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Dollar’s Fall Spells Big Changes for USA

By Rick Ackerman Posted on March 15, 2011, 12:01 am EDT Last Updated March 15, 2011, 8:57 pm EDT

[With debt spinning wildly out of control and the States threatening to revolt against the tyranny of Washington, we asked some frequent contributors to the Rick’s Picks forum how they thought the nation would look five years from now.  In the essay below, John Skerencac finds these times too volatile to predict, other than to say that some very dramatic changes are surely coming. On the positive side, he sees a nascent revival of America’s manufacturing sector and a trend toward fiscal austerity. But if we fail, he says, there’s always the “Mad Max” option. RA]

Rick was nice enough to ask me to write a short essay stating my view of what the world will look like five years from now. Perhaps with enough of us engaging in an intelligent exchange of ideas, we might help each other make better decisions about where to allocate our resources. First, in my opinion, Congress will continue to ignore the ever growing budget deficit until outside forces compel them to take action. Scenarios for this include:

  • Enough States stand up to D.C. and make it obvious that the votes are there to bring down the Federal government via Constitutional Convention or 10th Amendment nullification.
  • The Federal Reserve’s three-card monte game of buying Treasuries somehow comes undone, causing an interest rate spike that creates havoc in the economy.
  • The world finally repudiates the Dollar as a reserve currency, leaving us no choice but to make draconian cuts.

Feel free to add your own tipping point, but with the February budget deficit at $223 billion, I feel we are very close to a train wreck. I feel that when push comes to shove, and the D.C. gang feels threatened by the States revolting over the mess they have created for us, they will turn on a dime and make big cuts in spending and stop Federal meddling in State issues.

That still leaves the massive National Debt to be dealt with. That is a very tough call to make once interest rates spike and it becomes difficult to service the existing debt. Will they selectively default? Will they make interest on Federal debt tax-free to lower what they need to pay? Will they declare a National Emergency and create a new currency and revisit FDR’s gold seizure?  And those are just the USA internal issues.

The Positive Side

What becomes of the Euro and the European Union? What role will China, Russia , etc. play in all  this? What happens when we bring our legions home at long last? There are so many variables, and powerful political forces in play, we have a social and financial simultaneous equation to be solved. It seems I have wound up with more questions than answers.

I will be positive and wrap up with what I think the U.S. will look like five years from today. Free Trade Agreements have been scrapped, protective tariffs of some sort are in place. We will be well on our way to restoring a manufacturing base. Loss of reserve status for the dollar has forced us to develop oil resources; the Bakken field comes to mind. We have cobbled together some sort of replacement currency for the dollar.

Since Federal supports for housing are no more, house prices have settled down to reflect what wages alone will support.

In short we muddle through somehow. But the transition will be difficult, dangerous, and the threat of policy failure will be lurking in the shadows. I hope we can pull it off, since the Mad Max option means head for Switzerland while you still can.

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  • Ed Nichol March 17, 2011, 8:04 am

    A very large number of people now know that banks and credit groups can create unlimited amounts of money. The same money can also be withdrawn on a whim. It means that financial problems are created at will. It has always been so. An answer to blunt the situation is to expand ( not contract ) the number of currencies that are traded instantly. Pick a dozen currencies and allow them to be traded electronically by anyone at a bank, bank kiosk, registered computer or street kiosk. The fee would be a few pennies and there should be a five? minute time delay to settle. ( good for human and business traffic but way to slow for computer traders.) Think about the ramifications on foreign workers, the carry trade, interest rates, bond trading…I think that there would be a modifying effect on all financial problems, especially gov.
    And another item. What would happen if the vast majority of mortgages were full term. It would be a different world.

  • Don March 16, 2011, 4:10 am

    Check the original CIA factbook data on Canada before going off.

    https://www.cia.gov/library/publications/the-world-factbook/fields/2186.html

  • Jim N March 16, 2011, 4:06 am

    Great conversation. Yes it is nice to speculate and predict, all in accordance with our own worldview and rose colored glasses. It is a fun exercise and makes us think.

    First off, there is just no way we can model or understand what will happen on any kind of short term basis. I do think we can look forward on a macro level to see what way things are trending.

    My big question to anyone, is what is REALLY getting better based on REAL quanitiative numbers? I little up tick in exports, or unemployment? Don’t see it.

    Overall when i put on my positive hat, i do see that the american culture is an innovative one. I do think we need to use some broad strokes to help give us a view of what will be happening. Here are a couple of things i see.

    1. There won’t be a political change in position with the economy until it is politically forced or some outside event that none of us here could accurately predict. Just take a look at how they reduced taxes and increased the budget with lots of new projects in January. Look how the tea party kids are so proud of their 60 B budget cuts…
    2. OK, if you had a gun pointed to your head, where would you predict interests rates to be in the coming years? Now, i think that is a certainty, and that will definitely do a number on the budget. I am not a bond expert, but seems to me like it won’t be easy to keep funding the country? So if this is going to be really hard, what will the political boys do?
    3. I don’t think the banksters care about what happens, just as long as they are taken care of. I think things will get out of control and they will no longer to control it. Kinda like Big Ben doesn’t have a lot of options to control the economy….kinda like a japanese nuclear plant. Out of control with no real options left.
    4. Now on a positive note, i have already witnessed many new grass roots efforts to start some new manufacturing actions. Mostly for local consumption though.

    my best..Jim

    • Ed Nichol March 18, 2011, 1:58 pm

      Remember, the US and our governments are not ‘printing’ money, They are borrowing it via bonds from the Fed and the open market. If any US president tries to print their own money, they tend to get shot. I think the Fed now holds more US debt than Japan. And, if you look at the lending charts, you will have to explain how the banks pulled one half of all the money out of the economy in 2009. Do the banks care? Ha. They are in control.

  • ricecake March 16, 2011, 3:37 am

    Watched many Chinese Econ programs. They are keep talking about what to do with so much Dollar at hands. They are talking about how no fun it is whatever China buys, prices are jacking up tremedously. They’re longing for investment opportunities overseas. Like in the U.S. They say that since the Americans don’t like the Chinese to buy up their large companies, they may be able to look at the smaller to small great Americans small businesses in the U.S soil. Therefore, it’ll be beneficiary to both Americans workers and the Chinese capital investments.

    Do you think Americans small businesses will welcome the Chinese money?

  • Robert March 15, 2011, 9:41 pm

    Ya know-

    I used to say that the only power the people have is the power to vote… but that’s not true.

    The only REAL power the people have is not to file that 1040 on April 15, and to file a new W4 with the word “EXEMPT” in big bold letters across the bottom.

    Until we ALL agree to wield our REAL power- we can all expect to continue to be treated like cattle.

  • Agent P March 15, 2011, 5:51 pm

    Mr. Jim Holling above is a wise man. Fact is however, that the $dollar hasn’t collapsed (as yet), and we are already well on our way to a Police State. One can only imagine what this landscape will look like if there are any large-scale disruptions.

    Secondly, we are a Fractured nation. We do not have an electorate – nay, even a society in general that believes in Constitutional precept and principle over governmental intrusion at every aspect of living – from $fiscal to ‘environmental’.

    Ask yourself this (assuming you are old enough to remember):

    – From the early 1970’s forward, how much Liberty have you lost or gained, and/or has been severely limited or perverted from that time frame? From property rights to gun rights and everything in between?

    I would suggest using the measuring stick of adherence to Constitutional prescription as a guidepost as to where the country is headed. It is, after all, Constitutional prescription what separates us from just another run-of-the-mill parliamentary or authoritarian regime that litters the Earth.

    I read an interesting piece from Doug Casey the other day in one of his ‘Conversations with Casey’ reports. Increasingly, Doug has been sounding the siren of things like Currency Controls and various other niceties the government has in store for its citizens. I highly respect Doug Casey – not for his investment prowess, but for the fact that he sees things for what they are, and he has no reservations about the machinations of a government out of control.

    In the end – which ever way this nation turns, I highly doubt that it will be easy, painless, or even bloodless.

  • Rick J March 15, 2011, 5:46 pm

    My bet is that this situation goes on for a long time. The banks that are bankrupt (all?) need to make their derivatives good or sell the rest of the losing side to the fed financed by the taxpayers or make a fortune through continuous volatility which they can capitalize on day to day. Eventually the inflation will kick up a few notches, people will buy stuff in order to not hold depreciating dollars, debt is inflated away and revenues go up due to inflated prices. The situation will look recoverable to the uninformed, even though the standard of living will continue to decline. How many years?
    The major problem with the above scenario is that in this round will Pimco come in and buy guv bonds again? Will foreign entities do it, even if the balance sheet shows any improvement? If not, will wages be low enough thanks to a depreciated dollar vs. foreign currency, that everyone is then driving American cars, if we can afford cars ,etc.in the same quantity as now?
    Not if free trade with China and the perpetual put to labor continues.

  • Roger Erickson March 15, 2011, 4:19 pm

    Rick has worked out accurate methods for deciphering the herd behavior of investors as they graze commodities.

    If you simply apply the same methodology for deciphering the herd behavior of citizens as they graze democracy you’ll be able to visualize when to call bullshit on irrelevant political risks and when to put your children’s future where your vote is.

    If we all chip in, maybe Rick will start “Rick’s Political Picks”. He seems to have a nose for that.

    Lord knows political pickings have been slim recently.

  • Benjamin March 15, 2011, 3:16 pm

    So long as we remain tethered to this system, and everything that comes with it, muddle “through” will be a nice way of saying muddling along with the mindless herd. The forces of the market and economy, you see, are an entity unto themselves. They are volcano gods that do things beyond our control, while we lil humans just have to muddle along with their awesome trends.

    Anyway, default is not a matter of if or even when. It is ongoing. From day one it was default. It’s only a matter of many beleiving that default is prosperity, rather than the theft and slavery that it always has been. That can go on forever so long as people are willing to say Mad Max is the “worst” of outcomes. It isn’t. THIS, to-day, is worse than that. And while beefing up our (the U.S.) deathly ill economy on the steroids of devalution might seem alluring, future historians would view it as the most ghastly of mistakes that resulted in the most miserable of times.

    All I can say in construtive terms is to weight your currency at your nearest Mint, and demand your government abide the terms of that contract. I know, I know… it’s barbaric, stupid, and unfeasible. Too, all the advanced species in this and all parallel universes will laugh at us if we don’t increase our allegery to unwanted gold and silver. Yes, I know that. But it’s the only way out of having to muddle along like a bunch of knuckle-dragging, pencil-neck nerds!

  • Jim Holling March 15, 2011, 1:17 pm

    What about the scenario where the dollar collapses, Washington loses it and extends it’s already repressive laws and America becomes Amerika?

    • John Jay March 15, 2011, 2:53 pm

      Jim,
      That might happen.
      Then it is time to move to Switzerland or someplace else, perhaps Canada, who knows.
      I have started to brush up on my high school French.
      The folks in DC are past the point of criminality and are at insanity now.
      They ignore the deficit, $223 billion in February alone, more than all of 2007.
      They plan extended stays in AfPakIraq financed by money we don’t have.
      John McCain stated that the I Pad and I Phone are examples of high quality products made in the USA, or so it was reported.
      I think Washington DC’s grasp of our situation is at the level of Hitler’s Berlin bunker in 1945.
      Half fantasy, half lunacy.

    • Roger Erickson March 15, 2011, 4:14 pm

      Washington DC never either “gets it” or “loses it.”

      What happens is that we, as a people, either keep control of or lose control of Washington DC.

      How a question is framed determines the utility of possible answers. Stop letting shyster lobbyists frame you & your co-citizens.

  • mario cavolo March 15, 2011, 12:44 pm

    I greatly appreciate this article pointing out that debt ratios for America are not the worst in the world, once again I’ll stick to my guns that “doomsday” is a silly permabear idealistic notion, that when in the end, when in the final moment, when they finally have their backs pressed so far and so painfully against the wall that they, the greedy lot of corrupted, misguided, selfish bastards they are, finally have no choice, and then, as needed in the moment, they cave in; a magical, calming, saving set of new decisions and policies will finally spew forth to avert disaster. While greed and corruptibility are indeed, disgraceful greed and corruptibility, they are simply not THAT stupid as to threaten their own spoils. More than I ever, I know I’m right. Doomsday will not come, they will adjust. In Toastmasters meetings ladies and gents, they have “the word of day”. The word of the day is “adjust”. Its all a game, a game of those in control pressing and pressing and pressing their advantage as far as they can so that, in the end they have then collected such a mass amount of spoils, any concessions they make in the end to “restore order” are a pittance. I realize with greater clarity, this thought approach is at the core of my sentiments that there will be no “doomsday”. Of course now that its become crystal clear to me, I’ll be completely wrong and we will enter a period of economic disaster never before seen, this being the way the Gods remind me who is in control. If you want to make God laugh, tell him your plans.

    Cheers, Mario

    • Brad March 15, 2011, 5:48 pm

      “Tell God your plans to make him laugh.” Ok, that made “me” laugh out loud…. 🙂

  • Erin March 15, 2011, 4:36 am

    May I chime in on your scenarios? It all sounds fun..

    It is time for the states to separate from the big bad federal bullies and do their own thing. Let people and states choose their own policies and divide the country into the two most obvious choices. The free markets and everyone else. I know who the winner will be and soon after, the country will restored back to the free markets because everyone else will have no choice because they will be broke and hungry.

    The Fed game is already over! Printing money has never worked since the beginning of time and we do not need higher interest rates to prove that. How do I know that? Are things really getting any better out there for the average American? Enough said! There is no secret formula for rising rates anymore. The economy is not real, so anything that we knew before as normal will no longer apply…Manipulation is a powerful tool! Pretend and extend at all costs is the name of this game. And the costs are rising substantially!

    The world already has repudiated the currency…At the beginning of the crises with Libya when the dollar should have been bought with both hands by everyone around the world…What did it do? It laid on the couch and took a really good nap!

    I would like to ask Mr. Ackerman a question while I am blabbing away here if I may…A while ago you did a little piece on Premium exploration. I already had owned it at that time so it was really nice to see the exposure that it received. I trade the Canadian exchanges with my loonies so I am very familiar with many of the juniors in all sectors…Have you ever seen such long intercepts of gold with decent grades? They are on to something really good there, just gonna take a little time to prove it up. Most of the juniors with great intercepts like that just take off and keep going which makes the whole situation very fascinating. I love that Venture exchange, you have liquidity and plenty of excitment to go around! But you better use those stops or you may never see your money again!

    • Roger Erickson March 15, 2011, 4:11 pm

      Disaggregate? That makes about as much sense as one arm deciding to leave the body and strike out on it’s own. Or one regiment deciding to desert from the Army.

      Odds are that’s just what will happen. You’ll strike out, in the baseball sense. The best option is always to figure out how to organize on a bigger scale. If you’re not into tackling that challenge, you shouldn’t have signed up to be a Yankee in the first place.

    • Rick March 15, 2011, 10:27 pm

      The Orogrande strike does seem to offer a well-leveraged speculation, and core samples along its 28-mile length continue to show great promise. Having met and talked with Premium’s management, I can also attest that the company is very well run — a first-rate operation.

  • TKO March 15, 2011, 4:15 am

    No repudiation of our debt, loss of reserve currency status, or financial panic of any kind will lead to any insurmountable disaster in the good old USA. Historical case in point: What country lost 90 per cent of the value of its currency, most of its food producing area, half of its land mass and population, its state religion, three quarters of its military, its economy and entire way of doing and viewing things? Answer, of course is the USSR. Most certainly there were pains and dislocations, however they managed to negotiate the problems quite satisfactorily. I suspect that us yanks, given our resources and resourcefullness, would
    fair much better in any similar situation.

    • Tom UK March 15, 2011, 1:04 pm

      I suspect many Russians would disagree that they “managed to negotiate the problems quite satisfactorily”, the previously listed losses being cases in point.

      Dmitry Orlov has analysed what happened in the Soviet Union and how it might compare with and differ from a collapse in the US – always worth checking his work out.

  • Cam Fitzgerald March 15, 2011, 1:50 am

    It’s all about the debt when we discuss the dollar. Interestingly enough, the US is still not in the worst shape of everyone out there.

    Have a look at a map I came across. It is nicely color coded and shows country by country the public debt to GDP relationship according the 2010 CIA Fact book data. Note Japan, Egypt and Europe too for interest sake.

    http://en.wikipedia.org/wiki/File:Public_debt_percent_gdp_world_map.PNG

    If anyone was wondering how Canada miraculously skated over the credit crisis and avoided the worst of the financial meltdown you now have your answer. We paid for it.

    We are even deeper in debt than you guys!

    • Hosehead March 15, 2011, 1:38 pm

      Hmmm.. well you may also be reading more into those stats than what they actually stand for. Norway for example is actually in the black if you factor in public assets on the other side of the balance sheet.

    • Cam Fitzgerald March 15, 2011, 2:51 pm

      Not at all Hosehead. I was very specific in noting it is “public debt” without noting what that means or exactly what is represented by the CIA Factbook data. That is part of the fun when you go look at the charts.

      With a name like Hosehead I am thinking you must be a Canuck! It’s just 6:45 morn. where I am right now out in Saskabush. It is looking like the TSX is headed for a kick in the teeth today along with most other markets. Seems overdue correction has finally arrived, precipitated in part by the sudden realization of Japan’s impending debt Tsunami.

      I mean it was coming anyway. This is the trigger.

    • Benjamin March 15, 2011, 3:29 pm

      Unfortunately, Cam, I’m too color blind to see anything useful.

      Seriously, though, it is is very telling as to why the U.S. is relatively “better off” in terms of domestic debt, whereas some other places are worse. I mean, if you’re the world’s reserve currency, how can you NOT “pay your bills” at home?

      Anyway, to add to the depressing outlook…

      http://en.wikipedia.org/wiki/External_debt

      I expected the U.S. to be at the top, but not Canada. Japan was also a surprise, as was Germany.

    • Cam Fitzgerald March 15, 2011, 3:57 pm

      Thanks Benjamin. The two charts together definately put a little perspective on our relative situations in each of our countries.

      The big difference is that in the US there is an amazing amount of analysis, open public debate and discussion taking place on the dangers of all those debt obligations.

      Up here in Canada on the other hand there is almost complete denial. It is just business as usual even though we are nearly as stretched as America, if not more by some metrics.

      It is baffling really. We have a handful of first class economists who are pretty much being ignored by the major media as they attempt to tell the tale of woe that is coming if we don’t get our house in order soon.

      But you see, we live in a fantasy world up here. We still have a growing housing bubble and there is a common thinking that we are immunue to what ails the world.

      We are not immune of course. Todays market action is telling us that Japan’s troubles are a big issue for Canada as our dollar is down 2.5 cents today already on the tail of an Asian led commodity selloff!!!

      My gut tells me that Canadian real estate has just seen its Black Swan and the carnage is imminent. Sorry there is no way to short this one though as there is in the States. Even Canada’s big banks are fairly immune as most of the risky debt is actually held by Canada Mortgage and Housing Corporation (CMHC) which is effectively a government version of Fannie and Freddie.

      Cheers

    • Roger Erickson March 15, 2011, 4:06 pm

      This idea that any other country is “funding” our currency supply growth (i.e., nominal “deficit” & fiat “debt”) is not a logical premise.

      What, exactly, are they supposedly buying our fiat currency with. Their fiat currency?

      I’d call that a fiat wash, or more accurately an oxymoron.

      Truth is that every country with a growing population doing more things has to increase it’s currency supply each year. Every country with sovereign control of it’s own currency does so by simply issuing too little, roughly enough, or too much of it’s own currency – through public spending. In our country that’s called Appropriations, in the House of Representatives. Those public disbursements put currency in the hands of private individuals (whatever they don’t scavenge back through taxes anyway) so that we can more efficiently denominate all the indirect transactions that innovative people want to execute.

      This isn’t rocket science, it’s simply sectoral balance – private savings = public fiat deficit [to the penny].

      We have to distribute standard bookkeeping tools (fiat currency), and let the public use it. That’s what public spending does.

    • Roger Erickson March 15, 2011, 4:08 pm

      just realized that format may confuse people; try this;

      This isn’t rocket science, it’s simply sectoral balance:
      private savings = public fiat deficit [to the penny].

    • Hosehead March 15, 2011, 5:09 pm

      Correctomundo Cam, only a canuck would get the Bob&Doug reference, but I living in Norway actually. I know you specifically identified “public debt” (not “net equity”) for the chart, but I just wanted to highlight that maybe that number alone doesn’t perhaps paint the conclusion drawn regarding “worst shape”. Norway is the same colour as the US, but in a “slightly” different economic situation as a net creditor.


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