for spending, and thus the budget deficit, flies off the map. By 2040, the yearly deficit grows from the current 3% of GDP to 40%!

(Click on image to enlarge)

The second element in the calculations of foreign lenders is a portfolio consideration. Owning too much of anything is worrisome. So even if the risk of the dollar losing its value were modest (which it no longer is), as foreign holdings of dollar-denominated securities grow, the risk eventually becomes intolerable.

Chart 5 shows foreign holdings of US investments. The numbers are enormous. Japan alone has bet over $1 trillion on the dollar’s ability to hold its value. That’s enough to breed uneasiness in any portfolio manager. And the numbers keep growing because the US keeps importing goods by the boatload and paying with dollar-denominated IOUs. The breaking point is getting closer at a rate of $2 billion per day.

(Click on image to enlarge)

Relying on the Kindness of Foreigners… Who Hate Us?

The great irony is that the US is counting on foreigners to invest $2 billion per day… at a time when we are not winning many hearts and minds abroad. The counterproductive and unwinnable war in Iraq is just the unhappiest part of the current picture. Among other reasons why hatred for Americans is rising are:

  1. We maintain military bases that locals don’t welcome, and not just in Islamic countries. Many Germans feel that their country is still occupied after a war that ended before they were born. The US keeps troops in over 130 countries, where most people are no happier to see them than Americans would be to see Russian or Iraqi soldiers shopping at their hometown WalMart.
  2. The US earnestly attempts to impose government-issued “American values” on others. Bush says he wants to democratize Iraq – with no regard for whether the Iraqis want to be “democratized” or not and with no thought to what actual practice will slither out of the slogan. We chastise others, including China, about their human rights record, but our words now appear hypocritical given the heavy-handed US occupation of Iraq and the indefensible existence of the Guantanamo gulag.
  3. The US helps governments run by dictators and murderers stay in power, and surviving victims remember. They won’t forget that Saddam Hussein was once an ally. Iranians who hate Americans don’t do so because they hate Calvin Klein underwear, but because they felt oppressed by our former protégé, the Shah. The same goes for many current US allies in “the ‘stans,” the most noticeable recent example being Vice President Cheney’s trip to Kazakhstan to cozy up with that country’s ruling despot. The pattern long held true in Latin America; the effectiveness of anti-American political rhetoric for politicians like Chavez, Morales, and their ilk should come as no surprise.
  4. We talk about freedom and free trade, but the threat of massive violence seems to be the main tool of our diplomacy, and US subsidies for farmers don’t provide much of a free-trade lesson to Third-World farmers.

In short, the American global cop, far from harvesting the gratitude of a world made safer, is perceived as a hypocritical and plundering thug – hardly the sort of thing that makes foreigners line up to invest in America.

US heavy-handedness abroad and the ill will it inspires are dangerous for many reasons, including their effect on the US dollar. War in Iraq and saber-rattling over Iran are driving the price of the oil and other imports up in the US, which increases the trade deficit, which adds to the pile of dollar-denominated IOUs held by foreigners. And the same belligerence confirms in many Middle-Eastern minds that the US is driven by an anti-Islamic agenda. It gives them a non-financial motive for embracing alternatives to the dollar: the euro, the yen – anything not made in the US. Other foreigners see the belligerence as more evidence that the US government is a reckless spender and heedless of the consequences of its growing debt.

When the Drums Stop

The foreigners who hold all those dollars are getting restless. Chart 6 below shows recent changes in foreign holdings of US Treasury securities. The pattern is shifting.

(Click on image to enlarge)

It is striking that, in keeping with its official statements, Japan (the largest foreign holder of US Treasuries) has indeed begun lightening its load of American paper. This is not an “if” or a “maybe,” but a real and very significant shift… happening now.

Other changes are happening, not major dollar dumping yet, but rumbling. Look at the UK bar – it has more than made up for Japan’s negative number in recent months. That’s interesting in and of itself – why the UK?

The UK, like Luxembourg and the Cayman Islands, two other major sources of US debt buying, is a financial way station for international transactions – particularly from the Middle East. We suspect that the spike in UK purchases reflects a desire by investors in the Middle East to avoid dealing directly with the US – Arabs with a lot of oil money who don’t want their US-based assets exposed to rising anti-Muslim sentiment, for example – but who are not yet ready to dump the dollar altogether. It’s an important sign. It indicates a shift in the attitude of the most sophisticated elements of the Muslim world away from thinking of the US as a financial safe haven.

And there’s more. Consider this statement from Mr. Yu Yongding, an official of the People’s Bank of China:

Regarding the need for China to reduce its holdings of US dollar reserves: Firstly, in the first stage we must reduce accumulation, then later we should reduce our reserves… [China and Asian countries] don’t need that large an amount, more than $2 trillion, of foreign exchange reserves… Then, all East Asian countries have tremendous foreign exchange reserves and they all want to get rid of them, but if you do this then you cause competitive devaluation, not of their own currencies, but of the US dollar. So we should do this in an orderly fashion. If Asian countries moved too fast, everyone would lose… It would be utterly unfortunate if Japan sells a proportion [of their reserves] that causes problems. Then China panics and China sells a proportion – it would be very damaging.

Mr. Yu articulates the anxiety shared by other central banks: a desire to unload excess, overvalued dollars that is checked by the fear of triggering a cascading fall in the dollar. They won’t tolerate life in this box forever. All it will take is for one central bank’s governing body to get spooked, to decide that it had better get out of the dollar before everyone else does. The stampede will be unstoppable, and the dollar’s foreign exchange value will tumble.

Where will all that money go? The euro? The yuan? The ruble? The one thing that seems certain to us is that a significant fraction will go into gold, not only as an investment but as a means of wealth protection. Just a few days ago, Mr. Yu was quoted in the press saying: “We need to use some of the reserves to buy other assets such as gold and strategic resources such as oil.”

We don’t know which central bank will be the first to tiptoe toward the exit or when it will try. The process may already have begun. But we do know that important changes are already taking place among US trading partners. The US government’s daydream of spending its way to prosperity may not last the year.

The End of the Dollar Standard

Central banks won’t be the only players. The millions of people around the world who use the dollar as their second currency will join in. And for most of them, “the dollar” doesn’t mean Treasury bills, it means $20 bills, $50 bills, and $100 bills. The collapse in the foreign-exchange value of the dollar sparked by foreign central banks unloading their excess holdings will undermine everyone’s confidence in the dollar’s usefulness as a store of value. Private foreign investors will flee the dollar, further reducing its foreign-exchange value. And most of that privately held cash will flow back to the US as more fuel for price inflation. The dollar standard will be dead.

The consequences will be of historic proportions.

How “historic”? As you can see in Chart 7, if the world’s central banks backed their currencies with gold, it would send the price up (in current dollar equivalents) to many thousands of dollars per ounce – easily $5,000 or more.

(Click on image to enlarge)

But wouldn’t central banks fight against such a rise in gold? Wouldn’t they sell some of their tons of bullion to cash in on higher prices or out of a desire to keep the price from rising further?

Our friends at GATA make a compelling case that the central banks don’t actually have as much gold as they say they do. But even if that’s not the case, all the gold holdings the central banks report still are nowhere near enough to back their currencies. Note that, as a percentage vs. paper, gold now makes up only .04% of total central bank reserves.

Again, if the dollar proves to be unreliable as a backing for other currencies, what are central banks going to replace it with? Even if they move en masse to the euro, a global crisis is hardly a time for central banks to sell off the one hard asset they have.

And, as discussed in previous editions of IS, all modern currencies are empty promises. If the dollar is an “I Owe You nothing,” the euro is a “Who Owes You nothing?” What central bank would want to back its paper with more paper in the midst of such a world-wracking crisis of faith in paper?

With the political uncertainties that surround the other contenders – not to mention the object lesson of the spectacular collapse of the USD, when it happens – we believe the world will eventually stumble back onto a gold standard. That could happen in as little as a decade. In the interim, they may flirt with the euro, the yen, or other tissue papers, but not enthusiastically and not for long.

Virgins Are Safe This Time

Is there anything the US government can do to stop the train wreck? Earlier governments tried sacrificing virgins to the gods to ward off disaster, but the practice seldom worked and isn’t likely to be revived. The Federal Reserve could try raising interest rates still higher, high enough to convince foreign central banks to hold on to their dollar investments, but that has about the same chances of working as tossing gold-laden virgins into deep, water-filled sinkholes did. It might protect the dollar standard for a while, but it would turn residential real estate into a financial graveyard and trigger the depression the Fed is trying to avoid. Of course, the Fed could fight a contraction in the economy… by lowering interest rates. But that would bring on a flight from the dollar and a more rapid end to the dollar standard. There is no way out.

Future Uncertain?

If we’re right about a coming monetary regime change, it’s hard to imagine a future for the US that isn’t grim, with plenty of harm splashed around on its trading partners: inflation… currency crisis… dollar crash… government instability… internal conflict for scarce resources… welfare system collapse… skyrocketing unemployment… taxes raised on a population burdened with an uncompetitive US economy… dollar down 40%… 60%… 80%?… emergence of competitive economic battles on too many fronts: China, India, Japan, Russia – and on too many military fronts. End of empire/Fall of Rome redux… the Greater Depression.

We are already seeing extreme volatility in emerging markets as the hedge funds beat a hasty retreat for liquidity. Get used to it.

Remember, never before in history has the unbacked paper currency of a single country been used as the de facto reserves of the world’s central banks. We are truly in Terra Incognita, uncharted territory – and a hair trigger away from a currency crisis that, once begun, will quickly spin out of control.

Gold Is the Past… and the Future

At our recent Chicago conference we polled the audience to see if anyone of the 300 attendees could name the five natural reasons that Aristotle gave as to why gold is money. Despite having regularly mentioned those reasons in these pages – and offering a prize – not a single attendee had enough confidence in his or her understanding to stand up and recite the five reasons. So, here they are again: It has intrinsic value (it’s valuable in many uses); it’s convenient (houses are not easily portable); it’s divisible (the Mona Lisa isn’t); it’s durable (wheat rots); and it’s consistent (diamonds have different grades that are not always easy to see).

Even if the regime change we foresee takes decades to come about, the softest “soft landing” imaginable will still be very painful, with repeated flights from paper currencies. That is why we have been saying that gold isn’t just going through the roof, it’s going to the moon. And given the signs – particularly the housing bubble popping on the sharp point of higher interest rates and the increasing moves on the part of foreigners to distance or divest themselves of dollar-based assets – we believe the fireworks are going to start sooner rather than later.

As to what speculators – what anyone – should do, it doesn’t really matter whether the fall of the dollar precipitates the level of crisis we expect. The steps we advocate are reasonable for anyone who doesn’t want to get hurt by a currency crisis: buying physical gold (and silver – both are still relatively cheap in inflation-adjusted dollars); getting a useful portion of one’s assets into a stable country outside of the US (preferably one with no involvement in the “War On Terror/Islam”); and investing a fraction of one’s portfolio in gold stocks.

That these moves are also the same as those you need to make for realizing enormous profits is not a coincidence but a reflection on our times.


One More Observation

Government deficits, trade deficits, and losses in the dollar’s value tend to move together, a point made clear in Chart 8 which shows what happened after the US abandoned the gold standard.

(Click on image to enlarge)

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Solid's picture

This is an old article...WTF?

X.inf.capt's picture

GEEZ, this is a SHOCKER!!!!

and ive been buying pre-65 dimes because the're SHINEY.....

I think I need to buy a gun's picture

congress called in peter schiff today......i guess it truly is almost over....complete collapse coming of anyone with savings as gold sucks up all this debt

X.inf.capt's picture


i volunteer helping vets, the're huntin', lets just get it on!

ive been a baker for 18 yrs, ill continue baking for and helping these kids out, we stick together, and will....

these guys are ready....

LowProfile's picture

all the gold holdings the central banks report still are nowhere near enough to back their currencies


IQ 145's picture

It's evidence that Ben Bernanke's statement that "no one could have foreseen this" is bullshit. I think it is intended to show us that rational analysis of available information is useful and does have predictive ability.

Mesquite's picture

Truth is timeless, and always useful...


Harry Browne was writing, and warning, in very early 80's..

IQ 145's picture

Harry Browne's (sp?, don't know), book; "How to profit from the coming Financial Crisis", is what saved my poor but. Many sober analysts thought the dollar/US scam was going to blow up right then and there; Volcker fixed it for us; but the irresponsible politicians continued to be bought off and now it's un-fixable.

mtomato2's picture

That this was an old article was clearly stated by the Durdens at the outset. I find it fascinating that someone had the prescience and clarity of mind to so fully flesh out all of this in 2006. Suck it, Trabeck ... suck it long, and suck it hard.

Solid's picture

I didn't see that. My bad.

piceridu's picture

Submitted by Bud Conrad of Casey Researchfirst published in the July 2006 International Speculator, and worth a reread for anyone who has not seen it previously...


Snidley Whipsnae's picture

At the time this article was written it was unknown which way the Fed would move on interest rates, thus...

"Of course, the Fed could fight a contraction in the economy… by lowering interest rates. But that would bring on a flight from the dollar and a more rapid end to the dollar standard. There is no way out."

Now we know.

Very good predictive article, kudos to Conrad... We have yet to see the 'flight from the dollar' because the disruption in Europe has delayed the dollar flight. The Euro currency has come under fire while the dollar awaits it's turn... but, being the best looking horse in the glue factory isn't going to save the horse forever.

IQ 145's picture

I would say there is a "little" flight from the dollar; into Gold and Silver. My image is of a small creek splitting off of a little river; a river of disposable capital, or available savings; but it seems that the little creek is growing bigger; perhaps we are watching the "flight from the dollar" but it's on a time scale that is difficult for humans to identify.

IQ 145's picture

I never know where to put these things; buying Dec. Silver this morning at $40.915 at 12:13 NYT; comex contract. Will risk $6000. I think it's demonstrated support and it's "time" for it to rally. Be interesting, anyway.

anonnn's picture

See this written 2005, that even predates Casey's article.

The piece below is from the China Daily. I thought you would be
interested to see the picture from the Chinese point of view...
[EDIT: This was printed first on SI.]

It's time to take seriously a US-led global recession by Lau Nai-keung

2005-10-06 07:37

I think it is time that we should take a serious look at the possibility
that the US is going to take us down towards a worldwide recession in one or
two year's time.

go to

and see anonnn's entry.

IMA5U's picture

yawn  yes  we domed zzzzzzzzzzzzzzzz

Solid's picture

Those were the good-ol-days.

dwdollar's picture

I don't think Ben is as stupid as we kid.  I think he will resign and they will find someone much dimmer and more printer happy.

gionetg's picture

yawn  yes  we domed

monopoly's picture

From 5 years ago. And it is so At first when I read it did not see the date. Thought it was right on.

"Horrific debt of 8.2 Trillion.. Is that not amazing, well, that was just a warm up for us, exactly double, yes sir. THIS IS AMERICA! We are so cool.

chipshot's picture

you want relavant to today.....find and read "the Illumnati" by larry burkett circa 1991

a partial list----japan quake ,tsunami ,japan calling in USTs, big event in so cal ,iran ,iraq ,FDIC ,confication of firearms , collape of the dollar,a jobs bill ,fair tax plan, the EU/EMU ,big US event occuring in...wait for it.....2001. the great deceiver, democrat in the WH, and astronauts wife. all this printing in the first 75 pages.

----just started it and got the heebs highlightering these events  in this "fiction"


circa 2011


Solid's picture

Makes one wonder how long it can go on.
They clearly said soon, and it didn't happen yet. Shit, it could last a lot longer, but something tells me it won't.

tyler's picture

Doesn't matter to me when it happens, I'm ready as best I can be.  


Bernake has a mad man look in his eyes.  He's been kind of dormant on the announced qe but he's still doing shit, that's his job.   There's nothing anyone with any power is capable of doing at this point to avoid a gigantic ass fucking of the american citizen.  The ones that could do something about it are marganalized and ignored.  The people are gonna get what they deserve.

Snidley Whipsnae's picture

"They clearly said soon, and it didn't happen yet."

It didn't happen yet because the Euro Currency and EU have been subjected to extreme pressure... Hence, a flight to dollars, Ts...

Anyone believe that China is ignoring what is happening to the Euro currency with help from multinational banks?

Economic war never sleeps.

Manthong's picture

Very good piece, likely more of a review for most here, but might I suggest that

"Spending more than you make, let alone more than you will likely ever make, leads to ruin."

in this context is more appropriately asserted "Spending more than you make, let alone more than you can possibly ever make, leads to ruin."

zorba THE GREEK's picture

As long as we don't spend more than we can print, we will be okay....


mtomato2's picture

...but as long as I still have checks...

Manthong's picture

True, but when you think that this was penned 5 years ago (?), at that time the debt might have been repayable at reasonable valuations. 

Thomas Jefferson's picture

Watching the CNN debate last night reassured me of America's fate.  Stupid in.  Stupid out.  Stench of Death is pervasive.

baby_BLYTHE's picture

A currency crisis can come about in both a deflationary collapse scenario as well as a run-away inflationary collapse scenario. The Great Depression being the example of in deflation- confiscation of gold and revaluation of the currency. Zimbabawe, Germany, Hungary, Ukraine- being the inflationary collapse examples.

It is important to remember also that dirty war has also usually either preceeded or followed such events.  

jimmyjames's picture

A currency crisis can come about in both a deflationary collapse scenario as well as a run-away inflationary collapse scenario.


Exactly-in fact it's more likely to happen in a deflationary environment than during an inflationary binge-simply because credit is used to inflate rather than wholesale printing (FRB)-

Credit acts like money in expansion-it does not act like money when asset prices fall out from under the debt level-which is genuine deflation-

If debt cannot be paid down without printing and the tax base is seen to be deteriorating-the currency can be sold down to nothing-game over-


nestle's picture

Damn!! it's 2006 again?? That's great!! I got to short the pants off SPY in 1+ year!!

S&P500 @ 666 in 2+ years guys!! you heard it first from me!

eakle's picture

This article gave some great advice back in 2006, when gold was ~$600/oz.

Segestan's picture
Relying on the Kindness of Foreigners… Who Hate Us?..... boy;  Thats a Truth. However, they also hate each other once the spigget turns off. Good luck.
SaveTheGreenback's picture

Great read, Tyler.  This guy should be Fed Chief...

fourthousand's picture

Home boy was prescient

PaJoad's picture

If you'd read this in '06 you would have thought we'd be where we are today...further along? Still waiting for the other shoe to drop? Tomorrow?
Or do we still have another 5 years in this ponzi? I think not but who the hell knows?

tekhneek's picture

This was written:

  1. Before the "financial crisis" (which it describes in detail)
  2. Before the bailouts after the crisis
  3. Before quantitive easing
  4. Before gold hit $1900/oz
  5. Before silver gained 600%+
  6. Before ... you get the gist.

Timing it is never a good idea as this article points out. Preparing for it is a much better use of your time.

I just want to point out that you'd be up 3.3x on your money in gold in that time frame. Silver? 4.5x

PaJoad's picture

Excellent illustration of quantifying preparedness.

Snidley Whipsnae's picture

...and before the Euro came under extreme pressure. Which helped the dollar/Ts because of 'flight to safety'... Dollar now running on time borrowed from Euro crisis.


Hephasteus's picture

Who would have thought this would be the collective concious of the few people who actually bothered to wake up.

jimmyjames's picture

1--The volume of dollars and dollar-denominated assets accumulated by foreigners during the reign of the dollar standard is staggering and without historical precedent. Any move away from the dollar would be… well, problematic


If the US runs a trade deficit with any country-then that country must accumulate USD-if the euros run a trade deficit with another country-that country must accumulate EUR-

btw- most of this accumulated money is not money-but money equivalents -TBT etc.

It can be turned into currency-but first the equivalents must be auctioned off and if that happened on a mass scale-they would likely be redeeming in a worthless currency-so i doubt they would try it-


2--Unlike in China, where the average savings rate is said to be 20% (some unofficial reports have it as high as 40%), or even in some European countries where it is reported at 10%, the savings rate in America is now negative


No the US savings rate is not negative-

It has broken out of a 30 year downtrend and now sits above 5% and was not long ago at 8% -

Snidley Whipsnae's picture


The US personal savings rate was 1%-3% as of June 2010 and the trajectory, as shown on Fortune's chart at link, was almost straight down...

I doubt that a great increase in savings has occured in the last year since wages are stagnant, prices are increasing, and unemployment is up.

"FORTUNE -- The long decline of the savings rate in the United States has been widely discussed, yet every revisit of the data brings new cause for alarm. Hedgeye recently provided its clients a chart showing savings as a percentage of GDP. In the 1970s and 1980s savings were in the 5 - 7% range. In the decades since, personal savings have declined to the 1 - 3% range."

sasebo's picture

What do you expect with all the stupid assholes in charge?

There is only one person with answers to all the problems mentioned in this old post. Dr. Ron Paul. I know he's pretty old but if you vote for anyone else you'll just get more stupid assholes. He's the only one with the record on these issues. He's also turned down his congressional pension. He's got more contributions from members of the military than all the others combined. Dr. Paul will replace Bernanke, Geithner, Clinton, etc with Austrians. How about Michele Bachmann as his VP? 

FeralSerf's picture

Nah -- Baby Jesus will save us.  Have faith.  You'll see!

If I vote for BJ, is He going to have the same birth certificate problem that the current TOTUS has?

adr's picture

I said stuff like this in 1996 in college. The downward spiral, debt out of control, stock bubbles, Microsoft taking over, digital cameras replacing film, computers making blueprints obsolete. I didn't have any money to invest in stocks but I knew the market was always doomed to crash due to the excess stupidity of people believing they can outsmart simple math. I guess I wasn't much fun in class. I could see the housing crisis from a mile away, again it was simple math, A+B did not come close to C. 

At some point the reality that the rules of simple math can not be broken has to be realized. 2+2=4 as much as they are trying to convince us it = 5. They are using words to complicate things like quantum mechanics just so people who claim to be smart can tell you that you just don't get it.

How are we going to reset a global currency or even a single country. If we use gold how do we set its purchasing power. Gold has actually increased far beyond its normal historical purchasing power when expressed in dollars. At $30 an ounce 100 ounces could buy you a pretty nice car in 1955. Right now that 100 ounces can buy you a pretty decent house in most of the country. That is a pretty big jump. Gold would somehow need to establish a fair value. You better be able to keep your gold safe if ten little coins is enough to buy a BMW. 

I don't see how we back a currency with gold today. There simply is not enough of it. Even at $10k an ounce there isn't enough to even make a dent in the paper needed to pay just a small portion of US workers. Gold could be valued at $1 million an ounce at which point every grave dug in the past 200 years is being dug up for fillings. 

Inflation has simply taken the gold standard off the table. To bring it back would mean a massive revaluation of every produced item.