U.S. debt explosion = dollar disintegraton by 2010
By Craig R. Smith
Aug. 8, 2005

"Are you saying… that to maintain our lifestyle today, Americans are starting to borrow against their home equity and credit cards?"
-JAN MICKELSON, Mickelson in the Morning, WHO, 8/3/05

I've never heard it put quite that way, but "yes" I told the astute radio host from Des Moines, Iowa during a radio interview last week. I went on to make a rare prediction: “Unless Americans make a radical change in our "living-on-borrowed-money" lifestyle (personal and governmental), and oil prices start falling soon, and we begin saving instead of consuming -- I expect we’ll witness the collapse of the U.S. dollar by 2010.”

This month the U.S. national debt topped $7.8 Trillion – up from $5.8 Trillion in 2001. That’s more seconds of time than God has created since Adam and Eve walked the earth!

U.S. News & World Report, 8/3/05 said it clearly this week; "Drowning in Debt?”... "Household debt rose from 96 percent of personal disposable income (consumers' take-home, spendable cash) in 2000 to 111 percent in 2003 to 113 percent at the end of 2004." Scott Fullwiler, an economics professor at Wartburg College in Waverly, Iowa says, "My concern is that as a percentage of disposable income, it's at an all-time high."

No wonder national savings rates are at ZERO -- the lowest since our spending binge in October 2001 and the second-lowest since the Great Depression. Small wonder both mom and dad must work -- sometimes two jobs -- to support a family. Any wonder the U.S. middle class is so prone to borrow from the future to maintain a living standard modeled on the past? (You remember, back when “sound as a dollar” still rang true).

The deficit’s domino effect

The In-Credible Shrinking Dollar has now moved into phase two, thanks to the huge U.S. current account deficit. It is expected to reach $665 billion this year, or 6.3% of GDP in 2005, 7% in 2006, and 8% of GDP in 2008. Now add the 2005 U.S. budget deficit of over $400 billion and you are talking over a trillion in new red in this year alone!

Devaluing the dollar is the market's way of correcting that trade deficit. The result of a declining dollar is always higher interest rates and higher inflation, which further squeezes consumer spending and/or saving.

Either the value of the dollar or the trade deficit has to decline, according to Alan Greenspan, both cannot continue rising. Higher interest rates may serve as the pin that pops both the housing bubble and the dollar bubble, which began losing air in 2002.

As America's twin deficits continue to breach uncharted territory, "the chances of a hard landing for the dollar increase," says economist Nouriel Roubini of New York University's Stern School of Business.

First it was Warren Buffet, then Bill Gates, then George Soros, now even our allies like the Korean central bank and, most recently, Saudi Arabia have been dumping dollar holdings in favor of other currencies. Why? Because we’ve become one nation under Debt.

How much longer can the U.S. continue to rely on Asian central banks to finance its skyrocketing twin deficits? China, Japan, and other Asian nations already have amassed $2.2 trillion in foreign reserves, including U.S. Treasuries.

Is the U.S. dollar really at risk of losing its status as the world's main “reserve” currency? Yes, the dollar's share of global reserves has already fallen from 80% in the mid-1970s to around 65% today.

Currency lessons of the last 2,000 years

Over the past 2,000 years the leading international currency has changed many times, from the Roman Denarius to the Dutch Guilder and then to the British Sterling.

In 1913, at the height of its empire, Britain was the world's biggest creditor. Within 40 years, after two costly world wars and economic mismanagement, it became a net debtor and the dollar usurped the Sterling's role.

The dollar has been the dominant reserve currency for more than 60 years, delivering big economic benefits to Americans, which can pay for imports and borrow at low interest costs. But never before in history has the guardian of the world's main “reserve” currency also been the world’s biggest net debtor. If America continues on its current path, the dollar is likely to suffer a fate similar to the Sterling.

Here are a few tips on how you can prepare for a dollar meltdown:

1) Reduce debt, live within your means
2) Increase income, develop your talents
3) Diversify some assets out of U.S. dollars
4) Vote to cut government tax/spend policies
5) Pray that God’s providential judgement upon America will teach our nation the benefits of righteous living before we face more social/economic consequences.

In the meantime, the next leg of the bull market in "real money" is on its way. Theory Letter editor, Richard Russell told the London Financial Times, "We are now in the second phase of the gold bull market - the phase when the public gradually becomes interested. I think gold will hit $1,000 before this bull market is over."


DISCLAIMER: All of the provided information is believed to be accurate, however errors are possible. The opinions in the Commentary section do not necessarily reflect the opinions of Swiss America. Past performance of any investment is no guarantee of future performance. All investments have risk.

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