By Sean Kelly
The Dollar Crash is Only the Beginning
We can certainly be accused of giving ample exposure to grave warning about the US dollar crash from one prominent economist. Yet based on what has transpired, it is exposure that is more than justified. It is a warning that should urge today’s investors and those seeking to answer the question, “What to own when the dollar collapses?” to hasten to acquire precious metals now, while the world’s leading currency is being shaken to its foundations.
The title of this commentary, “The Dollar’s Crash Is Only Just Beginning!”, is taken from a Bloomberg News article this week by Stephen Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia and former chief economist of Morgan Stanley.
We first began writing about Roach last June (here and here) when he warned that “U.S. living standards are about to be squeezed as never before.” That, he said, is because the dollar was going to fall “very, very sharply,” as much as 35 percent against its foreign competitors.
In his latest follow-up, Roach writes that while the dollar has already fallen 10 to 12 percent against its major trading partners. We are only getting started.
Here is a chart of the dollar’s decline since the beginning of June 2020:
Even with the steep sell-off of the dollar visible on this chart, “we are only in the third inning of a nine-inning baseball game,” says Roach.
Many of the US markets are trying hard to ignore what is going on with the world’s reserve currency. We think that they are whistling past the graveyard. The markets will be suddenly forced to confront this dollar crash and answer the question “What to own when the dollar collapses?” The dollar’s weakness has yet to be reflected in either the breakdown of the overvalued stock market or in a forthcoming breakout of undervalued gold prices and silver prices.
Roach notes that his warning of a dollar crash has been “wildly unpopular.” We understand, but those who act on his warning will be rewarded for doing so.
Roach’s case is built on three points that we will explain briefly:
The Current Account Deficit.
A current account deficit occurs when the value of the goods and services a country imports exceeds those it exports. It is often the result of underinvestment in the domestic economy and an over-valued currency exchange rate. For the US, this broad measure of trade saw its largest erosion on record in the second quarter. It is in its worst shape in more than a decade. The huge current account deficit, fueled by plunging domestic savings, notes Roach, means that investment capital must be borrowed from abroad. Domestic savings will likely continue to fall, putting even more downward pressure on the current account deficit. What to own when the dollar collapses to protect your savings?
The dollar’s woes are even making the euro look good. Roach writes that some of the pushback he has personally received about his forecast dollar crash falls under the category of TINA, “There is No Alternative” to the dollar, no matter its problems. That is like saying “tough, you’ll learn to like it.”
But where their money is concerned, when people are told to suck it up and learn to like a losing situation, they will begin to find alternatives. That goes for a mismanaged currency like the dollar, even if it means the alternatives include the equally poorly managed euro or the Chinese yuan.
That is why we have made the case many times that the best alternatives to the dollar are precious metals, and not other unbacked currencies. Gold and silver are the enduring money of that ages the world over, and the time-tested alternative to foolhardy governments and central bankers.
The Federal Reserve.
Roach explains that “when current-account deficits are under pressure, the central bank can usually be counted on to come to the rescue by tightening monetary policy. That, most assuredly, is not the case with today’s Fed.”
We will note that tightening, or raising rates meaningfully, is simply out of the question for the Fed. It is an existential issue, no matter the growing current account deficit. Any increase in interest rates by the Fed would only compound the Fed’s already formidable problem of funding the US government debt, demanding more money-printing to pay for more costly debt service on the $27 trillion dollar debt load. Yet that additional money-printing would only further weaken the dollar and, perversely, put additional upward pressure on interest rates!
If the Fed cannot let rates rise, we will feel the pain in the only alternative available: in the crashing of the dollar. What to own when the dollar collapses?
We hope our friends and readers will take this warning seriously and protect their wealth and retirements with gold and silver. We agree with Professor Roach that 2021 will be a momentous year.