We have built a Great Inverted Pyramid of financial "wealth".
Right now, the largest floors, near the top, constructed from the leveraged debt of individuals, businesses and local governments, are in raging flames. People are racing from those floors to the next floors down, constructed from the debt of sovereign nations. This confuses our understanding, for it is the rent on these "soverign debt" floors (especially the U.S. Treasury floor) which backs the currency we use as the metric (the 'unit') of wealth on most of the other floors. Suddenly space on the "soverign debt" floors has become valuable, lowering the Dollar denominated pricing of most everything else. This pricing distortion will last only as long as the raging fires of financial collapse on the higher floors dominate the pricing.
It is likely that the raging fires of this deflating wealth will not stop at the floors of private debt, but rather continue down, into the "soverign debt" floors. I don't expect total destruction of the Dollar or of other sovereign currencies around the world. I do expect alot of FIRE damage, and some rebuilding using a wider mix of local and regional currencies based on various sovereign, regional (e.g. Euro), and IMF debt.
Of late, our esteemed American financial leaders have been building extensions to the Fire Break, in an effort to stop the raging flames before they destroy the Banks of their favored colleagues (of course, their sole motive is to protect the wealth of the banks customers
.) Unfortunately, they build weak structures using paper thin woods, in bizarre formations. This so called Fire Break should burn nicely, if one is alert to watch it, for it could burn very very fast.In the previous century, as America inflated the Mighty Dollar to its current position as the world's dominant "unit" (its reserve currency) of financial measurement, it first severed the domestic connections with the previous "unit" (gold) under FDR, and then later severed the international connections between the Dollar and gold, under Nixon.
As the Mighty Dollar now loses its esteemed status as the world's only reserve currency, we will work in reverse order. First the international status of the Dollar will fallback, later the domestic.
Already we are seeing the volume of international trade of both commodities and finished goods collapsing. Soon the global demand for U.S. Dollars and short term T-Bills from panicing deleveraging hedge funds and banks will slacken. Foreigners will scorn America's Golden Treasuries. We're talking the worlds most liquid, most watched markets here. The action will likely not be that of a gentle spring rain, but rather more like that of Colliding Worlds.
Americans will import less, and pay more. The laborers, diggers and farmers elsewhere in the world will lose their best customer (and worst "investment"
.) Treasuries will partially default by having their terms unilaterally restated or just by having their prices fall (yields rise) to levels not seen since Paul Volcker. Sensible American investors are already abandoning long Treasuries.Domestically, within America's borders, the Dollar will remain the undisputed currency. It probably will not massively collapse in the manner seen in the German Wiemar Republic (3 billion marks for a pound of bread in November 1923) or currently in Zimbabwhe. The Dollar has too much inertia, is too deeply embedded into the large American economy, for such hyperinflation to be a near term risk. Nor do I expect to be prying loose my gold teeth to bribe the border guard to allow my passage to Canada or Mexico.
Nor am I of the school that if we just abandoned fiat paper currency and fractional reserve banking, returning to "real" money that "is no one's liability" and that "has never gone to zero value", then all would be well. The Romans mucked up their metal currency just as thoroughly as us Americans are mucking up our debt-based currency. I invest in Gold neither as a short term trade (though I do what I can to time my gold trading to my advantage) nor as an ultimate survival currency, along side my guns, whiskey and cans of survival food. Rather I invest in Gold as an insurance policy, hedging unforseeable failures of my other investments. At times, gold has also been a nice medium term investment, as various asset classes rotate in and out of favor.
Though the Dollar will not die, it will once again grow weaker. Domestic American inflationary price increases, caused by the rising Dollar denominated prices of the imports on which America is now so dependent, will seep through American society.This will lower the value of pensions, savings and Social Security payments. This will lower the standard of living of most Americans. Stubborn and widespread unemployment of millions of former workers in various financial, service, real estate, construction, automobile, and other businesses will further lower the American standard of living. Many Americans are going to have to learn the hard way the merits of downsizing and frugal living and hard work at unpleasant labor.
I doubt that Americans will be receiving many sympathy cards from the rest of the world in the coming few years. The rest of the world will have their own burdens to bear,and the opportunities for blame are abundant and in some cases well deserved.
Advancing senility has so weakened the minds of the few remaining members of The Greatest Generation of Americans that they will let this new state of the worlds affairs pass with little complaint. They were never ones to beg for sympathy in any case. If any of them who are still left with clear minds are reading here today, I say a heartfelt Thanks.
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