Back To The Future

Highway Sign - Future - Back To The FutureIn our recent article, How Long Can This House Of Cards Last? What Can We Do?, Urs Vrijhof-Drose remarked:

“Asia and Russia have a problem with the USD being the global reserve currency. …. We believe that this ongoing depreciation of the USD will continue….”

Charles F., a subscriber to both Chuck Butler’s Daily Pfennig and our letter, sent us a challenge:

“I am 78 & ok in retirement with status quo. What’s the odds that remains? Your interview spurred an idea for a future blog.

Describe life in the US 5 years into the loss of our currency reserve status. Winner, Losers, what does gov’t look like on different levels, our position in the world, let your imagination run wild. When I do this my thinking quickly turns to mush.

Good luck Mr. Phelps, should you decide to attempt this mission, your position in the bloggers hall of fame will escalate dramatically.”

It’s a doggone good question. Many of us are holding our own today, not sure what tomorrow brings; particularly if the USD loses world reserve currency status and inflation takes off.

Chuck’s initial reaction:
Delorian from Back to the Future Film“Remember the movie Back to the Future II? It was a storyline about Biff, the town bully in his youth…. Old Biff (1985) stole the time-traveling DeLorean and made one trip back to 1955. He gave the 1985 Sports Almanac to his younger self, in the hopes of improving his life.

Sure enough, young Biff made lots of money betting on sports games because he already knew the outcome.

How would you like to have an investment almanac dated five years from now; knowing where to invest for a sure-fire profit?

Charles F. wants us to get in touch with our older self and describe what life will be like when the USD loses its reserve currency status and learn what separated winners and losers.

If we knew that for sure, we would be in the investor’s hall of fame next to other trillionaires. We can look at history, blend in common sense and experience and give readers our best shot.

How far do you want to go down that deep rabbit hole?”

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We are about to find out!

We will break the interview into two parts.

Part 1, what will things look like; winners and losers.

Part 2, focus on how we are preparing to stay afloat and come away winners…

DENNIS: My head is spinning, much to think about.

What are the perks of the country with the world reserve currency?

How does a country benefit from world reserve currency status?

What happens when they lose their esteemed status?

What should we expect?

CHUCK: Well, let’s start with the perks…

The reserve currency is held in significant quantities by central banks/ monetary authorities as part of their foreign exchange reserves. Worldwide demand for dollars has allowed the United States government to borrow at lower costs.

The reserve currency is used in international transactions, investments and all aspects of the global economy.

The U.S. has an advantage when it comes to commodity prices since all are priced in dollars.

Also, so far at least, the reserve status allows the U.S. to print as much debt as the world can swallow, at very cheap levels.

When a country loses reserve currency status, those perks go away as the world no longer needs, or demands their currency to facilitate international trade.

DENNIS: When the world is awash with an unwanted currency, the value depreciates, and they experience high inflation. I was in Brazil in the mid-’80s when they experienced ridiculous inflation. 1000 bills were commonplace.

FRED Chart: Inflation, consumer prices for Brazil

Leftover currency explains:

“Brazil went through waves of economic turmoil in the second half of the 20th century, during which the South American country switched its national currency many times. Two currencies with the name ‘Cruzado’ were in use in Brazil between 1986 and 1990:

The Brazilian Cruzado (BRC) was in use between 1986 and 1989. It replaced the Second Cruzeiro ‘Novo’ at a rate of 1 cruzado for 1000 cruzeiros novos. The Cruzado was replaced by the Cruzado Novo (BVN) at a rate of 1 cruzado novo for 1000 cruzados. In 1990 the Cruzado Novo was replaced by the Third Cruzeiro at par.

…. The value of Brazilian Cruzado banknotes was wiped out entirely by inflation. Cruzados are no longer exchangeable at the Banco Central do Brasil.”

If this were dollars, $1000 as we know it, would be worth less than a penny. The Brazilians went to work and struggled to feed their families while their currency was worthless in the rest of the world. Yet, some of the businesspeople I worked with did just fine.

How do you see that playing out?

CHUCK: Hold on tight, here we go down the rabbit hole…

So, losing the advantages I outlined would bring about quite a few changes in our economy, our value of the dollar, which affects your buying power, and life as we know it…

Any future weak dollar trend could easily trigger the loss of the reserve currency status, affecting everyone:

  • A sudden dollar collapse would create global economic turmoil.
  • Investors would rush to other currencies.
  • Investors would rush to other assets, such as gold and commodities.
  • Demand for Treasuries would plummet.
  • Interest rates would rise, and possibly very high.
  • U.S. import prices would skyrocket, causing inflation.
  • The cost of commodities like Oil would increase.

As an example, I used to compare gas prices. In the U.K., gas costs $8 a gallon as compared to the U.S. being $3. We would all pay what everyone else in the world pays for gas.

Remember when the Beatles appeared on Ed Sullivan in 1963? They showed pictures of their home town, Liverpool, England. Those pictures are as depressing now, as they were then.

The U.K. lost the reserve currency status after World War II; 20 years later they still hadn’t recovered, economically, and psychologically.

The U.S. would probably have to default on some debts; causing a major shift around the world out of dollars, and stocks. I’d expect damage to your investments, psyche and your buying power.

All those reserves that foreign Central Banks hold in dollars, would be sold back to the U.S. or given back in trade, and no new reserves purchased.

U.S. Treasuries will be ignored at the auction window by foreign countries…

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Why would that be a problem? Today our government spends trillions more than they take in with taxes; financing the shortfall through borrowing. To borrow a line from Blanche DuBois; when the kindness of strangers disappears, how will the debt be financed?

To borrow money the government would have to allow Treasury yields to rise to the point where there is enough risk premium to entice foreigners to buy them. That will have a negative effect on business and the market.

Countries that experienced hyperinflation all experienced some level of civil disorder, riots, and calls for more money from a bankrupt government.

After paying the higher interest rates on our massive debt, we won’t have enough money to spend on anything else – you know, like Social Security, Medicare, WIC, food stamps, etc.

And, to finish this off – political promises cannot be kept to creditors and/or citizens.

DENNIS: During the Great Depression, our country was still primarily an agricultural society. Many people could live off the land, and we saw pictures of people waiting in line for food and for the possibility of a job. Things have changed, bread lines have been replaced by food stamps and debit cards.

I’m sure the government will do all they can to prevent social unrest. Wolf Street published an interesting chart showing personal income hit astronomical levels.

WTF Overshoot: Personal Income, All Sources Chart

A large portion of the income was from stimulus, Unemployment Insurance and Welfare – not earned income. Sending out worthless dollars to the citizens won’t solve anything.

While I’m sure they will announce some grandiose plan to save the day and stabilize things, there will be big problems that must be addressed. How did Great Britain work through the process?

CHUCK: That’s a good question… I went to Wikipedia just to lay the groundwork:

“The United Kingdom’s pound sterling was the primary reserve currency of much of the world in the 19th century and first half of the 20th century, until the UK almost bankrupted itself fighting the two World Wars, resulting in the Pound losing its status as the world’s most important reserve currency.”

After WWII, the nearly bankrupt U.K. went into a belt-tightening scenario. Austerity became a word they hated to hear; it was the only way the U.K. could get back on its feet. They didn’t print sterling and give away free money; they cut deficit spending. While it took more than 25 years for them to recover, they did.

Do you see the U.S. implementing austerity measures? I don’t… I’ll just say that, and let that sink in…

Let’s stop for a breath. Some investors, the winners, will stay ahead of the game; invested in hard assets. After the huge inflation losses, those assets would be sold for good money, and their true wealth protected. All Americans are likely to be affected, some will win, lose or stay even.

Dennis here. Like Charles F., we want to hold our own and enjoy life, regardless of what is happening around us. Next week, we look at how the winners did it.

A little help means a lot!

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On The Lighter Side

This week is infusion week for me. We will then pack the van and head to Indiana for a visit, returning home in time for my next scan and infusion.

I’m looking forward to some cooler weather. We turned on the air conditioner here in AZ and expect it will not be turned off until late September. It’s not brutally hot yet, but I’m sure triple digits will be here soon.

We bought a Honda Odyssey to make the trip and doggone if we didn’t take a rock in the windshield with just a few hundred miles on it. That is common here in AZ, much more than we have experienced in other places.

If you like beautiful photography, check out this link. I was looking for some new wallpaper for my desktop that would be pretty and provide contrast for my icons, making them easy to spot. I was overwhelmed with the phenomenal photos and enjoyed looking at all the choices.

Quote of the week…

Cartoon of man with moneyThis quote seems to align itself with this week’s article.

In Part 2, we will discuss what we can do to land in the winner’s circle. When the day of reckoning arrives, not everyone will be equally affected.

“As long as we live beyond our means, we are destined to live beneath our means.”
— Ron Paul

And finally….

Friend Tom G. sent along some common terms, explaining their history.

A SHOT OF WHISKEY – In the old west, a .45 cartridge for a revolver cost 12 cents; the same as a glass of whiskey. If a cowhand was low on cash, he would often give the bartender a cartridge in exchange for a drink. This became known as a “shot” of whiskey.

BUYING THE FARM – This is synonymous with dying. During WW1 soldiers were given life insurance policies worth $5,000. This was about the price of an average farm; so if you died you “bought the farm” for your survivors.

SHIP STATE ROOMS – Traveling by steamboat was considered the height of comfort. Passenger cabins on the boats were not numbered, instead, they were named after states. To this day cabins on ships are called staterooms.

And my favorite: (I’ll confess, I misunderstood this next one for years; thinking it was alcohol-related.)

SLEEP TIGHT – Early beds were made with a wooden frame. Ropes were tied across the frame in a crisscross pattern. A straw mattress was then put on top of the ropes. Over time the ropes stretched, causing the bed to sag. The owner would then tighten the ropes to get a better night’s sleep.

Until next time…

Dennis Miller

“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken

 

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