Sooner or later a day of reckoning must come for the dollar

Everything that lives also dies. It is just an observation, but it seems to apply to everything – trees, governments, financial systems, bubbles, empires, and people themselves. There is a life cycle to all things – institutions, insects, and insurrections. They begin small... they grow... they mature... they get taken over by parasites... and they die. Tout casse... et tout passe, as the French say. Everything breaks up... and everything goes away.

In the stock market there is a life cycle of from 30-40 years from one peak to the next. 


These cycles of up and down... bull and bear... are well known. What you can never know for sure is where you are in the cycle. “Markets always do what they’re supposed to do,” say the old timers, “but never when they’re supposed to do it.

While the Dow, U.S. bonds, and U.S. housing are probably going down, some things are probably going up. Japan has been in a slump for 16 years; it now looks like a good bet to change direction.

And gold suffered a bear market that lasted for the last two decades of the 20th century. Since George W. Bush entered the Oval Office, gold has more than doubled. It seems to be in a long-term bull market.

But there’s nothing like a 20-year bear market in his favourite metal to give a man a sense of modesty. As your author’s gold coins fell in value; his stock of modesty increased. Now, at least, he knows what he doesn’t know.

That still leaves the things about which he knows nothing at all.

Here we are in terra incognita. Since 1971, for example, the world financial system has looked to dollars to store and measure its wealth. But to what does the dollar look? Nothing at all. It merely floats on its full faith in empty promises and the credit of the biggest debtor in the world – the U.S.A. We’ve never seen anything like it. People work all their lives to lay in a store of a pure-paper money that lost half its value in the last 20 years... and could lose the other half any time. Foreign governments, pension plans, insurance companies, hedge funds too stake their financial futures on this same paper money, whose value is uncertain and whose future is unknown.

Never before have so many people had so much wealth tied up in so many dubious propositions. During the 20 years from 1980 to 2000, the capital value of America’s stocks rose more than 1000%... and the value of America’s residential housing approximately doubled. Meanwhile, so has the American government’s ‘financing gap’ gotten so large it will likely never be bridged. Between the financial obligations of the U.S. federal government and its anticipated revenues is a canyon of $65 trillion, in present U.S. dollars. No nation ever faced such a huge economic challenge.

Nor have the western economies – including Japan – ever been threatened by the competition they’re now getting from three billion Asians. Nor has any country ever run a trade deficit on the scale of the current U.S. shortfall of $800 billion. Nor has any country had anything like the dollar reserves now in the hands of the Chinese – more than $1 trillion of them.

Also unprecedented is the derivatives market. As recently as ten years ago it barely existed. Now, the latest news tells us it has swollen to more than $300 trillion. What kind of shock would it take to bring it down? Even if it only shivers and shakes, what will happen to the financial system when it does?

Against all this kudzu of dollar-based wealth, debt and delusions is a solid, slow-growing oak of gold – man’s traditional way of keeping score in financial affairs – getting larger at the almost invisible rate of 1.7% per year.

How will it all turn out? We don’t know. All we do know is that every previous monetary system has washed up. And every paper currency every previous experiment with paper money has ended in regret and recrimination. All bubbles end. All of them. And when a bubble in paper money comes to end, typically people abandon the paper and rush back to gold.

Sooner or later a day of reckoning must come for the dollar, America’s trade deficit, and the world’s faith-based monetary system. We don’t know how. We don’t know when. But it is a pretty good bet that it will happen.

Of course, if you knew how it would turn out... if you could look into the future... you could take just the right action at just the right moment to take advantage of it. But we are profoundly ignorant. All we know is that, however it ends, it would probably be a good idea to have a few gold coins in your pocket when it does.


Bill Bonner