Why You Should Stick With the Dollar and the U.S.

If dissolution is defined as the act of dissolving, what would be dissolved if the U.S. economy collapsed the same way the Soviet Union [U.S.S.R.] did in 1990-1991?

There are huge risks looming on the horizon which make dissolution all the more possible. We have witnessed over the last 20 years continual out-of-control over-leveraging, massive gov't spending, growing trade deficit, increasing unemploymernt, and markets whose bubbles pop at what seems to be 7-10 year intervals. Employees deposit billions of dollars into their retirement 401k's and 403b's, only to find that that the funds in which they invested are currently down 20-40%. Now that China, the largest underwriter of U.S. debt via purchase of U.S. Treasuries, is "slow leaking" investment of U.S. Treasuries and transitioning to commodity purchase for its own infrastructure, what lies around the corner?

In the event of a dissolution of the U.S. the dollar would rapidly devaluate and unemployment would swamp levels observed to date. The challenge during such a scenario would be how to scramble your lifetime savings into a safe investment mechanism. Owning a lot of gold or silver, or some other fiat currency or foreign equity far-removed from the dollar might be helpful.

We're not like Russia

In the U.S., corruption runs far lower than in the Russian Federation [RF] and Commonwealth of Independent States. In addition, oligarchies, while not characteristic of the U.S. political landscape, are nevertheless beginning to characterize the nature of the U.S. gov't. We have a good system, but it's not perfect.

The dissolution of the U.S.S.R. was not the fault of its citizens, but rather the U.S.S.R. government and its corruption. Prior to the dissolution, Russian banks were under siege, the ruble was sliding, Russian equity and currency markets were in a free-fall, and all large corporations were government-owned. Here in the U.S., large banks and auto companies are already essentially owned by the gov't.

While the investment mechanisms during pre-dissolution U.S.S.R. and the U.S. today are wholly different, there nevertheless should be fundamental asset preservation moves that could be taken if such an event ensues in the U.S. If the next bubble to burst is the U.S. dollar, what will the consequences be in a society with considerably more standardization and more systems of checks and balances? With big oil and other commodities (hopefully not confiscation of gold) on the chopping block, how long would this take to materialize and what will be the best way to preserve assets?

Fight or flight?

Harsh economic conditions over an extended period of time can evoke the "fight or flight" response. Fighting would mean sticking with the U.S. bond and equity markets (dollar) while fleeing would be similar to strategies for investing in non-dollar denominated bonds/equities. Goldbugs would rather see a gold-standard for a fiat currency or totally get out of any fiat currency and possibly trade with silver (poor man's gold) that's hinged to a gold standard.

Economies which are stressed over a long period of time undergo chronic suppression of their economic defense mechanisms, leaving their system open to opportunisitic threats. Sticking around and fIghting back can amazingly, however, boost the defense mechanisms and is therefore vital to survival.

Another very important factor for the health of an economy is population growth. Using data from the U.S. Census Bureau, from now until 2025, population growth rates for Australia, China, Brazil, Russia, India, Japan and Germany are projected to steadily decline. Russia and Japan are projected to have negative growth rates, while India seems to have the greatest positive rates above 1%. The projected growth rate for the U.S. appears to be steady near 1%, which is similar to Brazil's expected growth. In 2009, the top 10 countries with the greatest population sizes are 1-China (1,338,612,968), 2-India (1,166,079,217), 3-United States (307,212,123), 4-Indonesia (240,271,522), 5-Brazil (198,739,269), 6-Pakistan (176,242,949), 7-Bangladesh (156,050,883), 8-Nigeria (149,229,090), 9-Russia (140,041,247), and 10-Japan (127,078,679).

U.S. still offers best prospect

In light of the magnitude of the U.S. population size (#3 in the world), steady projected population growth rate of 1%, resilience of the U.S. economy, lower levels of corruption, it seems that a safer position for investment over the long term would be in the U.S. bond and equity markets and in dollar-related investments around the globe. This is all the more reason to stick around for the fight to strengthen U.S. economic defenses.

Comments

[Donald Ingram:]

A weak argument for remaining in US dollar backed assets. Decoupling is taking place without the American public taking much notice.The rest of world is not as bad off as the States are. The US dollar has lost ground against a host of currencies recently, as the flight to "safer" locations for wealth takes place. This is happening not only from around the world but from inside the US also.
In the words of Peter Shiff, "We are not the engine, We are the caboose, and we are being cut loose."

May 24 02:11 PM

[ed233:]

I have read your article with interest since I live north of the 49 parallel. My background is legal and buisness. I naturally look to the great USA as strength for the Canadian economy because we are so dependent upon trade with your country. Unfortunately, I find great disappointment simply because I see this economy(USA) looking more like a banana republic (other than the fact that it isn't a small state) as opposed to a great country setting an example for the rest of the world. I have to ask myself an important economic question. Is the Obama administration embarking upon unprecident practices that violate all sense of economic legal rules and commercial common law precidents? The foundation of an economic democratic state in the western world was founded upon a long tradition of legal and economic principles based upon contractural law and generally accepted commercial practices tempered by judicial public policy. When I see a government interferring with these principles as if they never existed then I have to ask myself, "What is the alternative?" Let me give you an example of what I'm referring to. I recently read in the latest news that the Obama administration is attempting to force bond holders in the US auto industry to accept a priority shift in their asset holdings that in effect violates the rule of law in favor of auto workers. Has anyone considered who makes up the group of bond holders that I'm referring to? They are in many cases retirees, pension funds and others who have for many years invested in the auto industry using their hard earned money to lend to an industry only to accept a lesser return based on a fixed pre-determined amount that in most cases provided a return on investment far below their inflationary costs over the years. In many cases they are the very US citizens who the Obama administration should be protecting first because they contracturally entered into this arrangement knowing that they were prepared for a lesser return only for security purposes as opposed to other investors who know that their rights come after payment to those creditors first. This is just one example of what I'm referring to that spells banana republic. Now if you change the rules in a retroactive manner then you might just as well say to future bond investors that their traditional position can be changed at the whim of any government in power. Now what countries come to mind when a government can up-root the rule of law under the guise of suggesting that it is in the best interests of the country as a whole? You are not living in a democratic country when these kinds of policies are implemented. And there are good reasons for this. Namely, who is going to be the beneficiary of those changed rules? Noone will ever really know except the group that has the most influence to bear. It looks to me that this policy is one that spells desister for the bond industry as a whole. What about federal bonds? Can you trust this government? This spells social chaos. Instead of green shoots I see many green tea parties who have the right to carry guns and I'm glad I live north of this border during these turbulent times. LOL Looking after your money.

May 24 03:12 PM

[cameroni:]

We all know of course that the US is a major consumer economy and a great deal of domestic activity is dependent on consumption. We cannot forget thought that the US is still a manufacturing powerhouse and goods are shipped around the world in good times and bad. I do not see the dollar collapsing as many predict. Quite the contrary, via devaluation the US will in effect draw in capital and foreign investment as the opportunity to buy quality US assets becomes irresistable. A point will be reached when foreign investors will look seriously at bargains as they go on the chopping block. And not necessarily to repackage and move to overseas locations.

Cheap labor is simply not able to fill all the specialized needs and demands that only a well educated and organized population can provide. I am also referring to a properly functioning Judiciary, government agencies and the plethora of private sector services that support so many great industries, Apple and Boeing as only two examples.

The dollar will devalue only to the point where excess is cleansed from the system and market forces can start to assert themselves. The US is a good buy at all times but it will be a real bargain sooner than we expect. I expect a real recovery will take a decade but the US cannot be counted out of the action yet. It simply has too much going for it in a thousand ways that the rest of the world still wishes to emulate and own a piece of.

Perhaps the biggest risk is the loss of prestige as foreigners flush with cash start to buy up some of the best and brightest companies we have. We need this correction though. We need it because we are not competitive enough right now. Coming back to earth may be a little painful but it will payoff in the end.

We could not have carried on with the economies trajectory of two years ago. That was unsustainable on every level. The bubble had to burst and now it is time to pick up the pieces and start rebuilding.

May 24 05:37 PM

[IronMeteor:]

With all due respect

In the words of Peter Shiff, "We are not the engine, We are the caboose, and we are being cut loose."

Peter Schiif is an idiot. That is the dumbest comment ever. Have you ever been to Europe, Japan, China, South-East Asia. I have been to all them. We are the engine, the cabose and the whole damn train to those export driven regions. I dare them to cut us loose. I will laugh as our manufacturing ramps back up and they die on the vine.

Come on, lets stop this fantasyland crap. China owns 2T in US assets because they sold us 2T dollars worth of junk the last 10 yrs. Who is going to buy 2T in the next ten. Their own citizens. Give me a break. Go visit China. They are poor and save every nickel. How about BMW, they going to sell all those expensive cars to China. Right.

Come on, the reason the world economy has tanked is the US consumer has tanked. They accounted for 60% of the growth from 2000-2008. Who is going to take that slack up. Its sure easy to run surpluses when you have a credit debt bubble in the US and debt addicted consumers buying it all. But now what, those US consumers are down and out (it's true) but so are all those export driven areas. I want to see Japan and Germany be so smug when we aren't buying their stuff. Those surpluses will be deficits (they now are, amazing). Who would you rather be, a recovering drug addict or the drug dealer who has no more customers.

We suck, we were drug addicts. But they suck even worse, they were the dealers.

Please, stop the insanity. Its hurting my ears.

Go ahead and listen to Peter Schiff, I guess losing 1/2 your money last year wasn't enough. You want to lose it all.

May 24 09:16 PM

[dcb:]

Once our currency collapses foreign investors will flock to the country to buy up cheap assets. you just don't want to be holding them until that happens. the same way you didn't want to hold an emerging market currency while the global finaincial system was in danger of collapsing. When things got cheap enough money flowed into Iceland. Do you want to hold icelandic currency before that? You keep your dollars, I'll keep my other currencies and when the value of your dollar drops enough I'll buy your assets with my other currency that has increased in value. You realize that is essentially what you are advising people to do. :-)


On May 24 05:37 PM cameroni wrote:

> We all know of course that the US is a major consumer economy and
> a great deal of domestic activity is dependent on consumption. We
> cannot forget thought that the US is still a manufacturing powerhouse
> and goods are shipped around the world in good times and bad. I do
> not see the dollar collapsing as many predict. Quite the contrary,
> via devaluation the US will in effect draw in capital and foreign
> investment as the opportunity to buy quality US assets becomes irresistable.
> A point will be reached when foreign investors will look seriously
> at bargains as they go on the chopping block. And not necessarily
> to repackage and move to overseas locations.
>
> Cheap labor is simply not able to fill all the specialized needs
> and demands that only a well educated and organized population can
> provide. I am also referring to a properly functioning Judiciary,
> government agencies and the plethora of private sector services that
> support so many great industries, Apple and Boeing as only two examples.
>
>
> The dollar will devalue only to the point where excess is cleansed
> from the system and market forces can start to assert themselves.
> The US is a good buy at all times but it will be a real bargain sooner
> than we expect. I expect a real recovery will take a decade but the
> US cannot be counted out of the action yet. It simply has too much
> going for it in a thousand ways that the rest of the world still
> wishes to emulate and own a piece of.
>
> Perhaps the biggest risk is the loss of prestige as foreigners flush
> with cash start to buy up some of the best and brightest companies
> we have. We need this correction though. We need it because we are
> not competitive enough right now. Coming back to earth may be a
> little painful but it will payoff in the end.
>
> We could not have carried on with the economies trajectory of two
> years ago. That was unsustainable on every level. The bubble had
> to burst and now it is time to pick up the pieces and start rebuilding.

May 24 09:42 PM

[dcb:]

Dude, the data just does not support your argument. I understand the emotional reaction to the idea of one's country going down the tubes, but staying in china 10 years made you good money. staying in the us market hasn't.

from the market peak in october (2007 to the bottom around march 9th you would see that ewz, veu, s&P had all dropped about 65% or so(all markets equalized) since the rebound many foreign stocks has doubled the performance of the US.

High levels of savings mean large amounts of capital to invest in future growth. high levels of consumer consumption just mean more garbage in the end. this is easily accepted macro theory, and many studies show how savings get invested and enhance future growth.

High levels of savings means more to spend in future, high levels of debts means less to spend in future. We spent in past and now will save, they saved in past and have money to spend. do not make the mistake of assuming the future must look like the past. it doesn't, and likely wont.
But hey, if you were roman talking about the decline of the roman empire didn'[t make you popular, or get you elected. It didn't stop it. I would add that the decline of the empire was hastened in expensive foreign conflicts and when decisions were more based on "politics" that merit. (think our current financial bailout strategy, and how it enriches those who caused it and have been giving money to congress).

The american purchasing power has been in decline for 30 years. when did you think taking on that debt to maintain living standards was actually going to catch up with us. did you think it could go on forever. But, once more you don't get elected telling people the truth about their future lifestyle. you get elected telling people the future looks bright and "yes we can". While at the same time you enact policies to ensure that we can't and put the same old people in power. you may want to read this if you think what I am saying isn't supported by data.

buffalobeast.com/136/C...

When the engine of the world economy runs out of gas, what happens when those with the gas (china, countries with savings) decide not to give it anymore. the engine stops. why should they keep giving us money to buy things when they can use it to buy their own.

May 24 10:06 PM

[dcb:]

The perverse thing is each tax dollar I spend propping up the financial system in the untied states causes more and more people to flee dollar (united states assets). This is our governments idea of money well spent. The insanity of continuing this (because of lobby money), proves the american empire is over. when our government would rather throw money at the political connected while rome is burning we know we are done. We can't even get our act together when it is a matter of life and death.

More proof of this in the KBR contacts in the Iraq War. Our own contractors will short change the American troops resulting in additional deaths if it means some extra bucks for their own companies and their CEO's. Remember dick Chaney (the great patriot and former VP) was the head of this company. Our own VP instills a corporate culture where american lives and american soldiers lives are less impt than profits. This man became the VP of the United states. No, our system is working just fine.

May 24 10:21 PM

[popey:]

I'm sorry Leif, but you provide no cogent economic arguments to support your view. Moreover, you yourself are bearish on the US medium term. Why spend millions trying to re-float the Titanic when you can get on another ship. The USD and bond markets are on the verge of collapse. Unfortunately, if you stick around the wreck will take you down.

May 25 09:12 AM

[EUARTE:]

You see here it is the citizens fault. We have a workable democracy with relatively honest elections. Don't blame the politicians. The citizens gave them the go ahead. Obama has a mandate to take over the private sector. He is a communist through and through and the citizens have allowed this man to be President. The polls show he is popular but a lot of his policies are not. All that shows is a citizenship of idiots.

May 25 10:47 AM

[Paco Ahlgren:]

The U.S. has committed $12.8 trillion just to fight this crisis alone. If you add up all U.S. government expenditures from the Revolutionary War to the period just before we committed the $12.8 trillion -- including all wars, the Louisiana Purchase, and the entire NASA budget -- everything totals a little over $8 trillion, in REAL dollars. So forget about previous obligations, or future budgets; the amount our government has printed is more than 50% greater than all previous expenditures, combined!

Mathematically, there is absolutely no way to solve this problem without printing even more money. Add to this equation unprecedented credit easing, and the outlook becomes positively terrifying.

I've written about 20 articles on Seeking Alpha since December exposing this catastrophe, and I've yet to hear a cogent argument suggesting the dollar can survive. Mostly, people just get angry and call me a traitor... hey, don' kill the messenger.

Your article is well-written, but I'd like to hear how you think the U.S. (and the entire world) can avoid colossal price escalations, deriving from current policies.

May 25 11:00 AM

[dybydx:]

i agree population is a factor, but in the case of USA, i dont think the argument is going to have an impact until the range of 2050 to 2100.

China pumped its population (per direct instruction of Mao) from 400M to 1.2B between WWII and collapse of the soviet union. and only since the 90's were the economists starting to take their sheer size seriously and it will take another 50 yrs to achieve dominance.

May 25 02:12 PM

[Fabien Hug:]

Relatively speaking, the US will still do better than any other countries of a certain size. US is still the engine of economic growth and I don't see any alternative in the horizon. Now, beeing the best of the worst can help feel better but will not help your retirement of paying for your children education. In conclusion, I wouldn't drop the US down the toilet but some diversification (up to 40%) in certain economies like CDA, AUS, NZD, CHF makes sense (there may be more but these are the one I know). They are managed in a way we understand (unlike RUS, CHA) and small enough to overcome the same problems that the US face in a much easier fashion. Furthermore, a diversification in real resources and the currencies that profit of them also makes sense.
I'm convince that it's where you face the least amount of risk as of today.

May 25 02:56 PM

[Tony Daltorio:]

If anyone wants to see why the US is going down a sinkhole, never to rise again to a position of strength just read this commenter. And most Americans think like him.


On May 24 09:16 PM IronMeteor wrote:

> With all due respect
>
> In the words of Peter Shiff, "We are not the engine, We are the caboose,
> and we are being cut loose."
>
> Peter Schiif is an idiot. That is the dumbest comment ever. Have
> you ever been to Europe, Japan, China, South-East Asia. I have been
> to all them. We are the engine, the cabose and the whole damn train
> to those export driven regions. I dare them to cut us loose. I will
> laugh as our manufacturing ramps back up and they die on the vine.
>
>
> Come on, lets stop this fantasyland crap. China owns 2T in US assets
> because they sold us 2T dollars worth of junk the last 10 yrs. Who
> is going to buy 2T in the next ten. Their own citizens. Give me a
> break. Go visit China. They are poor and save every nickel. How about
> BMW, they going to sell all those expensive cars to China. Right.
>
>
> Come on, the reason the world economy has tanked is the US consumer
> has tanked. They accounted for 60% of the growth from 2000-2008.
> Who is going to take that slack up. Its sure easy to run surpluses
> when you have a credit debt bubble in the US and debt addicted consumers
> buying it all. But now what, those US consumers are down and out
> (it's true) but so are all those export driven areas. I want to see
> Japan and Germany be so smug when we aren't buying their stuff. Those
> surpluses will be deficits (they now are, amazing). Who would you
> rather be, a recovering drug addict or the drug dealer who has no
> more customers.
>
> We suck, we were drug addicts. But they suck even worse, they were
> the dealers.
>
> Please, stop the insanity. Its hurting my ears.
>
> Go ahead and listen to Peter Schiff, I guess losing 1/2 your money
> last year wasn't enough. You want to lose it all.
>
>
>
>

May 25 03:55 PM

[IronMeteor:]

I am not sure how my commentary is in anyway related to why we are going down the sinkhole.

I freely admit the US sucks. I am not in denial. But I think germany is in far worse shape. They built up their entire economy to supply us with goods. Now that's over - what's next. Nobody has answered that for me. I might go with long with Australia, but the Euro zone, I don't get it. Their demographics are pathetic, 2nd only Japan for a coming disaster. Their whole economic model is built on exports to anglo countries (UK and US) that can't afford them anymore.

Whats the encore. The Euro is at $1.40 here, not .83 like in 2001. There is no easy solution for them going forward. The export model is dead and their currency is sky high right now against their #1 and #2 trading partners, namely the UK and US.

What am I missing. All those Euro countires have debt loads as big as the US and even worse in some cases. Italy is a joke, their demographics are the worst in Europe and they have promised full pensions to everyone over 55. The US has tiny issues on S.S. compared to half of Europe. The US also has the best companies in the world. Lets not forget that. If we raised taxes to 50%, like Europe already has, our issues are gone. We have the resources to recover. We can reinvent ourselves to recover. I want to know how Germany does that. Export more! Good luck. I won't even talk about Japan, even Europe looks great compared to them.

So now the cabose is being let go - good grief. What a bunch of crap.

As for my investments, I was long gold since 2001 (sold late 2008), and short the dollar during that time. Very few stocks. But I change when the facts change. I am now long the dollar, long stocks and short the Euro. I make money, not friends. Buying the S&P below 700 was a steal, too bad Peter Schiff was still telling you to short.

Peter Schiff and his cabose idea is not even new. I read that same comment in 1981 about the US. I wonder how that turned out.

May 25 06:13 PM

[ozcutty2:]

ironmeteor is spot on, except his comment about Australia. Australia is Chinas mine so is going to get creamed. The Rudd governemnt spend 60 billion (deficit) last year alone just trying to keep us out of recession. We have had 3 stimulus packages and they have given out big grants to first home buyers. This is not sustainable, just encourages people to go in over their heads. When US starts to recover, Australia will be tanking.

May 25 07:46 PM

[nova:]

Some people do NOT know what they are talking about.

People who can barely find a country on a map become the "specialists" about country, its people, its economy, and its political system.

The former US Secretary of State Rise was specialist on USSR. Fantastic. No wonder that US foreign policies are in such deep shit.

Speaking about Russia, I was born there, graduated from their top Moscow university, and worked in their Academy of Science. Trust me, the author talks total nonsense about USSR/Russia.

Let us look at the author statement: "Russian banks were under siege, the ruble was sliding, Russian equity and currency markets were in a free-fall, and all large corporations were government-owned."

The reality check:
- The government owned EVERYTHING including all corporations and all banks
- There were not any equity and currency markets. None whatsoever.
- Yes, the entire system was under siege due to runaway corruption.

There was a good joke perfectly describing the Soviet reality: they (the government) pretend they are paying us and we (workers) pretend we are working. Such system could not last long without sliding back to a Stalinist totalitarian regime. Gorbachev tried to disarm a ticking bomb and it exploded. That is all.

I have no idea how US financial collapse and social unrest will develop but it is inevitable.

I think that Russia survived and the USA will survive but it will be very much different country. It will be tough times but people owning hard assets and gold will do much better than the rest.

All empires rise and fall, and the USA will not be an exception. A present geopolitical realignment process will continue. That is all!

Finally, I predicted 20+ years ago that the USA followed the USSR with 15-20 years delay. But it is another story. Let use look who survived and prospered id the Soviet collapse:
- Top government & Communist bureaucrats as well as state security and mafia bosses who used a phony privatization to seize the most valuable state assets for free
- Ordinary people survived by owning real-estate, valuables (like gold, paintings, etc.,), and hard foreign currencies.

May 25 09:09 PM

[MarkitWacha:]

Long-term, here are some stats regarding demographics:
www.youtube.com/watch?...

I don't agree with the tone of this video, but I have no reason to disagree with the facts presented. It's a macro-trend, and investors should pay attention to those.

May 25 09:28 PM

[IronMeteor:]

I'm not really long Aussie. But I would probably consider it because of the carry before I buy the Euro. I am mainly FX.

But as of last week, I am now long the Dollar, GBP vs Euro and GBP vs NZ and some US stocks from March.

(I am not short the Aus or Cad right now. Too fanatical a following. I am waiting for that final massive blow-off before I go short)

But I will not sell the BRIC's short. I think China is way overbuilt, but the reserves are huge and its not worth shorting. Plus, there are much better shorts to be had like the Euro Zone and Yen. The exporters who have nobody to export to anymore.

May 25 09:28 PM

[Leif Peterson:]

Thanks for the comments. The intent of the article was to contrast the current crises in the US economy with recent history for country with a high literacy rate whose economy acutely dissolved (i.e., "dissolution of the USSR"). By acutely, I mean short-term rather that chronic (long-term) loss of a currency base.

In 2007, data reported by the UN (hdr.undp.org/en/report.../) suggest the literacy rate for the Russian Federation was 99.4% (ranked 11), while for the largest countries in the world the literacy rates were China 90% (ranked 85), India 61% (ranked 147), US 99% (ranked 17), Indonesia 90.4 (ranked 87), Brazil 88.6% (ranked 95). Pakistan 49.9% (ranked 160), and so on.

Because this article is about the US, the only other large country in the world with a similar literacy rate whose economy recently acutely dissolved is the USSR. Japan ranks 10 in the world population and has a 99% literacy rate, but I don't see that the "lost decade" compares to the dissolution of the USSR. Readers may not understand the implications of this. What's interesting is that the economy quickly dissolved in a country (USSR) whose literacy rate was one of the greatest in the world.

Looking at the Human Development Index (DHI, hdr.undp.org/en/statis.../ ), which combines life expectancy, literacy, and standard of living, Japan's ranks 8 in the world, while the US ranks 15, RF ranks 73, China ranks 94, and India ranks 132. Again, in terms of HDI, it's more appropriate to contrast the US with RF(USSR) before China and India if you need to use an example of an economy that quickly dissolved.

As a totally relevant aside, I have been the principal on many joint US-Russian nuclear research projects with Moscow-trained scientists, and have been doing nuclear research in several CIS countries over the last 20 years. Thus, I never really never *compare* the US. vs. RF. If you contrast economies of the US and RF, however, they are fundamentally different. I only used the historical case of the dissolution of the USSR as an example of rapid devaluation of a currency base in a highly literate country.

May 26 01:13 AM

[tuj:]

Should not the proportion of US GDP on military spending have some impact on the valuation of the dollar? At the end of the day, the US has all the big guns.

May 26 08:15 AM