An Interesting Book on an Interesting Topic: Gold and the Ongoing US and Dollar Collapse

[Marie Louise von Preussen]

According to this visionary 2004 book, available here:

The dollar is in trouble. It has fallen against other currencies for the past three years, and now its orderly retreat could well become a rout. This spells potential disaster for the American economy—and potential riches for a few smart investors. In The Coming Collapse of the Dollar and How to Profit from It, financial gurus James Turk and John Rubino show how the dollar arrived at this precipice, why it will plunge, and how you can profit from the resulting financial crisis.

The U.S. today is the world’s biggest debtor nation, printing money with abandon to sustain the illusion of prosperity. The federal government owes $7 trillion and its debt is soaring. As a society, we owe more than $37 trillion, or about $500,000 per family of four. Our trade deficit with other countries is staggering, and to finance this mountain of debt we’re flooding the world with dollars. The inevitable result: The dollar will decline until it is displaced as the world’s dominant currency. Precious metals will soar in value, and gold will reclaim its monetary role at the center of the global financial system.

Traditionally a haven during times of uncertainty, gold has risen dramatically since 2001. By the fall of 2004 it was up by nearly 50%, at over $400 an ounce.

This book is divided into two parts. The one that interests us the most, is how it dealt with and was able to predict an eventual upsurge in the price of Gold since the last decade, and also the collapse of the Dollar and the eventual crisis of the US economy since its writing. And it gives rather fundamental and interesting insights. Now the book is relatively long, so I'll just selectively quote the most insightful parts. I'll put it into spoilers so the lazy readers can skip it, but I definitely don't recommend it:

Spoiler Alert, click show to read: 

During the final two decades of the twentieth century, the U.S. economy was the envy of the world. It created 30 million new jobs while Europe and Japan were creating virtually none. It imposed its technological and ideological will on huge sections of the global marketplace and produced new millionaires the way a Ford plant turns out pickup trucks. U.S. stock prices rose twentyfold during this period, in the process convincing most investors that it would always be so.

Toward the end, even the federal government seemed well run, accumulating surpluses big enough to shift the debate from how to allocate scarce resources to how long it would take to eliminate the federal debt.

[...]

But as the century ended, so did this extraordinary run. Tech stocks crashed, the Twin Towers fell, and Americans’ sense of omnipotence went the way of their nest eggs. As this is written in early 2004, three million fewer Americans are drawing paychecks. The federal government is borrowing $450 billion each year to finance the war on terror as well as an array of new or expanded social programs. Short-term interest rates have been cut to an incredible one percent, and while growth is finally accelerating, borrowing at every level of society is rising even faster. The dollar, meanwhile, has become the world’s problem currency, falling in value versus other major currencies and plunging versus gold. The whole world is watching, scratching its collective head,
and wondering what has changed.

[...]

So why say that nothing has changed? Because today’s problems are new only in terms of recent U.S. history. A quick scan of world history reveals them to be depressingly familiar. All great societies pass this way eventually, running up unsustainable debts and printing (or minting) currency in an increasingly desperate attempt to maintain the illusion of prosperity. And all, eventually, find themselves between the proverbial devil and deep blue sea: Either they simply collapse under the weight of their accumulated debt, as did the U.S. and Europe in the 1930s, or they keep running the printing presses until their currencies become worthless and their economies fall into chaos.

This time around, governments the world over have clearly chosen the second option. They’re cutting interest rates, boosting spending, and encouraging the use of modern financial engineering techniques to create a tidal wave of credit. And history teaches that once in motion, this process leads to an inevitable result: Fiat (i.e., government-controlled) currencies will become ever less valuable, until most of us just give up on them altogether. These are strong words, we know. But by the time you’ve finished the next two chapters we think you’ll agree that they are, unfortunately, quite accurate.

Spoiler for On Borrowing: 

In light of the tech-stock crash, the mini-recession of 2001, and the World Trade Center attacks, you might expect American consumers to have spent the early years of this decade in full financial retreat, borrowing less and building up cash in anticipation of more bad news. Instead, between 2000 and 2003, consumers put the pedal to the metal financially speaking, borrowing more than ever before. And lenders, instead of pulling back, supplied credit to all comers: Bad credit, no credit, no problem!

[...]

Why, exactly, are all these bright bankers and credit analysts willing to lend more money than ever before to increasingly strapped consumers? For one thing, their executives are so desperate to boost their stock options by pleasing Wall Street that they’re blind to the consequences (or they see the consequences but hope to have long since ridden off into the sunset with a fat retirement package).

[...]

As a society, we now owe about $37 trillion. That’s more than three times GDP (up from about twice GDP in the early 1980s) and comes to $128,000 per citizen, or a mind-boggling $500,000 per family of four. And the pace, believe it or not, is accelerating. In 2002 and 2003, despite a slowing economy that common sense says should cause Americans to scale back, we took on $6 of new debt for each new dollar of GDP. And recall that this calculation excludes the two biggest numbers of all: Washington’s $40 trillion in unfunded trust-fund liabilities, and U.S. corporations’ $100 trillion in derivatives exposure. In short, the U.S. has clearly met the first two requirements of a currency crisis: Government spending and debt are both growing like crazy.

Spoiler for Trade Deficits: 

If the dollar is still a functioning currency after America’s two-decade-long borrowing binge, what’s to stop it from functioning forever? Well, for one thing, we’re not alone in the world. Foreign investors have a say in the value of the dollar, and in the next few years they’re going to say some very unfortunate things.

As a major trading nation, the U.S. exports computers, software, movies, and food, among many other things. And we import just about everything you can imagine. When we buy more than we sell, we make up the difference—known as the trade deficit—by shipping dollars overseas. And in recent years we’ve been buying a lot more than we’ve been selling. After averaging a manageable $80 billion annually during the 1980s, the trade deficit soared into the $300 billion range in the 1990s. And by 2003 this figure had exploded to over $500 billion. That’s about 5 percent of GDP, a level that, when it has occurred in other countries in the past, has preceded a sharp decline in the value of the local currency.

Why are we buying so much more than we’re selling? One reason is that it’s a lot cheaper to make most basic products in places like China, where smart, highly motivated people will work for about a tenth the prevailing U.S. wage. So U.S. companies, in order to take advantage of this differential, are closing factories here and setting up new ones over there.[...] And where not so long ago our trade with China was more or less in balance, we now run a deficit that exceeds $100 billion annually.

But the imbalance goes beyond just China. We’re running annual deficits with Japan and the European Union of more than $100 billion and $50 billion, respectively. And of course oil imports, mostly from the Middle East, seem headed nowhere but up. The inescapable conclusion is that U.S. consumers are addicted to a lifestyle that includes new cars, big houses, and slick electronic toys. And, as you know from the previous chapter, we’re willing to borrow whatever it takes to avoid cutting back.

The book then goes on and on about how the developed world, Europe and Japan in general, face similar problems about excessive borrowing, living beyond one's own means, inflation, deficits, etc...:

Spoiler Alert, click show to read: 

So here we are. The world’s major economies are all living far beyond their means and are borrowing to cover the difference. And they will, it now seems certain, continue to create as much new fiat currency as it takes to delay the day of reckoning. The stage is set, in short, for a currency collapse à la Weimar Germany or 1990s Argentina, in which the world simply loses confidence in the dollar in particular and fiat currencies in general. In such a “flight from currency,” the demand for dollars will dry up. We’ll spend our cash the minute it comes in, sending prices through the roof.[...]We’ll shun financial instruments, including bonds and many stocks, like the
plague. And we’ll return en masse to the only money that is impervious to government mismanagement: gold.

The book then goes on a lenghty discussion of the value of Gold, how booming economies in the developing world (namely China and India) are attracting a large flow of Gold, how it is rather impervious to the problems currently assailing fiat currency today, namely speculation, inflation, etc... And how its value was destined to increase in the last years of the past decade notwithstanding concerted efforts by Central banks (since the late 90's) to flood the market with gold and keep its price artificially lowered. We need not to dwell into these lengthy insights, rather I'll summarize the main points of the book's argument and its main predictions for our times:

1 - That the US is basically spending and borrowing beyond their means, getting deep into debt, and thus directly undermining the value of the Dollar.
2 - That gold, as a "shadow" currency that suffers the effects of the Dollar directly in an inversely proportional manner, will shoot up (it's already doing so) and thus becomes a worthy investment.
3 - That this not only represents a grim picture to Dollar investors, it also signals the end of artificial boosts for the US economy: Americans are headed and may well be into a loooong time of deep recession and crisis, facing high unemployment rates, insolvency, and a general picture of grim stagflation as they direct all their efforts to pay their large debts instead of growing.
4 - That this was caused by not just the Government, but generally everyone trying to live beyond their own means: excessive borrowing, subprime mortage crises and bubbles (such as the 2008 one) and generally lots and lots of bubbles since the 80's bursting, together with debt eating more and more of the total GDP.
5 - That European and Japanese economies face pretty similar conditions.

AND, incidentally:

6 - The old Fiat x Gold debate again. The book makes the case for gold based currencies yet again, by arguing that a) Fiat economies are fated to fail and fall into hyper-inflation, b) They are doing so now, c) That all property assets are being devalued and the general scenario of collapse was caused by the inherent limitations of Fiat currencies and de-regulated economies in the last decades.

What's the big picture? Besides these six points, the authors claim are we also witnessing the inevitable fall of US and Dollar hegemony over the Global economy, and their inevitable slide, in the decades to come, to a 2nd rate power in a multi-polar world. The book then goes on, and makes interesting analogies to the decline of the Sterling and Great Britain in the 20th century, including the excessive military spending.

Now, I won't jump into the bandwagon and right now I prefer to remain neutral to this, just exposing these (not uncommon and not unfounded) claims. Rather I'll just put up these issues for scrutiny and debate so you can leave your insights .

[Condottiere 40K]

I think we'll have to go with the fiat ponzi scheme; at this moment, gold is a great safety net for individuals, but too inflexible to tie a currency to.

[Enemy of the State]

gold is a great safety net for individuals, but too inflexible to tie a currency to.

That is a good thing. We want a stable currency.

[Marie Louise von Preussen]

Actually, you're all right. The book also argues in a lengthy manner that to institute both state intervention in the economy in a massive scale AND create a modern welfare net, a massive credit expansion was needed. Thus FDR, who was a pioneer in this sense in the United States, ordered the confiscation of individual gold assets back in 1933. The book analyzes this through a pro-gold, anti-government perspective.

[Georgy Zhukov]

Spoiler Alert, click show to read: 

Housing bubble

Spoiler Alert, click show to read: 

Tech Bubble

Spoiler Alert, click show to read: 

Gold prices

See the comparison?

Gold is not a "stable currency" if it was a "stable currency" it's price wouldn't have shot up 1600 dollars in the past 5 years. Gold is ripe for a bearish reversal, otherwise you wouldn't see the crazy volatility that its been having. Now, that being said it may be a long time before Gold is restored to a reasonable level since investors consider it a safe investment. But as soon as consumer confidence picks up, as soon as the economy picks up those investors are going to liquidate their positions to look for better returns. And gold will drop like a sack of ... well, gold. The idea that gold is some magic metal that has value is stupid. The uses of gold industrially and commercially are limited. As warren buffet once said “[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” Gold based currencies aren't a magic pill for solving all problems. The US hugely expanded its empire under the gold standard, the US had two depressions under the gold standard and god knows how many panics and recessions.

[LSJ]

Spoiler Alert, click show to read: 

Gold prices

See the comparison?

Gold is not a "stable currency".

Indeed. Just because gold is increasing sharply now does not mean it will be safe in the long term. People who invested a lot into gold during its last peak in the 1980s would have lost more than half of their money, and would only be able to see gains on their investment in 2006.

Gold has been above 1980s value for a mere 5 years with inflation adjustments. What happens when new industrial giants work their massive gold deposits? When currencies stabilize (since the recession is, for most of the world, ending) and some people sell their overpriced gold and invest in currencies again? When new products proven to be cheaper, better options than gold that have already been developed begin seeing use in electronics factories?

If people become too entranced with gold, they alone might cause another recession if the funhouse falls.

At least that recession could be called the Golden Years. Makes it sound better.

[motiv-8]

I don't do economics, but in terms of history I found this part to be particularly true:

So why say that nothing has changed? Because today’s problems are new only in terms of recent U.S. history. A quick scan of world history reveals them to be depressingly familiar. All great societies pass this way eventually, running up unsustainable debts and printing (or minting) currency in an increasingly desperate attempt to maintain the illusion of prosperity. And all, eventually, find themselves between the proverbial devil and deep blue sea: Either they simply collapse under the weight of their accumulated debt, as did the U.S. and Europe in the 1930s, or they keep running the printing presses until their currencies become worthless and their economies fall into chaos.

Paul Kennedy talked about exactly this back in the 80s with Rise and Fall of the Great Powers. He also pointed out that even while debts mounted and other spending was cut, military expenditure soared for a short time before leveling off, right before the precipitation of general collapse, because military strength is used by faltering great powers as a desperate replacement for economic might, an ultimately unsustainable choice. I do think that's what we're seeing in the United States right now, unfortunately. The only question is whether it can be stymied.

EDIT: I'm not sure I like the purpose of this book. How to profit from the collapse of America? Mildly annoying. And overly optimistic -- nobody wins from the collapse of America, not even our biggest competitors and/or enemies.

EDIT2: Speaking of Kennedy, he wrote a pretty similar article for WSJ back in 2009, this time without the silly predictions of the Japanese taking us out economically from 30 years ago: http://online.wsj.com/article/SB123189377673479433.html

There is nothing else in the world like them in absolute measures and, even when calculated in proportion to national income, the percentages look closer to those you might expect from Iceland or some poorly run Third World economy. To my mind, the projected U.S. fiscal deficits for 2009 and beyond are scary, and I am amazed that so few congressmen recognize the fact as they collectively stampede towards the door entitled "fiscal stimulus."

The planned imbalances are worrying for three reasons. The first is because the total projections have been changing so fast, always in a gloomier direction. I have never, in 40 years of reading into the economics of the Great Powers, seen the figures moved so often, and in such vast proportions. Clearly, some people do believe that Washington is simply a printing machine.

Do people really think that China can buy and buy when its investments here have already been hurt, and its government can see the enormous need to invest in its own economy? If a miracle happened, and China bought most of the $1.2 trillion from us, what would our state of dependency be then? We could be looking at as large a shift in the world's financial balances as that which occurred between the British Empire and the United States between 1941 and 1945. Is everybody happy at that? Yet if foreigners show little appetite for U.S. bonds, we will soon have to push interest rates up.
If I have spent so much space on America's fiscal woes, it is because I guess that its sheer depth and severity will demand most of our political attention over the next two years, and thus drive other important problems to the edges of our radar screen. It is true that the economies of Britain, Greece, Italy and a dozen other developed nations are hurting almost as badly, and that much of Africa and parts of Latin America are falling off the cliff. It is also true that the steep drop in energy prices has dealt a heavy blow to such charmless governments as Vladimir Putin's Russia, Hugo Chávez's Venezuela, and Mahmoud Ahmadinejad's Iran, with the hoped effect of curbing their mischief-making capacities.
On the other hand, the data so far suggest the economies of China and India are growing (not as fast as in the past but still growing), while America's economy shrinks in absolute terms. When the dust settles on this alarming and perhaps protracted global economic crisis, we should not expect national shares of world production to be the same as in, say, 2005. Uncle Sam may have to come down a peg or two.

And lo and behold, two and a half years later:http://globalpublicsquare.blogs.cnn....-to-fifth-spot

The United States fell to fifth place in a global ranking of the world's most competitive economies.
The World Economic Forum announced Wednesday that the United States fell in the survey due to its massive deficits and declining public faith in the government and political leaders, the Associated Press reports. The rankings are based on economic data and a survey of 15,000 business executives, it states.
The top spot went to Switzerland, which has held the number one ranking for three straight years.
The ranking by the Geneva-based forum put Singapore at second, Sweden at third and Finland at fourth. The United States had been in the number one spot in 2008 but has fallen for three consecutive years.

[motiv-8]

Maybe somebody who's good with economics can answer this: Doesn't the massive spike in the price of gold have a detrimental affect on the electronics industry, which uses gold for parts like transistors and wiring for cables?

[Nietzsche]

Maybe somebody who's good with economics can answer this: Doesn't the massive spike in the price of gold have a detrimental affect on the electronics industry, which uses gold for parts like transistors and wiring for cables?

I don't really need a degree in economics to answer this Q for you... There isn't that much gold in electronics, at least, not any more. Refined techniques and alternatives have made it so there is very little gold in the average piece of hardware. There are exceptions. Legacy equipment connectors can contain larger amounts, but you'll have to melt down quite a bit to make any money. You'd probably be better off going to the Yukon Territory and spending a year or two by a stream with a pan.

[Denny Crane!]

I don't really need a degree in economics to answer this Q for you... There isn't that much gold in electronics, at least, not any more. Refined techniques and alternatives have made it so there is very little gold in the average piece of hardware. There are exceptions. Legacy equipment connectors can contain larger amounts, but you'll have to melt down quite a bit to make any money. You'd probably be better off going to the Yukon Territory and spending a year or two by a stream with a pan.

This. If there was that much gold in a motherboard people wouldn't be so quick to chuck out a computer.

[Ahlerich]

investors always say keep 10% or 15% in gold not more.
the hype thats happening now comes due to people that dont want to make money by investing in gold. its people that fear the total collapse and want to secure their savings. of course this doesnt make 100% sense because if the total collapse comes what will you do with your gold? you will not be able to eat it and you will not really be able to buy potatoes with gold.
gold price now is simply representing the panic of the public that has some wealth. in germany thats particularly beacuse of the several hyperinflations we had in the first half of the 20th century

[Enemy of the State]

you will not really be able to buy potatoes with gold.

You could for thousands of years. And you would still be able to if it wasn't illegal to use gold as tender. If the fiat system collapses,people are going to go back to gold no matter what the government says. I'm eagerly awaiting for that day. Maybe people will finally figure out that we can't trust the production of money to a single banking cartel.

[Ahlerich]

You could for thousands of years. And you would still be able to if it wasn't illegal to use gold as tender. If the fiat system collapses,people are going to go back to gold no matter what the government says.

a gold based currency would mean government consfiscating all gold in private posession.

[motiv-8]

Yes, I do look forward to going back the ultra-convenient days of carrying around heavy metals to purchase basic goods....

[Sphere]

You could for thousands of years. And you would still be able to if it wasn't illegal to use gold as tender. If the fiat system collapses,people are going to go back to gold no matter what the government says. I'm eagerly awaiting for that day. Maybe people will finally figure out that we can't trust the production of money to a single banking cartel.

I always fail to see why this "single banking cartel" would be planning to collapse the world's financial system. There seems to be little to gain for them in it. On the contrary, their schemes (ECB, BoE, US Fed etc.) seem to have produced stable, rather predictable currency inflation for many decades now, which ... gasp ... benefits the financial sector.

Believe it or not, Gold dug out of the ground is far more fickle a beast than a fiat currency managed by experts. The availibility of Gold can swing widely as people choose to either to eat it up and stick it under a mattress or conversely slosh it around like candy (and this is leaving out the entire uncertainty of gold mining itself). This can be seen by simply looking at the swings in the price of gold, in which ups and downs of 10% in a few months are commonplace because nobody has control over it, leaving it all up to the whims of the exchanges. Yet a yearly inflation/deflation of the Euro or the Dollar at 3% gets has everyone buzzing, and endless editorals calling on these central banks to do their job and get it under control.

But perhaps more importantly than than the inability for anyone to easily control the availibility of gold, is that fact that in the past a gold currency could not be used in a counter-cyclical way, but rather tended to feed the cycle. E.g. in the 1930's people horded gold because of deflation, which in turn furthered deflation. With a fiat currency you at least have some way of trying to counter the cycle.

But this whole argument boils down to someone figuring out that central bankers can print as much fiat money as they want, and concluding that we shouldn't use a fiat currency. When the more correct conclusion is simply that those people would make very bad central bankers.

[Denny Crane!]

I see more future in alternative currencies than in gold to be fair. Bitcoin isn't the future but it is indicative that growth in alternatives is viable and will continue to be more viable and attractive as time goes on, can't see it happening to soon in the future and it would take innovation but it could happen, more easily than the Gold Standard.

[Condottiere 40K]

Except for jewellery, collectable coins and art pieces. I wonder if a life size solid gold replica of the Venus de Milo qualifies.

[Ahlerich]

Except for jewellery, collectable coins and art pieces. I wonder if a life size solid gold replica of the Venus de Milo qualifies.

i will invest in spanish dublones from sunken treasure ships then

[Condottiere 40K]

My cousin once decided to play buried treasure, so he took my aunt's collection of silver dollars and buried them all over (I assume like easter eggs); she says they never found them.