How Long Will It Take the Dollar to Fail?

"You cannot afford to wait for perfect conditions. Goal setting is often a matter of balancing timing against available resources. Opportunities are easily lost while waiting for perfect conditions."

-- Gary Ryan Blair

 

I have always made it a policy not to try to time markets, and while my outlook for the dollar is bleak, I don't feel comfortable making an exact prediction about its demise. Having said that, in December -- when the Fed implemented zero-interest-rate-policy and announced its intention to employ quantitative easing -- they galvanized my conviction that the dollar and Treasuries are doomed, and I started building a public case against the United States Government and its ability to sustain its decades-long policies of borrowing and printing. Nevertheless, when I predicted Treasuries would fall, I didn't expect the 30-year bond to gain more than 100 basis points in less than two months! But after that surprise, my time-horizon for the life of the dollar has shrunk considerably. I still think the Fed might try to defend the long end of the yield curve, but every single day, my faith in its ability to maintain low yields wanes, and I increasingly believe things are going to unwind sooner rather than later.

I am not an alarmist, and I used to roll my eyes at people who talked about burying guns, potable water, and canned food in the backyard. But if hyper-inflationary price increases are coming – and I certainly believe they are – buying durable goods now is not only smart, it's necessary. Anything that lasts and provides future utility is going to be a good investment, and if I have a choice of buying a can of beans now for 89 cents, or five years from now for $12, well, it doesn't exactly require a financial calculator to establish how good that rate of return is – even if the things I buy merely keep pace with rising prices as a whole.

A lot of people will call me an alarmist for my previous statement, but it really just boils down to the same questions I've been asking for weeks now: do you believe the United States can continue to borrow at the same pace it has for decades? Do you believe the number of dollars in the system, along with the unprecedented easy credit the Fed is creating, won't lead to runaway price increases? For me it's like Pascal's wager: If I'm wrong, I can always eat canned goods later -- laughing at my miscalculation a little harder with each subsequent forkful of tuna. But if I'm right, my family may be able to weather an extremely nasty storm in relative comfort.

Another thing to remember – something I pointed out in a recent article – is that it is far more important to look at the dollar versus commodities than it is to look at the dollar versus other currencies. Quarter-hour updates on financial news networks discuss the "strength" or "weakness" of the dollar, but this metric is misleading; it is a measure of the dollar against a basket of other currencies, not against commodities. And even the government's gauges of the dollar's efficacy – like CPI – are so misleading and vague that I just don't trust them. In any case, it may be that, as prices begin to rise against the dollar, they may also be rising against other major currencies, and the dollar could show relative strength against those currencies – if it is not falling as fast. Still, copious printing and easy credit will cause prices to rise, and any other assessment of dollar "strength" will be an illusion. In other words, when you're trying to ascertain the value of your currency, don't measure it against the yen, measure it against milk and eggs at your grocery store.

Every presidential administration in the 20^th century conspired – wittingly or not -- to destroy our currency. It has been like a subtle cancer – not readily apparent on the outside, but slowly eating away at the body from within. Now, at the zenith of this crisis, just when the government should be tightening credit, strengthening the currency, encouraging saving, cutting taxes, and reducing spending, the Obama Administration is doing just the opposite: it is taxing precious capital, along with the most productive and innovative members of our economy – thereby redistributing wealth to the least productive and innovative members of our economy. It is increasing spending to the tune of $8.5 trillion over the next two years, while encouraging unprecedented printing and easy credit. Our government is relying on the continued generosity of our lenders, namely China and Japan, but I have made cogent arguments that those countries are not likely to continue to support our voracious and insatiable appetite for new capital at current yields – especially capital that will be allocated and invested poorly.

I have said this before, but it warrants repeating: we were a creditor nation in the 1930s, with a massive manufacturing base. Not that I think it was the correct solution, but we borrowed our way out of the Great Depression. Today we are the largest debtor nation on earth, with a relatively small manufacturing base. Jim Rogers claims to be the worst market-timer on earth, and I disagree with him only in that he can't be worse than me. As such, I can't tell you exactly what day the dollar will collapse – or if it will even be that sudden. But one thing is for sure: the cancer has metastasized, and there is no hope of recovery; my instinct tells me that the sheer lack of vision, coupled with the absence of any substantive acumen in Washington is going to ensure that the failure comes sooner, rather than later.

 

Disclosures: Paco is long gold, UGL, DXO, and TBT. He has been a financial analyst and a portfolio manager for 18 years. You can buy his novel Discipline wherever books are sold. Or visit www.disciplinebook.com. If you have questions or thoughts, leave a comment or write to Paco at questions@pacoahlgren.com. Copyright 2009, Paco Ahlgren. All Rights Reserved.