I recently finished reading The Demise of the Dollar by Addison Wiggin and published by Agora Financial. Wiggin was a coauthor on the last book that I reviewed, The New Empire of Debt, also published by Agora Financial. You can read my review of that book here.One of my criticisms of Wiggin’s other book is that it offered no solutions for how investors can protect themselves or even turn an opportunistic profit from what Wiggin has identified as an “epic financial bubble.” The author rectified that in this book. In this book, Wiggin identifies a few hedges and profit opportunities amongst a dire outlook for the U.S. dollar.
I will admit that reading this book brought back memories of reading my finance texts in college. The book is not an overly technical read but it is certainly not as easy of a read as the previous book that I reviewed by this author. There were a few sections that felt quite wordy, almost as though Wiggin was stating the same point over and over again. I think that he could have effectively made the case for a long-term decline of the dollar in about half the length that he actually took. With that said, Wiggin does effectively make a strong macroeconomic case for a progressive, long-term decline in the value of the U.S. dollar.
The author is clearly troubled by the massive growth in consumer debt over the past few decades. He describes this as “pathological consumption” and he states that this is one reason that the dollar will necessarily decline in value. The reason is that this debt-fueled consumption is driving a massive trade deficit. American factories have been progressively moving overseas since the late 1970s. As these factories leave, the jobs that formerly existed at these factories leave with them. This is causing a labor shift from high-paying manufacturing jobs into low-paying jobs in other sectors. Consumers, however, increased their spending despite the loss of income. They accomplished this with debt. Since the products that consumers are buying are constructed in factories overseas, Americans have effectively been borrowing money to ship to other countries. According to the author, America has been “selling its factories and financial assets to pay for consumption.” This cannot go on forever and it is a major and growing stain on the value of the dollar.
Wiggin also states that the Federal budget deficit will drag down the value of the dollar over the long-term. He is particularly concerned about how the budget deficit has become institutionalized. According to Wiggin, “we cannot continue the exponential expansion of debt without a catastrophic economic outcome.” He also points out that the debt is actually much larger than the stated levels; this is due to the obligations of Social Security and Medicare. These obligations have not been funded. As with the author’s other book, Wiggin is very apolitical when it comes to the causes of the burgeoning national debt. Wiggin lays the blame squarely on both the Republicans and the Democrats. He also debunks the Republican theory that lowering taxes will fix everything. The author seems to be pessimistic that our deficit problem can be resolved and he offers no solutions that I could see to this problem on a national level. He does offer advice that individual investors can use to protect themselves though.
Wiggin devotes the final chapter of the book to the thing that I suspect every investor is most interested in: profiting off the dollar’s decline. Here are a few of his suggestions:
- Long-term puts on mortgage securities and subprime mortgages. Considering that this book was written in 2005, this was a very prescient call. It also proved to be a very correct one. An investor who goes long a put option is essentially going short the security. During the most recent recession, a short on mortgages, especially subprime ones, was a very profitable investment to make.
- Oil. This was another correct, if volatile, investment to own since 2005. Wiggin’s thesis is based on the long-term growth in oil demand. The author states, and I agree, that over the long-term demand for oil will grow more rapidly than the supply will. Basic economic principles tell us that this will cause prices to rise. Investors who own assets that will benefit from an increase in oil prices should profit from this.
- Foreign investments. Wiggin’s suggestions are limited to commodity companies located in areas that will benefit by profitably providing resources to a growing and hungry China. His suggestion is Australia. I agree with him that Australia does have some promising qualities and it would have been a great long-term play at the time that the book was written. Wiggin did not expand on the foreign investment theme like I would have liked though.
- Gold. Anyone who bought gold in 2005 at the author’s suggestion can tell you how good of a call this was! Wiggin makes the case for gold at numerous points throughout the book. There were times when I got the feeling that I was reading a very thorough investment thesis for gold. I think that gold is Wiggin’s strongest recommendation for an investor looking to navigate the coming dollar devaluation.
Overall, I found The Demise of the Dollar to make a very convincing if somewhat wordy case for the continued decline in the value of the U.S. dollar looking forward. The author seemingly tries to aim the book at investors and readers of all experience levels but it may be easier to follow if you have at least some knowledge of macroeconomics before you begin reading. The profit opportunities chapter does offer more suggestions than what I have detailed here and has strategies for both beginning and advanced investors. All in all, the book was a success at what it set out to do!