Saturday, August 20, 2011

The dollar bubble

Most recently the gold bears are coming out bashing gold saying it's a bubble which is going to blow up in the gold bugs face. Wells Fargo came out this week claiming gold is in a bubble and that investors should look to "cashing" in their gains. On a technical basis sure gold looks very bubbly but fundamentals are at play in this specific situation. Quoting Doug Casey on Forbes:

I hate encouraging people to buy gold at $1,800 an ounce, because that level is already more than 700% above the bottom in 2001, and I’m a bottom fisher. I like bargains, and I can’t call gold a bargain today. But it’s plain as day that gold is going to go higher. There’s simply no other place for people to try to safeguard their wealth as the dollar, euro, and other currencies plummet toward their intrinsic values. What else could people buy as they get more and more afraid of paper currencies losing acceptance? What are corporations going to do with the billions of dollars in their treasuries when their management gets frightened? Where else can they go when they need to get rid of dollars, euro, yen, and yuan? Central banks, too – what will they do when they need to dump dollars in favor of something that will hold value?

This is why I see a bubble in gold still ahead. It has nothing to do with the supply and demand for gold in the jewelry trade, or whatever – it’s going to be a result of there being no viable alternatives when the paper-money con game is over. Gold is the ultimate cash, and that’s where people will go when there’s a global, total, panic to cash.

Mr. Casey says it best that gold is the ultimate cash while paper cash is simply trash. I agree with this assessment as dollars can be created by fiat while gold has to be mined. In the end its simply a store of value and nothing more.

Now what if the store of value that the world has relied on is in a bubble? Right now there is some crazy shit happening in the markets with gold and treasury bonds moving in the same direction. This week we saw record lows in the 10 year treasury AND a record high in the price of gold. Remember that bond prices and yields have an inverse relationship. This week the 10 year yield hit 1.97%, just as I had called a few weeks ago on this blog (that we would see sub 2% on the 10 yr). Now also recall that a good 10 trillion dollars worth of US government debt is in existence and the vast majority of these bonds have gone up in face value. While we are currently following Japan with its incredibly high level of government debt and low yields I believe this trend will reverse itself as over 8 trillion dollars are held overseas. The total cumulative trade deficit of the United States since 1975 totals over 8 trillion. With a 600 billion annual trade deficit this number will continue to grow. Throw in a massive 1.5 trillion dollar annual federal deficit and what we get is a recipe for a dollar catastrophe.

In 2008 when global stock markets cratered there was a knee jerk flight to safety in the US dollar as the US dollar index popped from 72 to 89. Fast forward to 2011; stock markets have fallen close to 30% globally and the dollar index languishes at all time lows of 73 while gold surges to 1850. Something has obviously changed. Bonds continue to rally with rates at historic lows. Eventually, gold or bonds will crash. I expect a volatile battle between the two as the powers that be obviously favor the strength of treasuries over the strength of that evil barbaric gold. I expect the authorities to implement a punitive capital gains tax on gold to bring down the price but in the end reality will win as it always does.

Gold and dollars are essentially the same thing: a store of value. Except you can't print gold at will. I refuse to put a timetable on when the dollar bubble will burst but when it does the American standard of living will crash and burn alongside the dollar. And this is when the real pain will begin. Not that it signifies the end of the world but it will signify the end of life in America as we knew it. As Americans have been afforded the opportunity to live above their means for the past three decades, we will be forced to live below our means, for possibly the same amount of time. One silver lining out of this mess will be a wealth transfer from creditors to debtors as a dollar devaluation will free millions of student loan borrowers from the chains of debt serfdom. Those who hold their wealth in paper dollars have been put on sufficient notice of the risks involved with holding paper dollars. Fuck it, let the wealth adjustment begin. The sooner the better.


  1. I wouldn't be surprised if Gold hits $2,000 an ounce by Halloween. What do you think will ultimately happen to Silver in the next few months?

  2. I have two graduate degrees and, thanks to scholarships and jobs, never borrowed a cent. For the longest time, I held to the notion that it would be unfair to let others out of having to pay. Over time, I have come to see it differently. First, while I did not come from a wealthy background, I did grow close to a college campus and hung out there all the time, so I grew up knowing a lot of college faculty and staff, so I was under no illusions of making big bucks when I was 18 and talking to admissions about what I could afford would be like asking a car dealer which car I should buy, meaning that I was extremely careful. Others did not have this advantage. Secondly, the cost in terms of consumer spending, investment, and, perhaps most seriously, innovation and entrepreneurship (because someone deeply in nondischargable debt can't afford to take risks) hurt everyone but the wealthy, even those like myself who are not in debt, far more than a few years of high inflation.

  3. ^^^^ this.

    The effect of a debt overhang extends beyond the indebted. If only more realized that fact.

  4. I am moving to Canada in a few months due to the student loans in the US, which I cannot pay and can no longer defer, as well as because of a job market that provides no job with income sufficient to pay back those loans. Having completed my undgrad degree and law school, my loans now total over 200K. With law school tuition roughly $43,000/year on average and living expenses(rent) being $10,000/year, law school easily accounts for most of my loan balance. After having taken the bar and applied to over 10,000 jobs(yes, 10,000) within the past year, I have only been able to find temporary work that pays $15-20/hr, which in no way covers my loan payments, which alone are over $1600/month. Seriously, the MATH IS NOT THERE. I work two jobs now and can't make it here. All of this nonsense about the American Dream and social mobility and the value of education is GARBAGE.

    Some people have even suggested that I should have worked my way through school or saved up the money for law school!!! HA!! If I had a job that allowed me to save up over 200K for law school, don't you think that I would have stayed in THAT job.

    Others have suggested that I should have anticipated the risks. Well, no one tells you that the law schools fraudulently manipulate the numbers they release to US News and World Report. Having now worked in the admissions office at Georgetown Law School, I can tell you that the school cherry picks the data to only use the high-paying individuals....and then actually has the nerve to hire people part-time in a temp position for 4 weeks so that they can count those people as employed for the purpose of the survey. Further still, they count people working in fast food and who have no legal jobs as employed for the purpose of the survey. THAT IS FRAUD. Basically, I along with many people were sold on lies and dishonest stats, which we used as the basis for our investment/risk. This issue deserves a wikileaks-styled espose in itself.

    Move to Canada where the US has NO JURISDICTION over your loans. Start life anew and watch the US economy collapse under the weight of its own lies. Enjoy this life; this is the only one you have. I chose to follow the rules and believe the popular mythology about education debt being good debt. Rather than squander year and year....month after month....trying to find solace in entertainment, books, music, friends, family and that old adage "things will work out"....wake up and get the hell out while you can. You owe it to yourself as a HUMAN to have no allegience to anything or anyone that would suppress your humanity, making you a slave to an orchestrated, bureaucratic fraud that is so large that the contemplation of it likely makes even my short message here seem exaggerated.

    Don't trick yourself into saying this is all YOU. You know what you are feeling, and your brain has already made you keenly aware of what is not working. The powers-that-be have already fooled you once. Don't go on fooling yourself.

    WAKE UP and get out.

    Yes, it is that bad. (Remember, DO NOT FOOL YOURSELF...USE YOUR BRAIN and YOUR SENSES)

    It is time to follow your own path rather than follow the misguided directions of others that served only to line the pockets of your schools and the bankers, who now make interest on the money that was loaned out.

    You can punish them by listening to yourself.

    1. Make sure you visit websites and gather information about your possible professions statistics from sources other than the schools you might attend before you enroll. Someplace like this might have info you can use.

  5. Nothing wrong with moving to Canada (details on what allows you to do this would be welcome) but you are fooling yourself, as you put it, if you think the US is going to implode anytime soon.

    The rich control the US government and they have no interest in implosion. Those who try to overthrow the system will end up in prison. If there is a shortage of workers to produce weapons and work as soldiers, police and prison guards, then immigrants will be brought in to do these jobs. The only thing that will shake the system is a major military defeat by the US, and that won't happen for decades. Living standards for the average American can fall and fall for all the rich care. What matters is that there is money to pay for the things the rich want: military to keep the rest of the world under control, police and prisons to keep Americans under control, food and other things the rich want to consume. And there will always be plenty of money for the things I just listed. All the austerity, if austerity is required, will fall on the middle class and poor.

    Good luck in Canada!

  6. good luck in Canada. You're making the right decision here. 200k in debt with no means of ever repaying is debt slavery. I hope everything turns out ok for you. Please update your status from time to time

    God bless

  7. Ah yes, I too am a defrauded law student. My massive debt and questionable job prospects led me to question the sustainability of the system as a whole, and once one goes down this path it seems there can be only one destination: gold. It seems as though you have journeyed down the same trail.

    FOFOA's blog is the best of the best on gold in my opinion, check it out:

  8. eToro is the most recommended forex broker for beginning and pro traders.


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