Comments on David Wessel’s WSJ article ‘Why Dollar Is King Despite U.S. Woes’

Copyright 2013 John T. Reed

The 12/5/13 Wall Street Journal has an article with the above title. Google that title to read it.

The Dollar Trap book

The article mainly summarizes a new book The Dollar Trap by Eswar Prasad, a Brookings Institution economist.

1. governments around the world force their banks to hold U.S. dollars (USD)

2. When their currency goes up in value against the dollar, exports are hurt, so the governments intervene which means buying USD to drive down the value of their own currencies. Switzerland and Japan have recently said they were and would continue to do this.

3. governments want to hold dollars to fight of speculators trying to drive down their currencies (George Soros became rich by driving down the British pound)

4. By buying $1T of US bonds per year, which is all of the new issues plus many of the FNMA and FHLMC bonds, the Fed is artificially making them hard to find.

5. If not the USD, then what currency should they buy?

Definition of ‘is’

#1, the operative word is the title would be “is.”

I do not buy or recommend foreign currencies to deal with what is. I buy them and recommend them to deal with what might be in the future.

I do not have to prove to myself or anyone else that we will get hyperinflation soon. I only need to prove that we could get it in our lifetimes Protecting your life savings from possible hyperinflation is like buying fire insurance on your home. You don’t buy it because a fire next year is probable. You buy it because a fire is possible, would be financially devastating, and can be cheaply insured against.

I have neither bet on imminent USD hyperinflation nor recommended that you do that.

Fiats about fiats

Points #1, 2, and 3 are government fiats to buy US fiat money. They are not structural or fundamental facts like the fact that the Australian debt-to-GDP ratio is 20% compared to the U.S.’s 108%.

Points #1, 2, and 3 can, and will, change in a New York minute if and when there is a run on the dollar. The fact that governments around the world want the dollar to remain a store of value will delay a run on the dollar, but because the decisions of those governments can change in a heartbeat, they do not prove there will never be a run on the dollar.

Furthermore, those governments are increasingly complaining out loud that the U.S. government is recklessly abusing its privilege of being the world’s reserve currency and most popular currency and all that. Many of them are striving to find alternatives. If, say, China, gets pissed at us about something, they could dump their USD and that might cause the worldwide run on the dollar. Or Saudi Arabia which is currently outraged at US policy toward Iran could do the same and/or end the agreement to price oil in USD.

The U.S. government is currently engaging in fiscal and monetary policies so reckless that they are all but daring foreign countries to find a substitute for the USD.

QE must be wound down

Point # 4 virtually all agree cannot continue. Furthermore, it must be wound down, that is, the U.S. bonds that the Fed has purchased in Quantitative Easing I, II, and III must eventually be sold. When they are, it will have the opposite effect of buying them. That is, it will drive up interest rates which, in turn, typically causes a recession or worse.

If not USD, what? hard assets and good forex

#5 is an easy question for me to answer for individuals like me and my readers. Get out of the USD and into hard assets and selected foreign currencies (forex). Some countries have been doing that like China buying up natural resources around the world. Those have solid economic fundamentals.

The hard assets should be things you will use yourself like your home or a more expensive better located one, and your vehicles and business machines and long-shelf-life food. To the extent possible, they should also be good barter items.

The currencies I hold and recommend are AUD, CAD, CHF, NZD. If you want two more, DKK and SEK. Unlike a foreign country, I see a currency like the CAD as being the money used in a country I can drive to and take refuge in during any U.S. hyperinflation. I am not concerned about the world price of the CAD, only whether I can pay rent there with it and buy breakfast at McDonalds in Canada with it. I am confident that I will be able to do that.

In other words, since you are a person, not a country, your perspective on what you want out of the foreign currency you buy is quite different from that of countries like China buying USD. Do not imitate countries and their politicians. Just make sure you have almost all of your money in hard assets that you will use and your liquid assets in selected foreign currencies that you can use while staying in those countries on 90-day tourist visas

There is little cost or risk to following my advice. Worst case with foreign currencies is you move money to savings accounts in those countries then later convert it back into USD. That would cost you a little for each conversion.

Worst case if you fail to follow my advice and example: all of your USD and USD-denominated assets are wiped out. You would have to barter your possessions—most of which are probably not good barter items—to stay alive. You would not be able to leave the country because you would not be able to prove to the border guards that you can support yourself in the other conutry. This exact thing has happened in memory in Latin America and other places that had high inflation along with capital controls and price controls, etc.

See my book How to Protect Your Life Savings from Hyperinflation & Depression, 2nd edition for more information.

John T. Reed