Waiting for the Crash

This chapter was published as an article in late 2004.


This past weekend I had the pleasure of accompanying my wife to LSU-Baton Rouge to visit my daughter who just this week was initiated into her sorority. We pulled our small Airstream trailer four hours south and enjoyed a delightful weekend visiting our daughter and relaxing in the perfect November weather of south Louisiana (clear blue sky, 68 degrees, sunny with a slight breeze). I even managed to finish Pat Buchanan’s new book, Where the Right Went Wrong: How Neoconservatives Subverted the Reagan Revolution and Hijacked the Bush Presidency.


Mr. Buchanan explains the foreign policy of post-World War II United States, a big part of which centered on monetary policy and the development of international organizations to head off the sorts of economic chaos that had occurred after World War I. It all started with Harry Dexter White’s plan at the 1944 Bretton Woods Conference in Bretton Woods, New Hampshire.  White was an economist (and alleged spy) working under Treasury Secretary Henry Morgenthau.


Under the Bretton Woods plan, the U.S. dollar would serve as the world’s reserve currency and would be backed by gold at $35 per ounce. All other currencies would be valued against the U.S. dollar.


The plan also called for the establishment of the International Monetary Fund (IMF), funded with 104 million ounces of U.S. gold and billions of dollars of U.S. cash. Other countries contributed money and were granted voting rights in proportion to their contributions. The IMF was set up to provide loans to countries facing a run on their currencies.


A third part of the plan was the creation of the International Bank for Reconstruction and Development to provide loans to rebuild countries that suffered destruction during the war. The IBR&D would later become known as the World Bank.


After WWII, the United States sold the rest of the world twice as much as it imported. Since under the Bretton Woods plan, the U.S. was supposed to provide liquidity for the rest of the world, the trade surplus had to be addressed. Too much of the world’s money was piling up inside the United States. Several methods were used to send U.S. dollars throughout the world. The U.S. stationed troops and built bases around the world, which helped export dollars. Foreign aid and loans from U.S. banks sent even more money overseas. U.S. markets were opened to foreign goods with no import tariffs. Foreign currencies were devalued to make foreign goods more attractive in U.S. markets, enabling countries that were rebuilding to earn cash to pay back their loans.  These techniques worked well, and pretty soon, the flow of money going out of the U.S. got out of hand.  In 1971, President Richard Nixon and Treasury Secretary John Connally severed the gold link to stop the subsequent gold redemptions and allow us to drop the value of the dollar to match the currency value to that of our trade partners so that we could compete in the import/export arena.  Nixon’s and Connally’s short-term thinking in unpegging the dollar’s peg to the gold standard has caused long-term pain and problems.


Following the U.S.’ dismantling of the gold standard, the International Monetary Fund changed its mission, loaning money to any country that found itself unable to pay back its loans, so long as that country pledged to follow IMF rules concerning its monetary policy, which came to include “easy money” policies and abundant quantitative easing and which put the banks in the position of having enormous power over some countries.


With the Reagan tax cuts and economic boom as well as the defense cuts at the end of the Cold War, the U.S. was, as a major funder of the IMF and a major purchaser of foreign goods, able to help “rescue” Mexico, Thailand, Indonesia, South Korea, Russia, Argentina and Brazil from currency collapse. The IMF and the World Bank poured money into these countries to allow them to continue servicing their foreign debts. The IMF insisted that these countries devalue their currency so they could export their way out of the crisis by flooding the U.S. market with cheap goods to earn U.S. dollars to service their loans. The U.S. agreed to keep its markets wide open.  All this was done at the expense of the U.S. market.


With its trade deficit at more than $600 billion dollars, the U.S. is in trouble.  U.S. dollars are piling up overseas. Unless the U.S. can substantially increase its exports (not possible given how cheap it now is to produce goods outside the U.S. compared to within it), then the U.S. dollar must fall. In the long run, a devalued U.S. dollar will help us export goods and correct our trade imbalance. In the short run, however, there will be much pain. There will also be pain for anyone foolish enough to be holding U.S. dollars.


Eventually, U.S. industry will reassert itself, but it will take a decade or more. First, the dollar value will have to continue to drop, followed by our standard of living.  Eventually, people will be comfortable working for wages that make the U.S. competitive.  Then, once our dollar is equal or below theirs, other countries’ goods will start to look relatively expensive compared to our own. We have basically engaged in a calculated race to the bottom, allowing multiple government entities and markets to determine where exactly the bottom is.


For now, we must import many essential items because we no longer make them in this country, and when the dollar devalues we will have to pay a much higher price for them until we can produce them again. Make no mistake: the dollar must devalue because of the economic strategy.  Politically, a devaluing dollar will play havoc with our empire.


A couple of silver linings in this situation are that our troops may have to start to making their way back home because we will have less capital for the war games we tend to play. Our population may pay more attention to the character of the individuals they put in office.  Incumbents may have to shape up or lose their jobs.


In the meantime, foreigners are buying U.S. assets such as Treasury securities and U.S. businesses. Our great U.S. companies are slowly being sold. Our country is being deindustrialized while we sit and watch.


Will there be a trigger that precipitates a dollar crisis? Will the system blow up? Will the Middle Eastern oil countries suddenly decide to sell their oil for Euros only? Will the dinar upset the U.S. dollar? Or will we the dollar die the death of a thousand cuts in which it slowly but steadily devalues?


When the dollar devalues, gold naturally goes up (unless it held down by artificial means). Over the past few years the dollar has dropped around 35% against the Euro and gold is up almost 70%. Maybe it is already happening before our eyes.


Live life and enjoy today because it is the only life we have, but be aware of what is happening all around us and take financial precautions.  And remember: hard currencies work best in hard times.


There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

--From The Economic Consequences of the Peace by John Maynard Keynes




It is worth noting that in 2004, when this chapter was published as an article, gold was priced at $435 an ounce. Since then, it has risen to a high of just under $1900/ounce (roughly 430% growth) and has backed down to $1650/ounce (roughly 375% growth) at this writing (January, 2013).

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Since 2001, Larry LaBorde has sold gold, silver, platinum and palladium for investment to clients in the U.S. and around the world through his firm, Silver Trading Company LLC. The firm also offers guidance about metals storage options. We love your feedback! Please email Larry with your thoughts about this article or your questions about metals or storage.

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