The Bell Tolls For The Dollar

September 1, 2005

The bell tolls for the US Dollar because it is doomed. Like the Dodo bird, the US Dollar will, within the foreseeable future, disappear into the history books in the chapter on "Extinct Species".

This will be an event of profound importance that will impact every being on the planet. It will impact all corporations and businesses around the world. It is not too far fetched to say that it will be the most important investment variable in the years ahead. It will transcend fundamental and technical analysis. Such analyses require a firm measuring device, but that measuring device will be destroyed.

It is vital for our mental, physical and financial health that we all understand what is happening and why. I am only the messenger, so please be kind to me. I just call the shots as I see them, so let me explain my reasons in more detail.

Let's start with the following recent posting from Richard Russell's Dow Theory Letters web site:

August 23, 2005 -- The American Institute for Economic Research out of Great Barrington, Mass. 01230, publishes an index for the dollar along with the dollar's purchasing power. Every time I look at this index it makes me angry. Why? Here's why. When I left the Army Air Force in 1945 the Institute's dollar index stood at 100. In other words, a dollar bought a dollar's worth of goods.

By 1960 the index was down to the point where the 1945 dollars that I'd been saving bought only 61.1 cents worth of goods. The erosion continued. By the time that Alan Greenspan took over the Fed in 1983, the index bought only 18.0 cents worth of goods. By 2003 the index bought only 9.9 cents worth of goods. I don't have the latest figure for 2005, but let me put it this way -- the dollar that the Army Air Force paid me in 1945 will now, here in 2005, buy me less than a dime's worth of goods.

So thanks, Federal Reserve. Thanks Alan. Since my youth when I was 22, I've seen the buying power of the dollar collapse over 90 percent. You see, the damn irony of the thing is that we hear our government talk about only 2 percent inflation today -- but they don't dare talk about what's happened to the dollar over five, ten, twenty, forty years. They don't dare even whisper it because it would sound God-awful. It would tell the American people that not only are they being taxed by their government, but they are being viciously taxed again by Fed-created inflation. - Richard Russell, Dow Theory Letters.

Richard Russell is indignant about the destruction of the purchasing power of the US Dollar, but why is there not a general outcry against what is happening?

There appear to be two main reasons, these being:

  1. The decline in purchasing power of the US$ has been fairly slow and people have been able to adjust to it;
  2. There has been deliberate deception, distortion and dis-information of the items that would alert people to problems in this area.

The trend toward loss of purchasing power of the US Dollar over the past 30 odd years has been very gradual and people have adjusted to the annual changes. People seem to have the ability to absorb and adjust to small, gradual changes in their lives but react poorly to dramatic changes.

We all have the problem of earning our daily bread, of simply managing our day to day lives. Earning a dollar has been more important than worrying about the fact that the dollar was gradually losing purchasing power. We simply adjusted to it. Our salaries and wages were increased or we found ways of increasing our capital by taking advantage of the declining purchasing power of the currency.

There is an experiment that I cannot vouch for (I have never tried it) that involves dropping a frog into a pot of boiling water. The frog apparently will leap out of the boiling water. If the frog is dropped into a pot of cold water it will happily stay there while the water is heated very gradually until the frog is boiled to death. The frog simply adjusts to the gradual temperature change until it is comatose.

I have been able to conduct a different experiment which proves that we humans are no different. We react violently to dramatic change but we do have the ability to adjust to gradual change. I tried the following experiment on a German autobahn where there was no speed limit. I was driving at a safe speed of about 70 mph when I suddenly speeded up to 100mph. The reaction from my wife was instantaneous: "Slow down, you're going too fast!" I dropped the speed back to 70mph and after a while started to very gradually increase the speed until I was doing 110mph - this time without getting a reaction. My wife had adjusted to the gradual speed increases.

The items that are included under the "deliberate deception, distortion and dis-information" reason include the official price indices, the gold price and the exchange value of the dollar. These manipulations have all been dealt with extensively elsewhere and I don't propose to spend much time on this issue. The disinformation will continue for a while but once we enter the period of rapid change, the deception will be obvious to everyone.

So we have adjusted to the gradual loss of purchasing power of the US Dollar over the last 30 years, but why should it not take another 30 years to lose a further 90% of its current purchasing power? Why should things not continue as before?

The answer is that the problems that have been building up in the US economy over the past many decades have been brought to the point where they are approaching crisis level. The expectation is that the creation of new US dollars to meet these crises will accelerate very rapidly. We will have entered the period of rapid change, when the depreciation in the purchasing power of the US$ will become exponential, and the changes will be so rapid that people WILL react to this.

The problems facing the US economy all seem to start with the letter "D". They are:

DEBT,
DEFICITS (both Balance of Payments deficit and Federal Budget deficit), the DOLLAR itself,
DEVALUATIONS (competitive depreciation of foreign currencies to protect their export industries),
DEMOGRAPHICS (Baby Boomers reaching retirement age, under funding of pension funds, social security etc),
DERIVATIVES (possibly the largest problem with the biggest numbers,
DEFLATION (which will cause the budget deficit to mushroom) and
DWELLINGS (as in Real Estate boom).

These problems have been dealt with exhaustively elsewhere, so I will not comment further. Suffice to say that the financial stresses that they will give rise to will be "solved" by "throwing money at the problems" by resorting to the electronic money creation process. The size of these problems guarantees that the creation of new US$ will rapidly accelerate, causing the decline in purchasing power to become exponential.

It is not a question of IF the dollar is doomed but rather WHEN sufficient people understand what is happening and panic out of their US Dollars. In my opinion, this should be within 10 years and possibly within 5 years, maybe much sooner.

The following is from a recent article by Robert Kirby:

Murray Rothbard, the brilliant student of Mises, explained the genesis of the boom. "Why do booms, historically, continue for several years? The answer is that as the boom begins to peter out from an injection of credit expansion, the banks inject a further dose. In short, the only way to avert the onset of the depression is to continue inflating money and credit. For only continual doses of new money on the credit market will keep the boom going and the new stages profitable. Furthermore, only ever increasing doses can step up the boom, can lower interest rates further, and expand the production structure, for as the prices rise, more and more money will be needed to perform the same amount of work. Once the credit expansion stops, the market ratios are re-established, and the seemingly glorious new investments turn out to be malinvestments, built on a foundation of sand.

"It is clear that prolonging the boom by ever larger doses of credit expansion will have only one result: to make the inevitably ensuing depression longer and more gruelling."

Mises continues, "It is true, the banks (or the governments) are in a position to prolong the boom for some time by injecting progressively increasing quantities of bank notes and deposits into the market. But the artificially created prosperity cannot last forever. Sooner or later it must come to an end. There are only two alternatives: 1. The banks do not stop and go on expanding credit at a progressively accelerated pace. But the spell of inflation breaks once the public has the conviction that the banks and the authorities are resolved not to stop. If no limit of the inflation and, consequently, of the general rise of prices can be foreseen, a general flight into real values starts. Everybody becomes aware of the fact that to hold cash and deposit balances with the banks involves loss, and that he does better to buy and store goods. Everybody is anxious to get rid of money and to exchange it for some other commodities, no matter how much he must pay for them. Prices are running away, and the purchasing power of the monetary unit drops to zero. The national currency system cracks up. 2. As a rule, the banks do not let things go so far. They stop sooner by restricting credit. Then the day of reckoning dawns. The illusions disappear, people begin again to see reality as it is. The blunders committed in the boom become visible."

The fact is that IT IS TOO LATE FOR OPTION 2.

We have been told in no uncertain terms by Federal Reserve Governors that there will be no deflation. Whatever funds are needed to avoid deflation will be made available. The electronic printing press will be resorted to.

That simply means that the US Dollar is doomed to extinction.

The bell is tolling for the US Dollar but the bell is also tolling for us. We need to make some important investment decisions in the months and years ahead.

Gold is the only commodity that has always been produced for ACCUMULATION and not for CONSUMPTION. Silver used to be in the same category, but has recently become more of an industrial metal.

The reason that gold has been accumulated over the millennia is because IT RETAINS ITS PURCHASING POWER OVER TIME. It is a haven where wealth can be stored during times when existing Government money is being rapidly debased and losing its purchasing power - exactly the situation we are facing over the next few years.

Currently the price of gold is at bargain basement levels. Not only has the price been manipulated downwards, but investors have to re-learn the benefits of holding gold. This they will do rapidly as the events relating to the US Dollar become obvious to everyone. We need to acquire some additional gold holdings while the bargain prices remain. I suspect that, like all bargains, this situation will not last much longer.

Alf Field
Comments may directed to the author at: ajfield@attglobal.net

Disclosure and Disclaimer Statement: In the interest of full disclosure, the author advises that he is not a disinterested party in that he has personal investments gold and silver bullion, gold and silver mining shares as well as in base metal and energy companies. The author's objective in writing this article is to interest potential investors in this subject to the point where they are encouraged to conduct their own further diligent research. Neither the information nor the opinions expressed should be construed as a solicitation to buy or sell any stock, currency or commodity. Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions. The author has neither been paid nor received any other inducement to write this article.

Alf Field was born and raised in South Africa. He is a Chartered Accountant by training. Together with a partner, he started his own funds management business in 1970 in Johannesburg. In August 1971, when the USA stopped converting US dollars for gold at $35, Alf perceived a major opportunity to buy large quantities of gold mining shares personally and for clients. In 1979 he migrated with his wife and four children to Australia. He is currently a self-funded retiree who manages his own portfolio. In 2002 Alf started writing articles on gold related subjects, including monetary history, as well as a series of gold price forecasts using the Elliott Wave technique.

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