What's Going to Replace the Dollar?

Recently, I've devoted most of my writing to a narrow range of topics, including the current unprecedented rate of inflationary activity by the Fed, and the looming failure of the dollar. The issues have brought a lot of debate from those who agree, as well as from those who think I'm crazy. Yet despite support or opposition, three questions seem to come up more than any others:

1. Will the collapse be an absolute failure of the dollar and the U.S. economy, or will the dollar retain some value?
2. Regardless of the answer to the last question, will some other form of currency compete with, or even replace the dollar completely?
3. What am I doing to prepare for the events I predict? Am I shorting the dollar, or is there a better way to capitalize on the move?

Before I begin answering some of these questions, I want to point out that most of my critics tend to cling to the notion that the economic and military dominance the U.S. has enjoyed for the last century are immutable conditions -- that is to say, the U.S. and the dollar will last forever. Ergo, I point to any number of empires that have fallen prey to the exact same form of arrogance and aggression -- including (but not limited to) Rome, Spain, France, England, and the Soviet Union.

Moreover, if I were forced to predict an outcome based on either the immutability of the U.S., or the immutability of basic economic principles, I would vote irrevocably for the latter. Every single one of the aforementioned defunct empires can thank inflationary money-creation for much, if not all of its downfall. The United States is proving to be no wiser, and it is extremely naïve to think that 50 quasi-independent entities – each sporting its own constitution and government – will sit idly by as Washington flies the dollar into the ground.

I don't want to digress too much into the likelihood of mass secession, having visited that topic ad nauseam last week. But what I should point out, in pursuit of an answer to the first question above, is that I do not subscribe to any theory postulating absolutes. While I do believe the dollar is on the verge of a tragic, extreme, and irreversible downward course, I do not believe it will simply disappear from the face of the earth as a medium of exchange. It is much more likely the dollar will collapse and then level off as a weaker monetary unit. It will not retain its status as "global reserve currency."

And that brings us to the next question: if the world flees from the dollar, what will it run to?

Those of you who read my articles regularly undoubtedly consider yourselves quite blessed to be regaled by my relentless assaults on the U.S. dollar. I despair, however, that my aggression against the greenback might offer the impression I am partial to its weakness. Let me assure you I am not; every major economic bloc on earth is implementing the exact same irresponsible policies of zero-interest-rates, quantitative easing, and massive government stimulus that cause me to fear for the dollar's future, and I am equally appalled by the prospects of all the world's major currencies – including the euro, the pound, and especially the yen. Indeed, even Switzerland -- once the world's last bastion of sound monetary policy – is now threatening to implement quantitative easing!

But there's yet another interesting variable in this equation.

The Chinese and other countries have been playing an interesting game with the U.S. for decades: they keep their currencies weak in order to make exports more attractive to the U.S., while at the same time lending the U.S. vast sums of money. The U.S., in turn, uses this borrowed money to buy cheap finished goods from these countries. The countries then use their profits to lend the U.S. yet more money. And so the cycle continues. Until now.

As I've noted so many times recently, U.S. creditworthiness is all but dead. The American consumer is tapped out. There are few people left to buy Chinese goods. Why am I bringing this up? As the dollar, the euro, and the yen start to give ground, the Chinese, for instance, will feel obligated to drive yuan lower in order to re-ignite exports. The whole thing is a tinderbox just waiting to explode. So if every major currency on earth faces the same fate as the dollar, what will people use as a medium of exchange when the bottom falls out? My answer is as simple as it is predictable: gold, silver, and other precious metals.

I know some of you are upset right now. I can almost hear you cracking your knuckles above your keyboard, preparing to launch into a vicious tirade about how abjectly stupid it is to think people are actually going to buy milk, eggs, and cereal with gold. What will they do -- chop Krugerrands into wedges, like modern Pieces of Eight? I suppose that is a solution – it certainly worked for the Spanish, whose coins were the "reserve currency" in the new world for a long time. But in our modern technological society, using coins – or even fractions thereof – is completely unnecessary, if also impractical.

I am not a futurist, and I am not willing to predict with any degree of purported accuracy the exact form currencies will take once the illusion of fiat money finally and irrevocably comes to the world's complete attention. In my book Discipline, however, I posited a scenario in which the world's major currencies fail, only to be replaced by private currencies backed by precious assets. In the book, the world's major powers try desperately to stop the flight from their inefficient, monopolistic currencies but because of the proliferation of credit and debit cards, the transactions in the new currencies are transparent and easily facilitated. Of course, this leads to the next question: what, exactly are these governments going to do -- punish their citizens for wanting to use a stable medium of exchange in response to a failed promise? Are these governments really going to hold guns to their citizens' heads, proclaiming, "Use our currency and starve, or use a private currency and go to prison."

Again, my prediction came in the form of a novel; maybe it will accurately represent the outcome, and maybe it won't. But is it so farfetched to think that the managers and purveyors of the SPDR Gold Trust ETF – which currently holds more gold than most sovereign nations – couldn't quickly and easily issue some type of certificates that might quickly and efficiently facilitate transactions, at even the grassroots level? Further, couldn't this fund quickly and easily supply debit or cash cards to the public?

Perhaps your response to my musings is to say, "It would never catch on," in which case my reply to you is this: have you seen the speed with which things like iPods and MySpace go viral? Do you really think that, if the world's major currencies were failing, people wouldn't flock to any form of stable money as quickly as possible? What would you do? If dollars were melting in your pocket, and someone offered you a liquid medium of exchange that just about everyone was accepting – backed by all the stability and consistency of precious metals – which would you choose?

We've addressed the first two questions I started this article with, so let's get to the third: if you want to prepare for a collapse in the dollar, should you short it, or is there a better way to benefit? The answer is that the only real way to short the dollar is simply not to own it. You can certainly short dollar futures if you like, but when you do that, you're shorting the dollar against specific currencies, and we've already established that all the other major world currencies are going to fall with the dollar. Even the dollar index is tied to other currencies.

As an aside, here's an interesting thought to ponder regarding the Dollar Index: the major currencies with which the dollar index is calculated could all be sliding with the dollar – relative to assets, goods, and services in the global economy -- and yet the dollar index could actually be going up, if the dollar is stronger than those other currencies. Just think about that. Every day on CNBC Rick Santelli refers to the Dollar Index as a true gauge of the dollar's strength, but in reality, the dollar might be weakening tremendously against assets, and if you only watch the Index, how would you know?

Anyway, if we assume the dollar is weakening with all other major world currencies, what do you do in response? Well, if you don't already know my thoughts on Treasuries, I've written plenty recently about how far I think they have to fall as faith in the U.S. government and the dollar wanes. Certainly, once it becomes clear the Fed can no longer realistically defend the long end of the yield curve, shorting Treasuries is going to be the play of a lifetime, so keep that in mind when you're trying to figure out how to prepare for failing global currencies.

In one of my recent articles, I also pointed out that in times of rising prices caused by the expansion of the money supply, it isn't so much the case that assets are becoming more valuable, due to demand. No, it is much more accurate to say that the currency is becoming less valuable.

When you begin to think about it in those terms, it becomes easier to consider how you might prepare against currency collapses. Think about the things that people will consistently need or want in precarious economic times – especially times of rising prices. Historically we know that precious metals have done well, but commodities in general also do well. Agriculture tends to keep pace. Also, as silly as it might sound, anything durable that you know you're going to use in the future is an excellent hedge against inflation. If you know the currency is going to be worth half as much in a year, and you know your infant son is going to need diapers in a year, then diapers are a good investment in today's currency – not only because you have use for the good, but also because you free up future, higher disposable income for investment.

Another idea? If you can maintain an income that rises with prices, being a debtor at a fixed rate is a great position to be in. Your salary is increasing, and yet your mortgage payment, for instance, is not.

One more thing to think about: while the historical consistency of precious metals is important, the psychological aspects of gold give it an edge as an investment in times of rising prices. Silver and palladium are certainly rare and precious, but they don't seem to have the same cachet – and indeed the poetic impact – as gold. How many country songs, for instance, have been written about palladium? What I'm trying to say is this: when gold rises, it tends to rise more than other precious metals simply because people are more passionately drawn to it.

Now let's talk about something like oil for a moment. In real dollars, the price of oil has averaged somewhere around $25 a barrel over the last several decades. Is demand for oil going to pick up? Of course; populations are increasing, and China and India are becoming industrial powerhouses. Is the supply of oil going to diminish? I would argue that it probably isn't going to diminish as much as environmentalists would have you believe – especially with the onset of new technological innovations which improve the efficiency of extraction – but it is a finite resource, so I will give some credence to the argument that it is becoming scarcer. Therefore, all things being equal, the price should rise based on nothing more than the principles of supply and demand – and probably sooner, rather than later.

But what will happen when major currencies start to collapse? The price of oil will increase accordingly, right? Actually, no; the price of oil will likely inversely mimic the slide in currencies, but it should also increase beyond that to account for ever-increasing demand.

To wit, I don't believe the historical average price of $25 per barrel – even in real dollars – adequately reflects the demand for oil we will face in coming decades. The same argument could be applied to agricultural and commodity securities as well. So I'll say it again: the best place to be when the dollar falls is anywhere but dollars. If you really want your portfolio to shine, however, you need to find the investments that will outpace rising prices, and that means agriculture, gold, durable goods (that you'll need anyway), and fixed-rate debt. And, of course, there's always gold.

But if you can get in on the ground floor of a private, gold-backed currency, well, that might just turn out to be the best investment ever.

Disclosures: Paco is long gold, DXO, and UCD. Unfortunately he also holds U.S. dollars by necessity, pending the advent of private gold-backed currencies.

Copyright 2009, Paco Ahlgren. All Rights Reserved.

Comments

[Cesato:]

So many thoughts in the same bag, but a broad, humble anaylis, I kind of like it. My view is USD down, USD Index up, Gold up, Treasuries down. if you hold USD by necessity, your Gold will hedge the loss of value on the USD. As far as inflation, remember that demand does not have to necessarily increase to produce inflation, if the offer of goods and services become limited and the US Government does have to keep on printing money then you have a scenario for inflation. You made the case, if treasuries sell-off, USD devalues, the stock market does not take off and the expectation of hyperinflation influences investors' long term strategies, then all is left is Gold. A book to read for eduactional purposes only "The Great Inflation and Its Aftermath" by Robert Samuelson.

Feb 09 03:32 AM

[Alan Young:]

I've been interested in the proposition put forth by another blogger that the main purpose of the US military in recent decades has been to enforce the dominance of the dollar. For example, the real reason for invading Iraq in 2003 was not its role in terrorism (there was none) or WMDs (which were long gone), but its threat to market its oil priced in Euros.

Bottom line, IOW, whatever wants to replace the dollar might have a war on its hands first.

I hope this is not true; but none of the wars promulgated by the US in the last 60 years have made any kind of moral sense--so, after all this time, no depravity in pursuit of economic power can surprise me.

Feb 09 03:47 AM

[mrtaxx:]

It's IDIOTIC to think WAMPUM (gold, silver etc.) will replace any currency.

Feb 09 03:56 AM

[JohnAl:]

"It's IDIOTIC to think WAMPUM (gold, silver etc.) will replace any currency."

Is it really? PMs have been used as money by many cultures throughout much of human history, and as the author points out, a modern PM backed money wouldn't necessitate carrying around metal. The conveniences of modern banking would still exist.

I do think it's likely that before we arrive at this juncture, though, there will be attempts to replace the dollar with other fiat currencies. Governments don't give up easily, and they need the fiat currency to maintain their power and their growth.

My guess is that the next step, which will come only after things get worse in the US and the government gets increasingly desperate, is that there will be an attempt at a world currency. This would necessitate the US giving up much of it's advantage though, which is why I don't see it happening until things are much worse here. They may even make a show at tying this new currency to PMs in some way. But it will be a sham. They will want to maintain their ability to create money out of thin air.

Feb 09 05:38 AM

[Conan the B...:]

JohnAl: The current activity between Central Banks worlwide enhances the possiblity of a World Currency. The USD would be a part of same.

This would replace the Dollar in International Trade though not necessarily internally.

I doubt Gold will ever surface as a Standard anywhere or even be included in the newly Created World Currency because it would distort the value of that WC. (Gold demand/supply outside of the framework of the WC.)

I'm not a futurist but looking into the available possibilities for future investment comes part and parcel with the territory.

Regarding Agriculture, I am looking for big upside moves in DBA and DAG. Being a futurist doesn't mean you ignore the present.

Currently in progress, Major Droughts in China, Australia and Caifornia, with an assessment of Winter Damage in the middle of the US yet to come. Weather is always the big threat when it comes to agriculture.

Feb 09 06:32 AM

[lady_knight...:]

I like the analysis here but find it very far-fetched, strething facts and imagination, such as the proposition that national-currencies will cease to exist. Even if that might be on the horizon its not a strong possibility in the next 10 years for sure!
So what would be more useful is to develop & present an understanding of what will replace the dollar in teh next 6months to 1year. Or where will the dollar be? How will the Yuan be positioned...
Sorry, but your article, esp the last bits read more like a preamble to the economic look alike of lord of the rings! Promoting some prophecy...
Pls dont do this to seeking alpha!

Feb 09 06:34 AM

[Roger Knights:]

I like the idea of GLD issuing certificates that could be used as currency between consenting parties. But wouldn't anyone who stated he would accept only such certificates, or even would give a discount price on such certificates, be in violation of our "legal tender" law? (OTOH, maybe the law making fed notes legal tender is in violation of the Constitution's requirement of "specie payments.")

Feb 09 06:59 AM

[ROLEX18:]

I would like for more precious metal coins to appear in circulation, but prices must be fixed, 250$ for ounce of Gold and 5$ for ounce of Silver.
So we can have nice shining coins in circulation, but it is impossible to implement as Gold/Silver are trading instruments and their values can't be fixed, they can only crash.

Feb 09 07:19 AM

[Whitslack:]

> Are these governments really going to hold guns to their
> citizens' heads, proclaiming, "Use our currency and starve,
> or use a private currency and go to prison."

Actually, yes. Check out the FBI raid on the Liberty Dollar:
www.reason.com/blog/sh...

The raid occurred in November 2007. The government is still holding onto the $3.5M in gold and silver that it confiscated. To date, no arrests have been made. The whole thing is totally bogus.

Big government doesn't like the sheeple having choices it doesn't control.

Feb 09 08:09 AM

[john s. gordon:]

collapse of stalin's soviet union was due to its own internal rottenness, not to 'excess money creation'.
> jack

Feb 09 08:20 AM

[Tetrapod:]

Rolex,
Do you mean they need to be fixed like the US Dollar or Euro that fluctuate everyday against other currencies and gold?
If there's any reference point at all in currencies, gold is it.


On Feb 09 07:19 AM ROLEX18 wrote:

> I would like for more precious metal coins to appear in circulation,
> but prices must be fixed, 250$ for ounce of Gold and 5$ for ounce
> of Silver.
> So we can have nice shining coins in circulation, but it is impossible
> to implement as Gold/Silver are trading instruments and their values
> can't be fixed, they can only crash.

Feb 09 08:33 AM

[Tetrapod:]

Paco,
What do you think of the outfits like goldmoney or bullionvault that basically establish the gold-gram as a standard currency and allow it to be instantly converted to any of the other major currencies or metals?
Payments can even be electronically sent to anyone in any currency.
It seems to me that that is a valid private currency. I don't think it's necessary to give the currency a brand name -- GoldGrams says it all and allows multiple issuers. I guess the only thing missing is a "Note" that can be carried on your person, but unless HYPER-inflation catches on, Dollars or Euro's, etc. should be fine for pocket change.

Feb 09 08:40 AM

[JudeJin:]

nothing needs to replace dollar. dollar lost 90% against gold in the 1970s. dollar is still here today.

no need to talk about gold standard. no need to talk about which currency to replace gold.

market price of gold will converge to its theoretical value as can be calculated from the money in circulation and the amount of gold held the fed. of course, the money in circulation will go up dramatically as the crisis unfolds further.

Feb 09 09:17 AM

[TeresaE:]

Thanks for the article, but you forgot to mention Germany.

Hyperinflation caused massive poverty and starvation, which led to rise of extremist powers. Look hard enough and you can see we are already following that path.

Feb 09 09:24 AM

[MichaelJ007:]

The fall of the dollar is still far from today. The US military as well as the military of any other nation using it as a reserve currency have a direct interest in the dollar's survival. Gold and other precious metals will surely increase in value due to inflation, but they will not replace the flexibility and the control that comes with a fiat currency. The idea of a World Currency is much more feasible. The dollar is practically the world currency already. However, some other type of note could easily replace it. All of the world's GOVs and Banks could collude to set its supply, rules, rates, etc.

Feb 09 09:36 AM

[Ferdinand E...:]

About this contribution. The dollar will be here long after Mr Ahlgren and the rest of this forum are blogging in another world. Of course it won't last forever, but as long as the president of the US is recognized as the most important man on earth, and his armed forces fill the role of an international gendarmerie, the dollar will be THE currency.

Feb 09 09:39 AM

[patio:]

I will say his fantasies are among the most absurd writing here at SA.
Even with our high debt, and not saying it is not a big problem that will take years to solve, the US is the worlds sole superpower- militarily, politically, and still financially.
Paco is a silly youn'un.



On Feb 09 09:39 AM Ferdinand E. Banks wrote:

> Ahlgren. That's Swedish, isn't it? Are you the guy who told me that
> I not only was the worst teacher in the world, but also I couldn't
> speak english? In the 15 or so years that I taught international
> finance in Sweden I only failed a handful of students, and I've always
> regretted that I didn't find out who that gentleman was, so that
> I could have failed him on the spot.
>
> About this contribution. The dollar will be here long after Mr Ahlgren
> and the rest of this forum are blogging in another world. Of course
> it won't last forever, but as long as the president of the US is
> recognized as the most important man on earth, and his armed forces
> fill the role of an international gendarmerie, the dollar will be
> THE currency.
>

Feb 09 09:54 AM

[Paco Ahlgren:]

Although my name is Swedish, I have never been to Sweden, and I don't think you ever taught me finance (or English). In fact, I don't think you and I have ever met, but if we do you are more than welcome to fail me on the spot at that point.

And I'll bet you a dollar I outlive the dollar.


On Feb 09 09:39 AM Ferdinand E. Banks wrote:

> Ahlgren. That's Swedish, isn't it? Are you the guy who told me that
> I not only was the worst teacher in the world, but also I couldn't
> speak english? In the 15 or so years that I taught international
> finance in Sweden I only failed a handful of students, and I've always
> regretted that I didn't find out who that gentleman was, so that
> I could have failed him on the spot.
>
> About this contribution. The dollar will be here long after Mr Ahlgren
> and the rest of this forum are blogging in another world. Of course
> it won't last forever, but as long as the president of the US is
> recognized as the most important man on earth, and his armed forces
> fill the role of an international gendarmerie, the dollar will be
> THE currency.
>

Feb 09 10:05 AM

[Paco Ahlgren:]

Well, that doesn't constitute much of a counterargument I guess.


On Feb 09 09:54 AM patio wrote:

> I will say his fantasies are among the most absurd writing here at
> SA.
> Even with our high debt, and not saying it is not a big problem that
> will take years to solve, the US is the worlds sole superpower- militarily,
> politically, and still financially.
> Paco is a silly youn'un.
>
>
>
> On Feb 09 09:39 AM Ferdinand E. Banks wrote:

Feb 09 10:18 AM

[David Roskoph:]

The better question is - What's going to replace gold as a monetary standard? The answer is the US dollar as a function of the value of the franchise. The world is drowning in fiat with a new tsunami guaranteed to occurr. The dollar will rise as the most secure of all the worlds' 'funny monies". Gold is fading as some magical place to avoid cataclysm. In fact central banks are probably selling it to a frothy public because things are so painfully extended (worlwide) that it's all or none.

Feb 09 11:03 AM

[Jimbo:]

Regarding Aalan's post on this thread: The Iraqi government was paying 25,000 USD to the family of every successful suicide bomber who killed Israelis. An Iraqi Lt. Colonel was working, apparently undercover, at the Iraqi embassy in Kuala Lumpur and was identified by Western Intelligence Agencies as meeting and driving men to a meeting in Malaysia. The Intelligence Agencies later concluded this meeting was a planning session for the 9/11 attack. This Lt. Colonel was detained later by a Gulf State and suddenly released from custody. He apparently returned to Iraq and has disappeared. The idea that Iraq under Saddam was not involved in terrorism is a total CROCK.

Feb 09 11:23 AM

[Conan the B...:]

Lady: not to worry, "PLS don't do this to seeking Alpha!"

Just stay away from any Articles written by Paco Ahlgren and you will find that many are very enlightening without becoming religiously locked into a particular point of view.

Feb 09 11:26 AM

[flowerguy:]

This is a bit scattered...but bear with me.

Folks, there is one little piece of data that tends to get overlooked...unfunded liability. The US, at present, owes about 50 Trillion in future pension, Medicare, Medicade commitments and Uncle Sam has not put asside any money....stop and think about that.

The only possible consequence, especially when you bake in the additional disclosed debt and the rate of increase in the money supply (dillution of the US dollars value) is runnaway inflation and Hyper inflation.

The US GDP is about 13.5 Trillion and total debt is about 75 Trillion.

Unless the US goverment forces an immediate increase in taxes to the tune of about 40% and cuts TOTAL programs and spending by 10%...Hyper inflation is coming within 1-5 years.

I belive, that this year the US will be forced to print money to buy their own treasuries since they need somewhere around 2 Trillion this year and another 2 Trillion next for programs so far..and there are few buyers left. Would you invest in a US t-bill with almost no effective yield and lock you money away in a currency that is being devalued at a record rate?

The net net result is a flight to hard assets and runnaway inflation. When the man on the street finally sees this he is going to run to anything that will protect him....can you say panic gold/silver buying. People will be melting down their candlesticks ....just like in the 80's when people were picking silver coins out of circulation and selling their grandma's silverware and women were afraid to wear real jewelry in public.

The final outcome will the the US government arbitrarily increasing the price of their own gold reserves from the current $42/oz to whatever they need and re-issuing and exchangeding "new dollars" for old. (in 1933 the US made it illegal to own or trade gold)

The ONLY question left is what is the ratio or new money to old going to be.

Buy the way ...gold production has been in decline years and all the silver reserves have been sold off and consumed. In fact much of the silver now mined is used by industry (mirrors to electronics)

There is NO valid argument against impending inflation...it's already starting at the consumer goods level. The only argument towards deflation is based on the price of homes when the entire market was simply overbuild. One sector does not make a trend...Canada overbuild retail space in the 80's and there were "sale" or "lease" signs on 1 in 10 businesss. Comercial real estate tanked by 50% and it took 10 years to consume it and recover. The US now has 11.6 million homes in forclosure and the recession is only begining.

The US government is working day and night to ensure inflation takes hold by printing money in unlimited quantities and they will not be able to get it out of circulation fast enought to slow down inflation once the banks start to loan and the velocity of money increases.

Just stop and think about what happens when inflation hits 20% and 30% and the unions are locked into contracts offering 2 and 3% increases (can you say strikes and transportation disruption). How about the farmers and manufacturers that need to charge 2 and 3% more just so their 30 day recieveables to retain their value...then this charge is passed on over and over again till it hits the shelves about 4 to 5 layers later (farm/manufacturer, wholesaler, distributer, retailer)

Remember, Wall street creates forcasts by looking in primarily what direction.... forward into the future or backwards at yesterdays performance? They are also paid to convince folks to invest in stock...not buy gold where they didn't get commissions ...till the recent birth of ETF's.

This in uncharted territory for our lifetime and when it comes to survival...families will do whatever they need and vote for whatever sounds best especially if it means they get security, stability food and healthcare. Pensions and investments don't matter in an environment when are a fearful about housing,jobs and food.

Naysay all you want...but what is the safest hedge you know? The largest banks in the world have already collapsed...that means the very financial system is changing and all bets are off regarding rules..it's every man for themself and survival of the fitest ..it just hasen't filtered down to "main street" fully yet other than all those job losses and empty forclosed houses.

Feb 09 11:27 AM

[kelm:]

If the worse case scenarios develop within the US then you will see a seriously debased currency, hyperinflation and a new re-valued dollar issued by the government. There is already a Bermuda based hedge fund that is offering shares denominated in gold - that reported a couple of weeks ago in the Financial Times so those who say it can never happen need to read the news for early signs.

While all fiat currencies are in trouble I seriously doubt we will see them all fall in tandem such that the dollar maintains it relative position. As the crisis progresses we will see repatriation of assets away fro the US and back to other nations - that will drive the US dollar down and others up.

What is most important about this article is not whether the scenario is or is not the most likely but rather that it generates a discussion of possible scenarios.

Here is a link to another discussion of w a reserve currency could collapse:

www.murdockglobalinsig.../

Feb 09 11:37 AM

[philais:]

"what, exactly are these governments going to do -- punish their citizens for wanting to use a stable medium of exchange in response to a failed promise? Are these governments really going to hold guns to their citizens' heads, proclaiming, "Use our currency and starve, or use a private currency and go to prison."

Paco, That questions has already been answered:

The FBI raid on Liberty Dollar organization.

www.libertydollar.org/...

Feb 09 11:44 AM

[Nik Kondrat...:]

Paco,

I don't know if you're right that gold and other precious metals will replace the Dollar as the world's reserve currency, but I think you've framed the situation in the U.S. very well. This is no ordinary financial crisis and the policy direction of the American gov't (both fiscal and monetary policy) is only exacerbating what will have to happen--a massive reset. We will see massive asset and wage price deflation as well as hyper inflation for commodities, goods and services. This is a toxic soup of financial ruin for the type of economy the U.S. has experienced over the past 60 years. What troubles me most (aside from the ignorance and arrogant beliefs that the U.S. can't lose its hegemony) is that no one in the mainstream media or in a position of political leadership is focused on the long term. We're all being spoon fed the line that the stimulus and bailout are going to right the ship. Hardly. They will only forestall the inevitable and treble the damaging consequences when the turds hit the spinning blades.

But of course, this could all be just a figment of my imagination because, in the words of Neils Bohr, "prediction is difficult, especially about the future."

NK

Feb 09 11:51 AM

[henarl:]

Pehaps what we are seeing is the beginning of the end of globalization and of any "global reserve currency". A possible retreat back to isolation and protectionism with very little international trade and each country using it's own fiat currency predominately within it's own borders. The standard of living of the "developed" countries will suffer the most and that of the developing and third world countries will stagnate. There will, of course, be wars and the U.S. would become "fortress U.S.A." with a large part of our economy devoted to miltary defense. Just a thought.

Feb 09 12:01 PM

[squeaky wheel:]

Good issues and insights. Has anyone read Alhgren's book, Discipline? Do you know of other writers with similar concerns? What would be the problems of having a barter society? Don't exchanges exist for bartering? Assuming all taxing entities started to to raise their rates, what would you pay with? Could we end up in a situation where there were multiple currencies simultaneously in use? How would a world currency develop, something like the Euro?

Feb 09 12:05 PM

[yank:]

Dave:
Yeah, I guess that's why the German Bundesbank publicly announced last month that they would not be selling ANY gold reserves in 2009. They do not want to repeat the mistake of Gordon Brown who in 2002 as Chancellor of the Exchequer foolishly sold over 200 million tons of gold at $250/oz. Gold prices proceeded to $900/oz over the next 6 years. Brown was rewarded for his stupidity with the Prime Minister position. Those Brits are amazing.

Yank


On Feb 09 11:03 AM David Roskoph wrote:

> The better question is - What's going to replace gold as a monetary
> standard? The answer is the US dollar as a function of the value
> of the franchise. The world is drowning in fiat with a new tsunami
> guaranteed to occurr. The dollar will rise as the most secure of
> all the worlds' 'funny monies". Gold is fading as some magical place
> to avoid cataclysm. In fact central banks are probably selling it
> to a frothy public because things are so painfully extended (worlwide)
> that it's all or none.

Feb 09 12:17 PM

[Conan the B...:]

Yank: are you sure about the "200 million tons"?

Thats more than has been mined, ever, or so I believe.

World annual production was 2400 tons in 2007 from another alpha member. 200 tons is more likely than not.

As for the Germans, they still believe that they are not going into a recession and should keep their interest rates high.

Feb 09 01:01 PM

[auto44:]

The ECB is at this point is struggling to keep many of it's member states involved. A world currency that the worlds countries could agree on seems to be a very remote possibility. These days we invest in stocks bonds commodities what ever and when we want to buy a need or want or when we think they are overvalued against currency we sell and shift back to dollars. Will fiat currencies shrink in value against goods and service? They almost always have and almost always will. They change values in relationship to each other and change value in relationship to everything else. Understanding the forces that cause these relationships to change at the time the change is taking place or foreseeing the changes results in profit if it is understood and acted upon.

Feb 09 01:22 PM

[popey:]

Unfortunately, the collapse of the USD and Treasury market may force the confiscation of gold from normal citizens. Moving to Australia or New Zealand may be a better option. Unfortunately very few anti-USD bloggers really perceive the implications of their arguments. A collapse of the US bond market will usher in such catastophic social unrest that it is difficult to imagine. No amount of gold will save people.

Feb 09 01:45 PM

[Paco Ahlgren:]

I think that's exactly the sort of thing that could (and will) replace the dollar when the world loses faith.


On Feb 09 08:40 AM Tetrapod wrote:

> Paco,
> What do you think of the outfits like goldmoney or bullionvault that
> basically establish the gold-gram as a standard currency and allow
> it to be instantly converted to any of the other major currencies
> or metals?
> Payments can even be electronically sent to anyone in any currency.

>
> It seems to me that that is a valid private currency. I don't think
> it's necessary to give the currency a brand name -- GoldGrams says
> it all and allows multiple issuers. I guess the only thing missing
> is a "Note" that can be carried on your person, but unless HYPER-inflation
> catches on, Dollars or Euro's, etc. should be fine for pocket change.

Feb 09 02:11 PM

[Ferdinand E...:]

Paco, the world isn't going to lose faith in the dollar. They have already lost faith, but they can't do anything about it. This is probably the best outcome of all for some of us.

Incidentally, this thing of yours about gold, if I were in charge of this site I would give you -1000 for that, but then you would have more minuses than I do, and that would not make me happy. If it wasn't for that I would give you -10,000 for not picking up a book on international finance and finding out why they 'went off' gold. Let me suggest a good book on this topic by...by myself. Global Finance and Financial Markets.

Feb 09 02:39 PM

[thewriterguy:]

Mr. Banks,

Isn't it a bit simplistic to say "they went off gold"? There are many ways in which gold was used as an international control over global currency creation. Gold played various roles and functions during the 19th and 20th centuries. One of those was to limit the amount of money the US could create after Bretton Woods.

That role was ended by Nixon in 1971, and the course of events thus began which brings us to todays crisis. Unlimited creation of debt and fiat currencies.

Without gold or some kind of braking system, governments will revert to creating money to solve their problems. They always have and they always will.

The potential negative effects of having some kind of gold standard are far outweighed by the certain catastrophe of having none at all. That should be clear to anyone by now.

Greenspan said it all in his writings on gold in 1966. Then years later he went against everything he believed in and helped to engineer the mess we have today. I wonder how well he sleeps?

Feb 09 03:39 PM

[Conan the B...:]

Paco: every single one of your "Articles" says essentially the same thing.

You claim not to be a Futurist, but you keep predicting the Future of certain asset classes.

You are currently long Gold, (Physical or paper?), DXO and UCD.

2 of those three are going down big time, I prefer DAG on the long side.

DXO and both forms of gold are about to get reamed.

Their declines are Imminent. IMHO

Feb 09 05:00 PM

[jepittman:]

I thought that was Casey Stengel. Or was it Yogi Berra?


On Feb 09 11:51 AM Nik Kondratieff wrote:

> Paco,
>
> I don't know if you're right that gold and other precious metals
> will replace the Dollar as the world's reserve currency, but I think
> you've framed the situation in the U.S. very well. This is no ordinary
> financial crisis and the policy direction of the American gov't (both
> fiscal and monetary policy) is only exacerbating what will have to
> happen--a massive reset. We will see massive asset and wage price
> deflation as well as hyper inflation for commodities, goods and services.
> This is a toxic soup of financial ruin for the type of economy the
> U.S. has experienced over the past 60 years. What troubles me most
> (aside from the ignorance and arrogant beliefs that the U.S. can't
> lose its hegemony) is that no one in the mainstream media or in a
> position of political leadership is focused on the long term. We're
> all being spoon fed the line that the stimulus and bailout are going
> to right the ship. Hardly. They will only forestall the inevitable
> and treble the damaging consequences when the turds hit the spinning
> blades.
>
> But of course, this could all be just a figment of my imagination
> because, in the words of Neils Bohr, "prediction is difficult, especially
> about the future."
>
> NK

Feb 09 05:09 PM

[flowerguy:]

Folks, Nixon closed the gold window for 2 reasons...France was demanding gold for their dollars and draining Fort Knox... and becuase like any good politician, if he could de-couple the currency from gold he could print more money to buy votes...see a trend here?

The reality is that people NOT government will decide what they trust and things like gold, silver, etc are all there is that they understand.

Final points, All the gold ever mined and minted will fill a football field 4 feet deep. Only 5-7% of all the silver mined is avaialble for investment...the rest is needed by industry. This stuff, unlike paper currency, is actually rare.

I agree all the currencies will not tank at once...but they will get sucked down. The only two currencies worth holding are Swiss Francs and Canadian Dollars. The Swiss and the Canadians are financing debt at record rates. The Canadians do 1 billion a day in trade with the US so no-one will be immune when the world's reserve currency (USD) becomes formally devalued.

You CAN'T owe 75 Trillion dollars on a 13.5 Trillion GDP and pretent things are fine and are going to be ok if we all just listen to the "wise" men in Washington. The very fabric of the US, the trust of its people and the trust of the world is about to be forever shattered.

So...all it will take is one of 20 countries or soveriegn wealth funds to decide to dump US treasuries or by up the available silver production and the flood gates will open and the world, in a very short order, will be a different place...just like the difference in the financial world from Summer to Winter ...last year.

Feb 09 07:17 PM

[oneblueshoe:]

Oh......so THAT is why we have been fruitlessly throwing billions down a rat hole for 5 hideous years of warfare. Makes sense now.


On Feb 09 11:23 AM Jimbo wrote:

> Regarding Aalan's post on this thread: The Iraqi government was paying
> 25,000 USD to the family of every successful suicide bomber who killed
> Israelis. An Iraqi Lt. Colonel was working, apparently undercover,
> at the Iraqi embassy in Kuala Lumpur and was identified by Western
> Intelligence Agencies as meeting and driving men to a meeting in
> Malaysia. The Intelligence Agencies later concluded this meeting
> was a planning session for the 9/11 attack. This Lt. Colonel was
> detained later by a Gulf State and suddenly released from custody.
> He apparently returned to Iraq and has disappeared. The idea that
> Iraq under Saddam was not involved in terrorism is a total CROCK.

Feb 09 07:32 PM

[thegreatyakk:]

Can anybody name any true fiat currencies that have stood the test of time? I can't. Each one that comes to mind has ultimately collapsed. This is nothing new for the U.S. Consider the Continental Dollar (its collapse is one reason the Constitution contains the phrase that gold and silver shall be legal tender) and the original Greenback during the Civil War years.

Feb 09 09:43 PM

[kpc:]

USD will be superceded only by a stronger economy or by whoever discovers dilithium crystals and warp drive - LOL

Feb 09 10:03 PM

[nova:]

Cesato wrote:

> You made the case, if treasuries sell-off, USD devalues, the stock market does not take off and the expectation of hyperinflation influences investors' long term strategies, then all is left is Gold.<

There are two additional classes of very valuable commodities:
1. Agriculture commodities
2. Fuel (oil and gas)

Feb 09 11:02 PM

[iyamwutiam:]

I am not sure why all the rancor. For those who have written books on the subject and wish to disparage a point of view based on the merit of publication - may I remind you that some of the best and brightest so-called brains who were educated i this field couldn't see what was in front of their face. The signs of inflation were all there - and yet people continued to believe the government numbers. The irrational exuberance of technology, the continued deception by bankers and their ilk (from S&L, Milliken and binds, Tech, outright fraud Enron, Adeplhia, etc) and the lack of true justice applied to them has been so increasingly evident that it n longer borders on contempt -it firmly resides on its highest peak.

What Mr. Ahlgren says is not at all different from Rubini, Faber, Taleb at all in some sense. However- because he feels free to contribute and perhaps edify some people - there appear to be a bunch of critics and cynics -who take the easy route of being critical rather than explain to us why they are correct.

Anyway -keep it up. Any sincerity is this world is much better than gobs of glib false erudition, tons of false confidence and decades of pretending to be educated -when in reality - an A is basically the ability to adapt yourself to an concept taught to you rather than the ability to actually see if the concept is correct (which would actually be a real education).

Feb 09 11:39 PM

[Conan the B...:]

Iamwutiam: Most people here agree on various aspects of Paco's Futuristic Itinerary.

I do not agree on various planes. But most of all, I disagree with the attitude.

The "I am right and you are wrong" holier than thou response to everything which is questioned.

I agree on Gold but not tomorrow's gold. The same goes with the dollar's demise or Oil's big move to the upside or the rapid bursting of the Treasury Bubble. (this was the theme of his first Articles, you couldn't change his mind there either.)

With him everything is urgent, it is "Imminent". Do what I say Now or You will be Doomed.

I am really sorry to see that in any person. Give me a debate not a lecture. IMHO

Feb 10 01:53 AM

[twin:]

Guys guys guys...

ok all of you relax and come to your senses.

I agree SOMETHING will happen to currencies worldwide - it is imminent. But to say what exactly is very very difficult. Whether its WC, usd collapse, the amero being created, etc etc - the possibilities are endless, but the point remains: how does one protect himself?

You mentioned buying gold. I agree in one sense as it has always been a standard since the time of the egyptians/romans. BUT, what value does gold intrinsically have? nothing! it's good for absolutely nothing, other than it's something shiny/pretty and people have put a poetic value to it. So what is the altenative? something that really shocks me that the writer nor any of the posts above mentioned: LAND ! if its in limited supply, world population is increasing, its inflation-adjusted, etc then why not park your money in land or real estate?? so much distressed opportunities out there!

Feb 10 03:02 AM

[Ferdinand E...:]

If I had to guess, I would guess that Paco owns some gold - if only the gold in his teeth - and he wants its value to appreciate. We see the same thing in energy all the time, with all sorts of lies about new sources of oil and gas being produced by greedy cranks.

And 'flowerguy', let me note that the strength of Swiss currency is just a reflection of the strength of Swiss society. I lived in that wonderful country for 3 years, and in an ideal world every head of state and their cabinet would spend 3 weeks or so in Geneva and Zurich. They might discover something about how a civilized society is constructed.

The things that I liked best about the Swiss were their military (e.g. universal conscription for a few months), and their freedom from foreign commitments - e.g. staying away from wars that are none of their business.

Feb 10 03:38 AM

[Bobhjon:]

I have been enjoying this intellectual discussion of a very imminent situation, but let's get real! Doesn't anybody remember when it was illegal for a private citizen to own gold in the US? And does anybody believe that our irresponsible Congress would not pass a similar law if they had the desire? As for private currencies, the Secret Service frequently has difficulty in detecting the sophisticated legal currency, wouldn't private currencies be counterfeited into oblivion? Has everybody forgotten Gresham's Law? For a practical view of what may happen, think of an International Zimbabwe!

Feb 10 08:48 AM

[john s. gordon:]

aalan - so the united nations police action in korea in 1950 made no moral sense?
> jack

Feb 10 09:28 AM

[Socialism c...:]

What will replace the dollar? The barter system -- people cannot afford the excessive taxation. At least those of us who still pay ours.

Feb 10 11:39 AM

[iyamwutiam:]

Dear Paul:
This is precisely the point. We have become a country where 'attitude' was not the most important measure. That was made America a magnet- if the USSR/India/China etc. (put native land here ___ ) - well you were SOL- unless you were fortunate to land on these shores in different times.

This rhetoric of being a 'team' player has basically led enitre industries, huge swaths of government etc to be a rudderless ship and those who rock the boat to change direction are being thrown overboard. The saying of its not what you say but how you say it - basically has morphed into 'watch what you say'.

This sudden revulsion to attitude occuring in the last 25 or so years has been the principle cause of this mess globally. Anyone who pointed out the obvious or discrepancies or actualy had the gall to say things were wrong -were 'labeled' as having an attitude or being a 'whistleblower' etc.

I mean seriously - how did we denigrate the conscience and committment of people to protect society into a compressed and fallacious word like whistle blower.

As you yourself said is basic premises are not earth shaking at all and have oft been repeated by many others -perhaps more couched or more subtley. However- the discussion should be focused on what he is saying and not how he is saying it.

By the way - you are a great contributor on this site-so no disrespect meant.



On Feb 10 01:53 AM paultaut wrote:

> Iamwutiam: Most people here agree on various aspects of Paco's Futuristic
> Itinerary.
>
> I do not agree on various planes. But most of all, I disagree with
> the attitude.
>
> The "I am right and you are wrong" holier than thou response to everything
> which is questioned.
>
> I agree on Gold but not tomorrow's gold. The same goes with the dollar's
> demise or Oil's big move to the upside or the rapid bursting of the
> Treasury Bubble. (this was the theme of his first Articles, you couldn't
> change his mind there either.)
>
> With him everything is urgent, it is "Imminent". Do what I say Now
> or You will be Doomed.
>
> I am really sorry to see that in any person. Give me a debate not
> a lecture. IMHO

Feb 10 11:40 AM

[Socialism c...:]

No need to look very hard. "If we don't act quickly, we face catastrophe". Couple that with the gun-control desires of the Dems, the bill introduced by a FL congresswoman that would create civilian detention centers, and the possible reintroduction of the "Fairness Doctrine"...and you can EASILY see what is already on our doorstep: the new Marxist regime is in the White House.


On Feb 09 09:24 AM TeresaE wrote:

> Thanks for the article, but you forgot to mention Germany.
>
> Hyperinflation caused massive poverty and starvation, which led to
> rise of extremist powers. Look hard enough and you can see we are
> already following that path.
>

Feb 10 11:44 AM

[PlentyOStocks:]

Fixed Rate Debt as a safe haven.??? Please explain??

If the paper money is worthless, so is debt denominated in that paper currency.

Feb 10 02:02 PM

[Conan the B...:]

PlentyO: That's the entire gist. Regardless of what the USD does outside of the USA, you/me/us will still use dollars to buy within the USA.

In this particular timeframe, if you have outstanding mortgage or Home equity loans, locking in the current rate and/or a the lock in of an increment above it, is a very good idea. You will have a fixed rate and when Inflation hits the Fan, You will still have the same Fixed Rate.

Feb 10 03:04 PM

[Tetrapod:]

Great point. Our currency and our central bank has already failed on more than one occasion. Our country, luckily, suvived through it.



On Feb 09 09:43 PM thegreatyakk wrote:

> Can anybody name any true fiat currencies that have stood the test
> of time? I can't. Each one that comes to mind has ultimately collapsed.
> This is nothing new for the U.S. Consider the Continental Dollar
> (its collapse is one reason the Constitution contains the phrase
> that gold and silver shall be legal tender) and the original Greenback
> during the Civil War years.

Feb 10 06:01 PM

[Tetrapod:]

From the early history of civilization, humans have tried many different forms of transacting business:
- Barter -- Works great in a VERY small society. Gets untractably complicated as the number of people and goods increases. That's why we created money.
- Grains -- Works great for short-term, but tough as a long-term investment vehicle because they lose value quickly as they decay, and the "money-supply" is too volatile as it depends on factors like rainfall.
- Shells -- Works until everyone's time is spent shell-fishing. Then inflation / currency crash / unemployment.
- Salt -- Worked for a long time. Roman legions were paid in salt. Until clever Phonecians discovered that they could make it from seawater. Ended that party!
- Gems -- Ok for large purchases. Tough to come up with change for buying a Big Mac.
- Silver and Gold -- Worked for thousands of years, except government after government decided they needed to abandon it so they could fight expensive wars funded through inflation.
- Fiat Currency (e.g. Dollars, Yen, etc.) -- It's a good deal if you can pull it off. Most likely will not last. I only say that because none ever has.

According to Von Mises a good "Money" (i.e. medium of exchange) has to have the following characteristics:
1) A stable supply that can't be easily increased.
2) Durable -- Doesn't decay with time.
3) Divisibility -- Must be able to pay any amount
4) Enough supply to provide some for everyone (within the constraints of #1 above).
5) Little inherent consumption value. If it's consumed then it won't have a steady supply.
6) Convenient to store and transport.

People have tried all possible commodities to use as money and over thousands of years kept coming back to Gold and Silver:
- Very difficult to expand the supply by more than a small fraction (1-2%) even with today's technology
- Very durable. Non-corrosive
- Almost infinitely divisible
- Enough to serve the monetary needs of everyone.
- Little inherent consumption value. In recent history Silver has lost a little in this department due to new technological uses (e.g. electronics and photography). 99% of all the gold ever mined is still in people's hands today.
- Reasonably easy to store and transport (although heavy!)

Try to think of another commodity that meets these criteria. Gold is not Gold arbitrarily. It was established only after trying everything else.

That is why it will still be currency even when no-one remembers the meaning of the word "Dollar".

Von Mises also argues that the "Dollar" (or Pound, etc) is only the "Dollar" because it was originally defined in gold. No one could ever have just created a new currency e.g.,"The Paco" without it having been backed by something stable and valuable originally. No one in their right mind would trade valuable commodities for it. The gold was gradually withdrawn from the dollar until it now stands on its own. It seems to us with our short attention span to be immortal and self-evident, but "nothing" is a very fragile foundation.

One more observation. Many commenters have said that Gold has no inherent value. True. See number 6 above. That is one of the rare characteristics necessary for a good currency. In fact it beats the dollar, franc and yen in that department, as they can be used as toilet paper while gold is rough on the bottom :-)

On Feb 09 11:02 PM nova wrote:

> Cesato wrote:

Feb 10 06:34 PM

[tclwrap:]

very interesting article, there seems to be logic in it. The Fed is printing money, the gov. stimulus etc.. yields the expected declinew in the value of the currency.

There are countering arguments, from articles I recently read, that describe a deflation cycle, not hyper-inflation as is suggested. The logic there, the loss in asset values such as stocks & bonds, homes, commodities have effectively reduced the money supply but a much larger amount than what's being introduced by the Fed. The Fed is fighting deflation and not expecting hyper-inflation as a result.

Anyone cares to explain which side of the story makes the most sense?

If you do jump on the gold bandwagon, deflation would kill that investment. If you hold the dollar too, the dollar gains in value in deflationary environments. Please comment, like to figure out which end is which! :-)

Feb 11 01:25 AM

[Conan the B...:]

Tclwrap: You have it. Gold Bulls Vs Gold Bears.

And I'm, essentially, in the middle: Long term Gold Bull, but short term Gold Bear.

There is plenty of time to get into gold, deflationary pressure is still in progress and the USD remains relatively strong. Its an opinion.

If you want to treat it as an investment based on the scarcity of the Metal, thats good too, Insurance is okay.

To me, its just an investment to be treated like any other investment.

Feb 11 01:51 AM

[tclwrap:]

thank you paul!

A good entry point for a long term Gold Bull may be around 700. I am waiting to pick up GDX when that happens...

Feb 11 01:57 AM

[Conan the B...:]

tclwrap: check out UGL, its one of Paco's favorites.

I didn't know about it until Paco brought it to my attention.

Like I said, I like Gold. But I am not going to get on the Bandwagon just because everyone else is.

Regarding $700. Personally, I do not think it will go that far down. You could pick up a little UGL as it breaks $800 as insurance against holding out too long.

Anyway, if you have a question and if I have a plausible answer, I will do my best to answer it.

Whenever a + or - shows up on one of my comments, I usually go back to see what I said that warranted either.

so click on the green for help. But please don't go back more than a few days since I usually don't check back that far. ( unless I am involved in some sort of debate).

Good luck, we all need it.

Feb 11 05:55 AM

[Tetrapod:]

tclwrap,
I've been struggling with the same questions. It comes down to one question:

Can the Government Create Inflation?

If, as all economists seem to agree, inflation is a monetary phenomenon,
and as government (including the Fed) fully control the money supply, I have to conclude they can.

Bernanke and Obama have made it very clear that they will not allow deflation to occur. Lots of reasons for this, but even if you look at it purely cynically, the number one reason is that inflation increases tax income (nominal capital gains rise / people move to higher brackets) and deflation decreases it.
Being a little less cynical, there are lots of other good reasons for the government to favor inflation:
- Reduces Government debt in real terms
- Reduces Personal debt
- Reduces Business debt
- Causes consumers to "feel" richer and therefore spend
- Avoids the deflationary spiral.

So if the government has both the WILL and the WAY, I have to conclude that it will happen.

There is no limit to the Fed's ability to create inflation. All they need to do is continue to buy assets such as treasuries, mortgage debt, corporate debt, etc. through their Open Market Operation.

If there is monetary inflation, Gold will have to rise, as it cannot be inflated (at least beyond 2% per year from mining).

It's very important to separate inflation from falling asset prices.

There are many reasons asset prices (e.g., oil, stocks, real-estate) fall, such as changes in supply / demand; structural issues such as availability of credit or raw-materials, etc. But broad-based inflation is a result of changes in the value of currency. Gold will always respond to the changes in the value of currency because it is fundamentally a stable currency and therefore the benchmark.

A side note is that even during the Great Depression, which was widely held to be a deflationary event, the price of gold rose by 60% or so. The devaluation of the dollar vs. gold which happened under FDR is the same as an increase in the price of gold.

Theoretically, during a true deflationary event, gold should maintain it purchasing power relative to other commodities, even if it loses nominal value.




On Feb 11 01:25 AM tclwrap wrote:

> very interesting article, there seems to be logic in it. The Fed
> is printing money, the gov. stimulus etc.. yields the expected declinew
> in the value of the currency.
>
> There are countering arguments, from articles I recently read, that
> describe a deflation cycle, not hyper-inflation as is suggested.
> The logic there, the loss in asset values such as stocks &amp; bonds,
> homes, commodities have effectively reduced the money supply but
> a much larger amount than what's being introduced by the Fed. The
> Fed is fighting deflation and not expecting hyper-inflation as a
> result.
>
> Anyone cares to explain which side of the story makes the most sense?
>
>
> If you do jump on the gold bandwagon, deflation would kill that investment.
> If you hold the dollar too, the dollar gains in value in deflationary
> environments. Please comment, like to figure out which end is which!
> :

Feb 11 08:55 AM

[heartbone:]

"What's Going to Replace the Dollar?"

ELECTRONS

(if the powers that be have their way)

Feb 11 10:20 AM

[Conan the B...:]

Tetrapod: One other person should be added to the Bernanke/Obama duo, Paul Volcker.

No one seems to remember that he is also part of the Administration. I believe he is there to mitigate the Inflationary aspects.

Will he make a difference? Of course, he will.

Will he stop gold from going up? Of course not, Gold has been recognized as an Investment vechicle. IMHO

Feb 11 11:18 AM

[john s. gordon:]

tetrap - no one has ever been able to figure out why FDR attacked the dollar by revaluing gold from 20 to 35, perhaps it was just a whim.

the end result was that gold mining was one of the few growth industries we had in north america after 1933.
> jack

Feb 11 02:54 PM

[Kunst:]

How's that DXO doing for you?

For a real eye opener, chart DXO and DTO since their inception 6 months or so ago.

Feb 12 02:35 AM

[Kunst:]

I don't know how well you speak English, but you certainly can't spell it.


On Feb 09 09:39 AM Ferdinand E. Banks wrote:

> Ahlgren. That's Swedish, isn't it? Are you the guy who told me that
> I not only was the worst teacher in the world, but also I couldn't
> speak english?

Feb 12 02:38 AM

[kcube99/kannan:]

there was gold standard in the world then special drawing rights a kind of world currency was introduced, now back to gold standard? the bushmen in africa and else where may feel barter system is not as bad before money/dollar replaced it.

Feb 12 12:15 PM

[twin:]

I repeat: isnt owning land, with its inherent value (same cannot be said of gold, as gold cant be used for anything) and inflation-adjusted feature, a much safer and better bet long term???????

Feb 13 03:17 PM

[flowerguy:]

I belive the US dollar has collapsed and been replaced three times in its history

The only things worth owning are things with intrinsic value..but that value must be something that everyone agrees on....

houses, energy, chickens, and some kind of portable wealth that is trusted as tender and as a way to store wealth so it won't be devalued.
Historically, in tough times coins are usually silver and were in the US till 1965...with gold coins being reserved for larger denominations

Rome fell when they started clipping coins and debasing the metal

A note in history...apparenty the first paper currencies were actualy warehouse reciepts for gold and silver (easier to move paper) than go and drag out the metals.

Feb 15 08:29 PM

[PeteK:]

Not only "IN GOD WE TRUST."
But also "IN GOLD WE TRUST."

Feb 17 03:30 AM

[commr51:]

I believe it is, except for the fact that if all the dire predictions of collapsing currency and runaway inflation come to pass, a local government desparate for cash can tax it away from you.

In that regard, I propose that nothing is safe unless you live in a libertarian utopia (is there one?).


On Feb 13 03:17 PM twin wrote:

> I repeat: isnt owning land, with its inherent value (same cannot
> be said of gold, as gold cant be used for anything) and inflation-adjusted
> feature, a much safer and better bet long term???????

Feb 21 01:37 PM

[qLee:]

I appreciate this and other articles. One thing I'd like to understand better, though, is how to get out of the dollar. I understand owning "things" like antiques, art, valuables that can be sold, and even real estate rental property. However, how does owning "things" apply to the stock market. If I want to prepare myself against the demise of the dollar, what should I do with my US stocks? (Let's assume I own companies that are extremely likely to not go bankrupt in the next few years.) Should I sell my stock? And when it comes to owning metals, where can I learn about the best way to own metals? Mining companies - and therefore stock? I'm new to commodities and don't even know "how" to own metals. Thanks for your help.

Feb 25 07:29 AM

[qLee:]

In my comment above I questioned owning equities (whether it is prudent to do so while believing that we have inflation and may soon see hyper-inflation). Since writing that, I saw a different article you wrote which said you have sold all your equities. That brings me to my question about owning commodities. Because of the obvious difficulty of physically possessing commodities, does it seem reasonable that owning commodities on paper (through a brokerage firm) is a good way to protect assets? Thanks, again.

Feb 25 07:50 AM

[Haigh:]

A good case can be made for the incompetence of the US government and its sycophants in managing this crisis. But on the threat of hyper-inflation I propose that just like the Fed was able to create massive liquidity out of thin air with keystrokes on their computers, they will be able to pull liquidity out of the system as fast and maybe even faster. Any really bad burst of inflation will be relatively short lived. I expect the Fed to fuel inflation as a tool for floating all the under water mortgages, but once thats done they will start tapping the brakes. It will surely be spastic, but it will work. I think we can agree on two things with gold, first its will value will never go to zero, and second its future price movements will be volatile.

Mar 07 11:52 PM

[Jeff Roth:]

HI Paco.

Been following your column. I love it.


Also been watching the currencies.

I know you’d say seek safety in Commodities—not another currency.

However, what do you think about the Canadian Dollar?
They have the most sound banking system, while ours is weak.
It’s easy to purchase Canadian Dollars (esp. since my wife is Canadian)
AND MOST IMPORTANTLY, THE CANADIAN DOLLAR JUST HIT A MULTI-YEAR LOW TODAY at 76 cents to the USD.

That seems like a set-up for a huge gain. I think the two will waive at each other in passing, on the way toward probably doing more than trading places.

I could see the USD at 50 cents to the Canadian Dollar?

Doesn’t this make sense to you?

Would love to hear your thoughts on this please.

Mar 10 03:03 PM