- The dollar priced in other currencies is an optical illusion as it takes more of all currencies over time to buy gold.
- Technically, a dollar crash can't occur as all governments are similar with debt to GDP increasing with future obligations.
- Fed odds of rate reduction increase but gold fell.
- We have only had a tease of deflation with coronavirus spreading.
- Commodities will all get hit when deflation really hits.
We have all heard the dollar will crash from so many over the years, that we think it's the boy who cried wolf and most of us just ignore.
This Is the Illusion That Most Don't Understand
The reality is that if the dollar crashed, by definition, that would mean that primarily the euro, yen, and pound would skyrocket. Why? Because of what the dollar is, or should I say, what the Dollar Index is because that is what makes up the dollar. You can see from the following what a dollar really is; a bunch of other currencies, primarily from Europe.
- Euro (EUR), 57.6% weight
- Japanese yen (JPY) 13.6% weight
- Pound sterling (GBP), 11.9% weight
- Canadian dollar (CAD), 9.1% weight
- Swedish krona (SEK), 4.2% weight
- Swiss franc (CHF) 3.6% weight
This isn't open for debate. If the dollar crashed, all of these currencies above would have to shoot up as a whole. Some may outperform the others as a group, but the real issue with a dollar crash scenario is the problem that currencies are priced in each other. Every country that a currency listed above represents, as well as the United States and its dollar, have Debt to GDP problems as well as future unfunded liability issues as shown in the following table. Notice the euro area is just above Argentina who saw its peso devalued.
What About A Euro Crash? Pound Crash?
If there are doomsayers writing books and articles here in the U.S. about a dollar crash, there are doomsayers in Europe writing about a euro crash or pound crash with the exact same reasoning; out of control government spending and no plan for future obligations leading to more debt and more problems along with eventually higher interest obligations to service the debt and absolutely no plans to pay any of it back. These countries are already going to negative interest rates to try and stir their economies and yet the powerhouse of Europe, Germany, sits at 0.0% GDP.
On its face, the doomsayers are 100% correct in their analysis of an eventual end game. All currencies throughout the history of mankind have failed, mostly because of government abuses (spending) or failed wars. While yes, economies are continuing to grow, an eventual tick up in interest rates will put that growth to rest and the unwinding of the trillions of excess credit will dwindle down into many worthless investments for hedge funds, pension plans, sovereign wealth funds and high net worth investors who didn't see it coming.
In fact, the U.S. currency technically failed in 1933 when the government had to step in and confiscate gold and again in 1971 when finally went off the gold standard and told the world to accept our fiat money. The world really didn't have much of a choice in the matter and agreed to create their own currencies and that's where you saw Debt to GDP ratios begin to rise around the world (more on that later). As long as citizens believe in a piece of paper with a number written on it, they could print as many as they wanted and by going into debt expand their economies with even more and more spending every year.
I'll get into interest rate analysis and why the naysayers have been wrong about the dollar crash in a bit, later in the article. Let's dive into why these other currencies that make up the Dollar Index are also subject to a potential crash and analyze why these currencies all can't crash at the same time, at least on paper, because of them being priced in each other. It's virtually impossible when they are priced in each other. But it will take more of all of them to buy gold and that's the part that matters most and why gold should be viewed as insurance for all portfolios, including the dollar.
You have countries that for the most part are continuing to produce more goods and based on their success their currencies move from one side of a ship to the other getting stronger or weaker. But if you break down the Debt to GDP Ratio of each country (see charts below), they are all on sinking ship and will collectively, over time, take more of them to buy gold. It is impossible for a dollar crash, as many you read or listen to continually call for, as by default it would skyrocket the euro/yen/pound. If the dollar gets weaker, then these countries' currencies move higher with 57.6% being the euro and primary currency that makes up the dollar index. Add in the pound (the euro and pound have been around 1.15 exchange rate the last 10 years on average so technically similar in value as so-called European Union countries till Britain just left), and you have 69.5% of the Dollar Index represented by Europe. The Debt to GDP ratio of these countries in the Euro Union is in the '80s, and with mass immigration and continued increases in government spending, I don't see it getting better.
Every country also has future obligations they can't possibly pay for. Gold will wake up to that more and more, but it will be printing by all to pay for things and pricing them in each other will continue to be the illusion of wealth I speak of in my last book. The real wealth will be revealed in gold, as hated as it is by so many because it has always been that way. All currencies have failed simply because of government abuses (spending that is out of control) and/or wars lost. What will be different this time?
The dollar can still be priced in the other currencies and look strong or weak comparatively speaking as all governments sink their economies in debt laden purgatory. Global debt is at a fresh record of 322% of GDP. Check out the second chart below and revisit what I wrote above about the end of all currencies with a little more proof. Central banks enable this madness. Politicians have no self-control nor do they really care enough to do anything but campaign to get elected again. All that money going to pay for a candidate running for President, if put to use towards eliminating homelessness, would make a difference. But we as a nation are so backward in our thinking that we believe that change will actually make us better off if we give politicians our hard-earned dollars. You already know what the definition of insanity is, and yet we do it every election and expect different results.
The only way out of the current mess countries governments have got us into is to practice austerity but that won't ever get a candidate elected. No one is talking about such nonsense now, during the so-called "greatest economy ever." If the younger generation is upset today, just wait till they get the bill for tomorrow. And if 85 million of them have student loans at today's low interest rates, wait till they get the bill for tomorrow's rate increases on those loans they can't default on or declare bankruptcy to eliminate the debt.
The facts are, that under current law, debt will rise to 160% of GDP by 2050 and 240% of GDP by 2070 and 360% of the economy in 75 years. Talk about your debt slaves for future generations. But we all know how governments always need more and the Committee For A Responsible Federal Budget projects these numbers to be double what they are. Just imagine the interest payment on that with future obligations taken into account. That's just the U.S.!
They do offer some solutions with a program called TRUSTGO, so have to give them credit, but it is highly unlikely these solutions are followed until the governments' hands are forced to do so. They are sure as heck don't incorporate the $60 trillion proposed by Presidential candidate Sanders.
Central Banks To the Rescue? All Hail the Fed?
The Fed will take rates to zero and negative eventually in the U.S. when they find they can't lower rates enough to stimulate the economy while failing to hit their 2% inflation goal. Gold has been sniffing this type of policy out with some bursts higher the past year but gold too is being caught up in the deflationary wave that can continue for a bit longer.
We really haven't started the bigger deflation yet. Markets can still take off a bit with hopium that the Fed knows what to do as the interest rate cut odds for March at 75% and April, 61%. But the Fed doesn't really know what they are doing. They are in it for themselves and their own survival and deflation is their enemy to that. Bernanke made that clear way back in his 2002 speech Deflation: Making Sure "It" Doesn't Happen Here by mentioning the unlimited money printing press and a reference to Milton Friedman's Printing Press, but even with the out of control M2 printing, it can't push on the string of this deflationary credit contraction that we are in the midst of. Today's Fed Chairman Powell at least has warned Congress that $1 trillion budget deficits are unsustainable.
The Fed has been bailed out by gold confiscations, higher taxes on gold and moving away from the gold standard. What will they do next to save themselves? How are you protected with the insurance gold provides if they fail again?
You can read some of my old articles where I talk about Exter's Pyramid, or listen to my interview of John Exter's brother-in-law Barry Downs, who was in the gold business, describe what potential troubles lie ahead. Nothing has really changed. But the whole world is clamoring for insurance and this dip in gold here may be your last chance to buy it at a decent price. I prefer to get the stock market up one last time and then an even more severe unwinding could occur than what we just experienced, technically from coronavirus fears which have brought some of the world to a halt, especially on the travel side of the equation.
But for gold, we see it as the asset of choice at the bottom of Exter's Pyramid because it is perceived of value. It is a long-term hold insurance policy that you can buy on every dip, and yes, dips always come. In a severe deflation, yes, gold could even dip to $1,000 area again, but that would be an extreme case where all commodities and stocks get hit together like they did in 2009 where we saw gold fall 30%. A 30% drop from today's price would put you under $1,200.
How To Trade Deflation
The CRB Index was at 55 Daily Sentiment Index - DSI and Gold at 93 on 2/24 after hitting 96 on 2/21. That's not where a buy is for the metals. Copper DSI is at 39 and feeling the deflationary effects faster than the precious metals. Crude Light DSI hit 27 and has been falling and oil could hit below 40 down to 35 possibly and natural gas DSI at 17 has also got hit hard and could fall even more testing the last low of 1.61 or lower before a bounce. Patience is required for a bottom but dollar cost averaging in at the spots mentioned above can pay off big.
Deflation is a killer to most everything, but it is not what we should fear as it will weed out the bad and overindulgence by corporations and banks and leave food on the table for all to eat if they plan accordingly. Many though will get hurt. Deflation is the enemy of the Fed and governments and savers are hurt by the low interest rate policies that are implemented by the Fed. When or if things get out of hand and the economy does stumble, then watch interest rates rising to get really worried about what's to come.
In the meantime, as I said, buy the dips in gold and silver and you can do this by buying physical bars or coins or by going with the ETFs like (GLD) or (SLV) that represent what I would term the second-best way to own if you can't buy physical as you can't redeem shares into physical gold unless in large sums and high fees with many of these gold and silver ETFs.
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