Friday, 18 April, 2008 11:12 PM
Dollar" Dilemma: Facing the Cold, Hard Truth Behind the Dollar's
help from the Fed, the dollar has been on a steady decline for some
time now. While most of us know that isn't good news, it's hard
to make heads or tails of what it all means. Addison Wiggin clears
it all up...and sounds a dire warning about the future.
American dollar is worth less now than it's ever been.
— The dollar has hit historic lows, and we're witnessing
the results: celebrities requesting to be paid in currencies other
than the dollar, desperate U.S. retailers opening their doors before
dawn the day after Thanksgiving 2007, and overseas visitors packing
the streets of New York City scooping up bargains. The sinking of
the dollar didn't just happen when all the recent recession talk
started. It's been a growing problem for quite some time, says Addison
Wiggin—it's just that many Americans don't quite know how
to put it in perspective.
"The dollar is a
victim of its own success," says Wiggin, author of The Demise
of the Dollar (Fully Revised and Updated) and Why It's Even Better
for Your Investments (Wiley, April 2008, ISBN: 978-0-470-28724-8,
$19.95). "It is America's most successful export ever—more
successful than chewing gum, Levi's, and Coca-Cola put together.
Trillions of dollars flow through the global financial markets every
week from Kiev to Karachi. But today, as a result of a government
and a populace living beyond its means, we are going deeper and
deeper into debt, and the dollar is quickly losing its worth."
While you've probably
read or heard the concerning media coverage about the falling dollar,
it can be hard to see the big picture. Wiggin hopes to clear that
"As of November
7, 2007, government debt officially passed $9 trillion," says
Wiggin. "To make that easier to comprehend, that's about $30,000
for every man, woman, and child in the country. That leaves us with
a falling dollar and a weakened economy."
Unfortunately the news
only gets worse. Wiggin says the federal policymakers, who could
help correct the falling dollar, are suffering from denial. Our
leaders have convinced themselves that the falling dollar will improve
the economy by eliminating the trade deficit, reducing inflation,
and improving our GDP.
"Seeking to spur
the economy to growth, the Fed and the Treasury have been actively
devaluing the dollar," says Wiggin. "Many dubious excuses
are given—protecting American exports, saving jobs, preventing
deflation, for instance—but there is no question that Capitol
Hill is actively engineering the dollar's demise. Seventeen rate
cuts since 2001, three tax cuts, massive deficits, and record money
creation bear cold witness to its manipulations. But it's an illogical
plan that is doomed to fail. You can't spend your way to prosperity;
no nation ever has or ever will."
Wiggin warns the near
future could prove to be a financial disaster for people who pin
their wealth to the strength of the dollar. He says a collapse is
inevitable, and it's only a question of how quickly it is going
Here are some of his
insights on how the dollar reached this economic low point—and
why it's only going to get worse.
Want historic evidence
that our government is taking the wrong approach? Look no further
than Japan. After years of growth in Japan's GDP, 1997 saw the numbers
begin to slow down and the country was quickly in trouble. That
year, the government made modest cuts to its budget deficit, and
the result was an economic free fall in 1998.
"Taking a page from
Greenspan's book, the government instituted record levels of deficit
spending hoping it would fix a failing economy," says Wiggin.
"But it didn't; the Japanese economy got worse and worse. The
solution from the Japanese government was to launch 10 financial
stimulus packages—ring any bells?—between 1992 and 1999,
but during that period its debt grew by $1.13 trillion. The ratio
of government debt to GDP soared from about 60 percent in 1992 to
105 percent of GDP in 1999. The Japanese history lesson reveals
that you can't spend your way out of trouble, and yet that seems
to be exactly what the Fed is trying with the U.S. economy."
Outsourcing has changed
the face of the worldwide economy. Our government likes to minimize
just how damaging the trend in outsourcing jobs has been for the
American economy. They cite the creation of millions of new jobs
in the retail and health care sectors as a sign of growth. But the
reality is these new jobs are very low-paying compared to the high-paying
manufacturing jobs that have gone overseas. So people may be working,
but they are earning less. The flailing labor economy results from
the roughly three billion new capitalists who have entered the market
by way of China, the former Soviet Union, Vietnam, and India, citizens
who are glad to work for dirt-cheap wages.
"As a result of
the cheap labor overseas, we haven't seen growth in manufacturing—defined
in terms of jobs, output, or profits—in more than 10 years,"
says Wiggin. "What has resulted is a trade deficit that has
us spending more of our money overseas than we're making at home,
which would be fine if the trade deficit resulted from a high rate
of investment, but it doesn't. We are spending, not producing."
Leaving the gold standard
was the start of the problem. We see repeatedly from history that
when countries operate on the gold standard, they thrive—and
when they go off the gold standard, they get in trouble. The problems
seem to appear after 30 years. So if we count from the Nixon decision
of 1971 to go off the gold standard, we should have seen these problems
soon after 2001. It stands to reason then that it was in 2002 that
the value of gold started rising.
"The gold standard
works because it forces spending discipline on politicians, despots,
demagogues, and democrats," says Wiggin. "When a country
is on the gold standard, it has to live within its means. But when
it goes off the gold standard and begins using fiat money—or
floating money—the sky's the limit. As long as any government
is able to print money indefinitely, you can bet that it will. Unfortunately,
even the best economic experts can identify when the printing of
money has gone too far by only one yardstick: when the system implodes.
By then it's too late to prevent the damage."
Our nation is drowning
in debt. Consider this: At the rate the US debt is growing—$1.4
billion a day or $1 million a minute—the most famous debt
clock in the country, located on Times Square in New York City,
will become obsolete once it hits the $10 trillion mark. It's unfortunate,
but today, many people, including most of those running our country,
simply accept as a fact of life that the national debt is unimaginably
"One way corporations
justify growing debt is that it enables the expansion of markets
and capital assets," says Wiggin. "But that isn't the
case with the federal government. It produces nothing. Money tied
up in the debt may go partially for necessities or entitlements
that large segments of the population want to continue, but the
debt itself is not an example of productive debt. So the arguments
that it's okay because (1) we owe it to ourselves or (2) our assets
are greater than our liabilities are both false justifications for
a problem that, ultimately, may define the collapse of the entire
"In the nineteenth
century, a series of presidents took debt seriously and, other than
in periods of war, diligently paid down the national debt,"
he adds. "Today, deficit spending has become the rule and balanced
budgets the exception. The concept of actually paying down the debt
is an oddity. The even more distant idea of eliminating the federal
debt is viewed as idealistic, even un-American."
The world's de facto
dollar standard will come tumbling down. Americans are not the only
ones to blame. We have codependents and enablers in the form of
foreign exporters who love selling their goods to Americans. The
governments in those foreign markets are as concerned about the
U.S. dollar's fall as Americans are (or should be). That's because
the fall of the dollar is the same thing as a rise in other currencies.
So the competitiveness of the foreign export economy is damaged
more and more as foreign governments' currencies increase in value.
"America is only
one side of the problem," says Wiggin. "As the consumer,
our dollars have tremendous influence throughout the world, if only
because so many central banks—China, for instance—have
pegged their currency to the dollar. At the same time, many exporting
nations are seeing their currencies go up in value, making it untenable
to continue exporting at the same rates as in the past. So we have,
through trillions of dollars of debt accumulation, created a de
facto dollar standard in much of the world economy—not good
news as we watch the dollar sink."
It's time to prepare
for a dollar dump. So, if all of these foreign currencies are tied
to the dollar, isn't it in their best interests to keep dollar values
high? The answer is yes, but only to a point. They'll be looking
out for their own best interests, so Asian central banks will ultimately
allow the U.S. dollar to fall to contain inflation in their countries.
And the more debt those central banks control, the greater their
control over the U.S. dollar—and over the standard of living
in the United States.
"When foreign investors
start dumping their dollars, the stock market will take a big hit,"
says Wiggin. "Because the dollar has been falling in recent
years, foreign investors in U.S. stocks—representing over
10 percent of the whole market—have been getting lower returns
on their investments. When the dollar takes an even sharper turn
south, those foreign investors will sell. That will mean that the
supply of stocks will increase rapidly, or, putting it another way,
prices will plummet as foreign investors start dumping US shares."
The U.S. economy faces three big problems down the road. There are
economic contrarians out there who anticipate a rally and unexpected
growth in the dollar's value. But, unfortunately, a bear market
rally alone will not make other facts disappear. We are facing three
huge obstacles that make a huge dollar rally seemingly impossible.
- Reduced foreign investment.
In August 2007 we saw a slowing down among foreign lenders as
a sign that we're reaching our international credit limit. Once
investors begin to worry about their chances of getting repaid,
the first impulse is to cut off the credit line—whether
across international boundaries or in the casino.
- Continuing slow foreign
demand for U.S. goods. The slow pace of demand for U.S. goods—often
cited as the cause of the trade deficit—is not only an external
problem. It is also a symptom of poor competitiveness in the United
States. The fix for the problem is to attack the trade and current
account deficits through revised pricing internationally, which
is no easy task.
- Unfavorable currency
exchange rates. As the dollar reacts to continued credit-based
spending, attrition of the dollar is going to continue. This damages
purchasing power not only in the retail mall or when traveling
to Europe, but also for U.S. business capital investment.
"We need to set things in motion if we expect the dollar trend
to reverse," says Wiggin. "And addressing what's at the
core of these three problems is a great place to start."
The dollar's purchasing
power is sliding relentlessly downhill. The theme that "a dollar
is always worth a dollar, but inflation results when businesses
raise prices," just isn't accurate, despite what the government
would like for us to believe. In fact, it is the decline in the
dollar's value that leads to higher prices. It would be more accurate
to define inflation as "a reduction in purchasing power of
the dollar." Instead of deceiving ourselves by saying that
"prices are up 10 percent over the past year," it would
be more meaningful if we simply acknowledged that "last year's
dollar is worth 90 cents today."
"Higher prices are
only symptoms following the debasement of currency," says Wiggin.
"If we examine why those prices go up, we discover that the
reason is not necessarily corporate greed, inefficiency, or foreign
price gouging. At the end of the day, it is the gradual loss of
purchasing power, the need for more dollars to buy the same stuff.
That's inflation. And it's the reason why food prices swelled 5.5
percent in 2007, and the average price of a gallon of gas more than
doubled from January 2000 to July 2006, jumping 130.5 percent."
"The dollar is a
currency fated to tumble," says Wiggin. "The dollar's
resistance to its debt load, fueled by the machinations of central
banks and the misguided faith of dollar investors, undoubtedly qualifies
as a trend whose premise is false. Sometime soon this trend will
"But there is good
news in all of this, if you are willing to be proactive," continues
Wiggin. "There are many ways you can capitalize on a falling
dollar. I highlight four of those strategies in The Demise of the
Dollar. The important thing is that you take your financial future
into your own hands. The days of the strong dollar are over, and
it's time to start making financial decisions based on that truth."
About the Author:
Addison Wiggin is the
executive publisher of Agora Financial, an investment research firm
based in Baltimore, Maryland. Agora publishes The Daily Reckoning,
a financial newsletter with more than 500,000 readers in the United
States, Great Britain, and Australia, and is translated daily into
French, German, and Spanish (dailyreckoning.com).
It has received praise from mainstream publications, including Money,
New York Times Magazine, and MarketWatch.com. Mr. Wiggin is the
author of the first edition of The Demise of the Dollar. He is also
the executive producer and a writer of I.O.U.S.A., a feature-length
documentary film nominated for the Grand Jury Prize at the 2008
Sundance Film Festival. The film is inspired by the international
bestsellers Financial Reckoning Day and Empire of Debt, which he
coauthored with Bill Bonner.
About the Book:
The Demise of the Dollar
(Fully Revised and Updated) and Why It's Even Better for Your Investments
(Wiley, April 2008, ISBN: 978-0-470-28724-8, $19.95) is available
at bookstores nationwide and major online booksellers.
Source: DeHart &