The Inevitable Collapse of the Dollar

[Aletheides]

Let's suppose six castaways are stranded on a desert island, five Asians and one American. Their problem is hunger. So they sit down and divide labor as follows: One Asian will do the hunting, another will fish, the third will scrounge for vegetation, the fourth will cook dinner, and the fifth will gather firewood and tend the fire. The sixth, the American, is given the job of eating.

So five Asians work all day to feed one American, who spends his day sunning himself on the beach. The American is employed in the equivalent of the service sector, operating a tanning salon that has one customer: himself. At the end of the day, the five Asians present a painstakingly prepared feast to the American, who sits at the head of a special table built by the Asians specifically for this purpose.

Now the American is practical enough to know that if the Asians are going to continue providing banquets they must also be fed, so he allows them just enough scraps from his table to sustain them for the following day's labor.

[To make the analogy more realistic], let's assume the American on the island pays for his food the same way real-world Americans pay, by issuing IOUs. At the end of each meal, the Asians present the American with a bill, which he pays by issuing IOUs claiming to represent future payments of food.

The castaways all know that the IOUs can never be collected, since the American not only produces no food to back them up, but also lacks the means and the intention of ever providing any. But the Asians accept them anyway, each day adding to the accumulation of worthless IOUs.

The Inevitable Collapse of the Dollar

Crash Proof: How to Profit from the Coming Economic Collapse

How to Profit:
1. Borrow money in USA and put it into foreign income producing investments. Use this income to repay the loan. As the dollar drops, the income you receive from these investments will turn into more and more dollars, and make loan repayment easier every month. In just the last 4 months the exchange rate for dollars to Mexican pesos has dropped by 5% - I don't think this is stopping anytime soon.

2. Hedge against the fall by buying gold and silver. This isn't exactly profiting, more like covering your ass. I now buy silver at the end of every month, as my checks roll in.

Any others? I'm brainstorming.

[Upperz]

Great post.

The nr 1 profit example means that the banks in the US will eventuelly have to pay the loss.
But as the US banks are already losing lots of money because of the morgue issue, I guess they are not really willing to lend money. Or will they do it just because they need income?

Well my way of making profit because of the low $ rate, is that my complete production (programming webapplications) now comes from Indonesia, as they use the $ for international transactions.
As I bill in € to my dutch customers, this gives me a big advantage.

[jasaunders]

You don't have a grasp of macroeconomics or finance. The analogy you described is not even close to reality and in no way describes the U.S economy.

[JLeezer]

You don't have a grasp of macroeconomics or finance. The analogy you described is not even close to reality and in no way describes the U.S economy.

I'm with you on this. He could have also made some connection between how the game of Monopoly is played and how the US economy functions.

[Aletheides]

I'm with you on this. He could have also made some connection between how the game of Monopoly is played and how the US economy functions.

You don't have a grasp of macroeconomics or finance. The analogy you described is not even close to reality and in no way describes the U.S economy.

lol this isn't my analogy, it's the analogy of Peter Schiff - economic advisor to Ron Paul. I think it describes our economy perfectly.

If any of you disagree feel free present your counterargument.

Watch this video of Schiff debating about our economy in 2006 - with much the same economic principles.

Fast forward now to 2008, looks like Laffer owes him a penny.

On May 16, 2006 in debate on Fox News, Schiff accurately had forecast that the U.S. housing market was a bubble that would soon come to bust. On December 13, 2007 in a Bloomberg interview on the show Open Exchange, Schiff further added that he felt that the crisis would extend to the credit card lending industry. Following this observation, it was soon reported on December 23, 2007 by the Associated Press that "The value of credit card accounts at least 30 days late jumped 26 percent to $17.3 billion in October from a year earlier at 17 large credit card trusts examined by the AP... At the same time, defaults -- when lenders essentially give up hope of ever being repaid and write off the debt -- rose 18 percent to almost $961 million in October, according to filings made by the trusts with the Securities and Exchange Commission."

[capforge]

The problem I see with this line of thinking is equating production to manufacturing. America has gotten away from much of the manufacturing of goods (though not nearly to the degree people seem to think) but what we have not stopped producing is IP. Unfortunately, the value of the IP produced has no easy way of being measured, so it isn't counted and we have a trade deficit on paper. But where do you think all the designs for the technology, toys, tools, clothes and everything else produced overseas come from? They aren't knocking each other off, or producing outsourced designs from Somalia- that is all IP from the US and Western Europe they are making. And personally, I'd rather have the factories somewhere else and the nice clean offices filled with smart people creating new technologies and designs here than the other way around.

[Aletheides]

But where do you think all the designs for the technology, toys, tools, clothes and everything else produced overseas come from? They aren't knocking each other off, or producing outsourced designs from Somalia- that is all IP from the US and Western Europe they are making.

I have a hard time believing designs alone would offset the deficit.

And personally, I'd rather have the factories somewhere else and the nice clean offices filled with smart people creating new technologies and designs here than the other way around.

Higher costs go along with this for basically the same work. Emerging countries are quickly proving that they can provide the same quality at a lower price - this is the downside to a global market.

For example, U.S. computer programmers competing with India.

There is a growing concern in the United States about the outsourcing of computer technology jobs to developing countries. But Professor White says there are benefits.

"The Internet and globalization in general allow Third World countries like India -- it's such a great example -- to really improve their situation by creating a wealthy middle class. And that's great for the world because it means salaries and income levels in those countries, where things are bad, are improving. So that's good," says White. "The scary part is that as those jobs go away, there is going to be a situation where a lot of Americans who are trying to find careers are going to have a challenging time."

[warrensway]

Most of this is near irrelevant. If you actually understood why global markets are good then I would discuss, but your nearsightedness on the topic is apparent.

[Aletheides]

Most of this is near irrelevant. If you actually understood why global markets are good then I would discuss, but your nearsightedness on the topic is apparent.

I never said global markets were bad - of course global markets are good.

But anyway, it's not like we're on a forum or anything... I like how you immediately pointed out my "apparent nearsightedness" from what, 3 sentences of my own words? Lol, nice. You're just too smart for this thread I guess.

IMO our currency is getting run into the ground. We start wars then print money or borrow money just to fund them, and this is one of the big reasons I think we're seeing a recession now.

Our dollar is backed by absolutely nothing. Many people still believe the dollar is backed by gold, in many instances this is still taught in schools today. The Fed recently sold off half of all it's gold reserves to manipulte gold prices.

Can anyone name a fiat currency that has actually withstood the tests of time?

Rome - fail.
Charles II's tally sticks - fail.
John Law’s fiat money experiment in France - fail.

History is filled with many more examples. While fiat currency lasts for a period time, it's not forver.

Look at the rate of inflation since the inception of the Federal Reserve in 1913.

http://www.economics-charts.com/imag...-1800-2005.png

If you work a job you better start working more hours or get a pay raise, you're going to have trouble keeping up with inflation at this rate. And don't even think about putting your money into savings, you'll only be losing it in the long run.

I ask them to look at a chart of the S&P 500 over the past 6 years of this war and ask them if the stock market has gone up in value or down in value. They all say up when looking at the $SPX S&P 500 index. I then show the S&P denominated in ounces of gold instead of dollars, and ask them the question again, and the truth is painfully obvious and it is readilly apparent that the perceived "bull market" is a sham.

In 2002, around 4 ounces of gold would buy you one share of the S&P index. Today, you can sell the S&P index for a little less than 2 ounces of gold. A 50% loss vs simply investing in real money, gold.

http://i22.tinypic.com/2ib2t7n.png

Presidential Candidate Ron Paul warns about dollar collapse.

[Tman0419TDV]

when do u think the dollar will come back to what it used to be?

[Aletheides]

when do u think the dollar will come back to what it used to be?

In order for this to happen we would actually have to control our spending and cut back on the current national debt which is something like 9 trillion - about $30k for every person in the US. Since this grows by 1.46 billion per day, I don't really see this happening anytime soon.

We would also have to have our currency actually backed by something real, be it silver or gold or whatever. This would stop inflation so it actually could come back, in a sense.

In recent years, the debt has soared and inflation has stayed relatively low in part because China has been willing to accumulate reserves denominated in U.S. Dollars - over 1 trillion.

But who knows how long this will last? I predict the Euro to be the world's new reserve currency sometime in the future, this would be bad news for the dollar.

US Dollar - The Odds Are Against A Major Comeback...For Now

Dollar falls would have been far more severe had Asian central banks stopped buying it, but as long as Asian currencies are held down it will be impossible to resolve global imbalances, and the risk of a dollar crash, one day, will grow. The pressure mounts steadily: with US interest rates down at 2 per cent, China is now losing vast sums of money on its foreign exchange reserves. Verbal intervention on the dollar and euro is welcome – but it is time for verbal intervention on the rupee and renminbi as well.

The World's Reserve Currency

More importantly, our greatest benefactors for the last twenty years-- Asian central banks-- have lost their appetite for holding U.S. dollars. China, Japan, and Asia in general have been happy to hold U.S. debt instruments in recent decades, but they will not prop up our spending habits forever. Foreign central banks understand that American leaders do not have the discipline to maintain a stable currency. When the rest of the world finally abandons the dollar as the global reserve currency, both Congress and American consumers will find borrowing money a more expensive proposition.

Remember, America can maintain a large trade deficit only if foreign banks continue to hold large numbers of dollars as their reserve currency. Our entire consumption economy is based on the willingness of foreigners to hold U.S. debt. We face a reordering of the entire world economy if the federal government cannot print, borrow, and spend money at a rate that satisfies its endless appetite for deficit spending.

[capforge]

You're right- we should go back to the gold standard, because an arbitrarily selected, arbitrarily valued hunk of metal makes a lot more sense to base a global economy on than anything else.

You are also right that when you can name three examples of something that didn't work then by default all future examples will also not work. Brilliant.

[Aletheides]

You're right- we should go back to the gold standard, because an arbitrarily selected, arbitrarily valued hunk of metal makes a lot more sense to base a global economy on than anything else.

You are also right that when you can name three examples of something that didn't work then by default all future examples will also not work. Brilliant.

LOL, so you're telling me that you would rather hold a dollar which is constantly losing it's value over time over a dollar that keeps its value over time?

Gold and silver is anything but arbitrary. What's arbitrary is the dollar now, with men who have secret meetings in large marble rooms and dictate the interest rates and the value of the dollar to the rest of the people.

Many of the founding fathers experienced the damage caused by fiat currency. Most of the revolutionary war was financed by worthless currency called "Continentals".

1. The U.S. Coinage Act of 1792, consistent with the Constitution, provided for a U.S. Mint, which stamped silver and gold coins. The importance of this Act cannot be stressed enough. One dollar was defined by statute as a specific weight of gold.
2. The Act also invoked the death penalty for anyone found to be debasing money.
3. President George Washington mentions the importance of the national currency backed by gold and silver throughout his initial term of office and he contributed his own silver for the initial coins minted.

When it comes to what's good for the economy, let's see...

Thomas Jefferson warned of the damage that would be caused if the people assigned control of the money supply to the banking sector, "I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a money aristocracy that has set the government at defiance. This issuing power should be taken from the banks and restored to the people to whom it properly belongs. If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered. I hope we shall crush in its birth the aristocracy of the moneyed corporations which already dare to challenge our Government to a trial of strength and bid defiance to the laws of our country" Thomas Jefferson, 1791

It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning. -Henry Ford

[Aletheides]

Aletheides! You don't know what you're talking about and I won't give you anything to back up my statement!