Yesterday we posted a great article on the Classical Gold Standard including its advantages, along with a rebuttal to the 3 most common arguments against a gold standard.
So you might want to read Part One first before reading on: Gold Standard Redux: All That Glitters
This follow up to that piece looks at 7 possible signs or indicators of a break down in the current US Dollar reserve currency system. Plus it then looks at 3 possible scenarios that may arise from the demise of the dollar…
“In finance,” Jim Rickards writes in his book The Death of Money,“there is no crystal ball for predicting one outcome then proceeding on a single path.”
Rather, it’s best to adapt to new information as it comes. Stay nimble. It would be foolish to expect one scenario and position all your assets accordingly. You need to be prepared for anything. (And if you’re not… why… what have we been doing all week!)
That’s why we invite you to think in terms of probabilities — and not in terms of hard truths. Expect the unexpected. But realize that some things are more likely to happen than others. That’s why, today, Jim will lay out seven specific probabilities. See them as guideposts. With them fixed in your mind, you’ll be able to beat uncertainty and make wise, level-headed decisions. Which, in the next few weeks and months ahead, could mark crucial.
These probabilities are hard-to-miss events that signal the acceleration of the total collapse of the American dollar. If you catch any of these in the news, see it as another domino down. And remember… it only takes one to collapse the whole line.
But that’s not all you’ll learn today. Jim has three more “bonus” probabilities for you. Most people, you probably know, will only tell you how the dollar might collapse. Few will venture into what happens next. Well, Jim isn’t most people. Today, he’ll show you three things that are likely to rise out of the ashes of the dollar. Yesterday, we toyed with the idea of a gold standard being “it.” That’s just one potential. Another one has been secretly in the works at the IMF. It has been for decades — and very few Americans have ever heard of it. And the third scenario… well… you’ll see.
Before we go there, though, let’s first check out these seven signposts of a crumbling dollar.
“Intelligence analysts,” Jim begins, “call these mileposts ‘indications and warnings.’
“Once the indications and warnings are specified, events must be observed closely, not as a passing parade of superficial headlines but as part of a dynamic system analysis. Investors must be alert for the indications and warnings of which path the economy is traversing. There are seven critical signs.
“Not all of these seven signs may come to pass. The appearance of some signs may negate or delay others. They will not come in any particular order. When any one sign does appear, investors should be alert to the specific consequences described and the investment implications.”
1] The Price of Gold: “Although the price of gold is manipulated by central banks, any disorderly price movements are a signal that the manipulation scheme is disintegrating, despite efforts at leasing, unallocated sales, and futures sales. A rapid price rise from the $1,500-per-ounce level to the $2,500-per-ounce level will not be a bubble but rather a sign that a physical buying panic has commenced and that official shorting operations are not producing the desired dampening effect. Conversely, if gold moves to the $800-per-ounce level or lower, this is a good sign of severe deflation, potentially devastating to leveraged investors in all asset classes.”
2] Central Banks Scooping up Gold: “Purchases by China in particular are a second sign of the dollar’s demise. The announcement by China in late 2014 or early 2015 that it has acquired over 4,000 tonnes of gold will be a landmark in this larger trend and a harbinger of inflation.”
3] IMF Reforms: “This third sign will mean larger voting power for China, and U.S. legislation to convert committed U.S. lines of credit into so-called quotas at the IMF. Any changes in the SDR currency-basket composition that reduce the dollar’s share will be a dollar inflation early warning. The same is true for concrete steps in the SDR infrastructure build-out. If global corporate giants such as Caterpillar and General Electric issue SDR-denominated bonds, which are acquired in portfolio by sovereign wealth funds or regional development banks, this will mark the acceleration of the baseline SDR-as-world-money plan.”
4] Failure to Reform: “A fourth sign will be bank lobbyists’ defeat of efforts by U.S. regulators and Congress to limit the size of big banks, reduce bank asset concentration, or curtail investment banking activities. Absent reform, the scale and interconnectedness of bank positions will continue to grow from very high levels and at rates much faster than the real economy. The result will be another systemic and unanticipated failure, larger than the Fed’s capacity to contain it. The panic’s immediate impact will be highly deflationary as assets, including gold, are dumped wholesale to raise cash. This deflationary bout will be followed quickly by inflation, as the IMF pumps out SDRs to reliquefy the system.
5] System-Wide Market Crashes: “A fifth sign will be more frequent episodes like the May 6, 2010, flash crash in which the Dow Jones Index fell 1,000 points in minutes; the August 1, 2012, Knight Trading computer debacle, which wiped out Knight’s capital; and the August 22, 2013, closure of the NASDAQ Stock Market. From a systems analysis perspective, these events are best understood as emergent properties of complex systems. These debacles are not the direct result of banker greed, but they are the maligned ghost in the machine of high-speed, highly automated, high-volume trading. Such events should not be dismissed as anomalies; they should be expected. An increasing tempo to such events could indicate either that trading systems are going wobbly, moving to disequilibrium, or perhaps that Chinese or Iranian army units are perfecting their cyberassault capabilities through probes and feints. In time, a glitch will spin out of control and close markets. As with the systemic risk scenario, the result is likely to be immediate deflation due to asset sales, followed by inflation as the Fed and IMF fire brigades douse the flames with a flood of new money.”
6] The End of QE and Abenomics. “The sixth sign will be a sustained reduction in U.S. or Japanese asset purchases, giving deflation a second wind, suppressing asset prices and growth. This happened in the United States when QE1 and QE2 were ended, and again in 2012 when the Bank of Japan reneged on a promised easing. However, as asset purchases are curtailed, a new increase should be expected within a year as deflationary effects develop. This would be another iteration of the stop-go monetary policies pursued by the Fed since 2008 and by the Bank of Japan since 1998. Continual flirting with deflation makes inflation harder to achieve. A more likely scenario is that money printing will continue in both nations long after 2 percent inflation is achieved. At that point, the risks are all on the side of much higher inflation as the change in expectations becomes difficult to reverse, especially in the United States.”
7] A Chinese Collapse: “The seventh sign will be financial disintegration in China as the wealth management-product Ponzi scheme collapses. China’s degree of financial interconnectedness with the rest of the world is lower than that of the major U.S. and European banks, so a collapse in China would be mainly a local affair, in which the Communist Party will use reserves held by its sovereign wealth funds to assuage savers and recapitalize banks. However, the aftermath will include a resumption of Chinese efforts to cap or even devalue the yuan in foreign exchange markets to promote exports, create jobs, and restore wealth lost in the collapse. In the short run, this will prove deflationary as underpriced Chinese goods once again flood into global supply chains. In the longer run, Chinese deflation will be met with U.S. and Japanese inflation, as both countries print money to offset any appreciation in the yen or the dollar. At that point, the currency wars will be reignited, never really having gone away.
Again, any one of these could trigger a full-on collapse of the dollar. And if you see one of these dominoes fall, be on high alert and brace your assets for what’s next. Which leads us to our next topic: Many people talk about what could cause the collapse, or why the system is fundamentally broken. And stop there. But we’re going to go one step further.
For our final Currency Wars Week episode, let’s take a quick look at what may rise out of the ashes of the smoldering dollar. Jim quickly outlines three potential scenarios.
“The dollar’s demise, according to Rickards, will take one of three paths.
“The first,” Jim begins, “is world money, the SDR; the second is a gold standard; and the third is social disorder. Each of these outcomes can be foreseen, and each presents an asset-allocation strategy best able to preserve wealth.
“The biggest mistake investors can make is to believe the Fed knows what they are doing — they don’t.
“The Federal Reserve does not understand that money creation can be an irreversible process. At a certain point, confidence in money can be lost, and there is no way to reconstitute it; an entirely new system must rise in its place.”
One of the following, says Jim, is the most likely scenario.
The SDR: “The substitution of SDRs for dollars as the global reserve currency is already under way, and the IMF has laid out a ten-year transition plan that the United States has informally endorsed. This blueprint involves increasing the amount of SDRs in circulation and building out an infrastructure of SDR-denominated investable assets, issuers, investors, and dealers.” [Learn more about the SDRs by signing up here.]
The Gold Standard: “This could arise from extreme inflation, where gold is needed to restore confidence, or extreme deflation, where gold is revalued by governments to raise the general price level.”
Social Disorder: “Social disorder involves riots, strikes, sabotage, and other dysfunctions. It is distinct from social protest because disorder involves illegality, violence, and property destruction.” It could arise, says Jim, “in the aftermath of financial warfare or systemic collapse, when citizens realize their wealth has disappeared into a fog of hacking, manipulation, bail-ins, and confiscation.”
Unfortunately, the only way out of this mess is by going through it…
Fortunately, no matter what happens, you can prepare for anything today. Right this second even.
As Currency War III continues to pummel the financial system into the ground, it’s going to be increasingly more important to understand what’s going on at a global level. You need the big picture. You need eyes up in space. Unfortunately, we can’t devote all of our attention to covering these ongoing battles in the daily pages of LFT.
That’s why Rickard’s brand new Currency Wars Alert is such a valuable asset — and could be one of the most valuable investments you make in preparation. Not only that, it’s also a way to profit from the final death throes of the current monetary system. Currency Wars Alert isn’t about having more information. It’s about gaining the kind of perspective that’s crucial for better thinking.
But don’t take it from me…