US Dollar Will Devalue by 20% to 30% (FREEPOM)

JcollinsEconomics, FREEPOM, Geopolitical102 Comments

Interest Rate Increases & Continued Gold Devaluation

By JC Collins

I’m just going to come right out and state it with absolute clarity.  Gold will continue to depreciate.

Not only that, but the Fed will continue with the planned incremental interest rate increases which are set to begin at any time now.  The normalization of monetary policy is considered impossible by many analysts and economic commentators. This is mainly because the larger play, being the transformation of the monetary framework, is not fully understood.

The incorrect assumption is that the US dollar will be replaced as the international reserve currency by the Chinese yuan, which in turn will cause the USD denominated assets (Treasuries) in the foreign exchange reserve accounts around the world to be “dumped”, leading to a flood of dollars coming back to American shores and causing the ever-threatened and often-predicted hyper-inflation.

It is concluded that this hyper-inflation will see a mad rush into gold and silver, leading to upward valuations in multiples of thousands.  With so many other alternatives developing (explained below), does this seem like a realistic scenario?

The volatility surrounding everything from commodity prices, exchange rates, sovereign debt, and equity markets, are jumbled together in passionate conclusions of doom and gloom.  We are told by many that the only viable means of protecting ourselves is to purchase more and more gold, which continues to decrease in value more and more.

Common-sense would strongly suggest that there are multiple paths forward from the point where we currently are located.  Though gold has its own unique and valuable qualities, and should be held in any strategically diversified portfolio, going “all-in” on one investment path is both harmful and irresponsible by those who promote such goofiness.

Let’s explore this in more detail.

Putin, the much-lauded savior of the misinformed world, has called for the end of using the US dollar in trade amongst Eurasian countries.  The time frame given for this change is between the years 2025 and 2030.  Hardly the mad rush out of dollars that is being widely promoted and regurgitated.

Russia, China, and most other emerging economies, along with some developed countries, are overtly calling for the diversification of the foreign exchange reserves.  The large accumulation of USD in these accounts has caused dramatic and unsustainable imbalances in the international monetary framework.

The most recent example of this can be found in the strength of the dollar over the last 6 months.  This dollar strength has put incredible downward pressure on the currencies of the emerging economies, forcing some to devalue their domestic currencies in order to maintain the exchange rate regime which has held against the dollar for decades now.

China has demanded that the Fed does not raise interest rates as this would further strengthen the dollar and put even more pressure on the yuan.  But perhaps this is exactly what needs to happen, as such actions by the Fed, being the normalization of monetary policy, will force the fragmentation of the existing USD exchange rate regime.

This would fulfill the plans of the US themselves to have the foreign reserves accounts diversified.

I was recently asked during a business dinner how I could expect the dollar to depreciate at the same time that interest rates begin to increase.  Linear logic would dictate that an increase in interest rates would strengthen the dollar and cause its value to increase, not decrease.

But what isn’t considered in that path of logic is the diversification of the foreign exchange reserves (being the reduction and replacement of USD in those foreign reserve accounts) with alternative assets.  This diversification will allow for the USD exchange rate arrangements to begin transitioning.

China has already begun to do this with its recent changes to its fixed daily rate.  In the post China’s Rate Change Is Preparation for Widening of Trading Band, we reviewed how the PBoC will gradually widen the trading band in increments until a free-floating anchor is reached.  This widening of the trading band will not just allow for the yuan to depreciate, but it will also allow for the yuan to appreciate higher as China slowly diversifies its foreign exchange reserves in increments over the coming years.

Less demand for dollars means lower value for the dollar.

It is probable that the PBoC will even maintain a strategic level of USD in its foreign reserves account.

The other part of this equation is that China will not be the only country diversifying reserves.  As mentioned above, the Eurasian members, led by Russia, will also be diversifying foreign reserves, as will some American allies in the coming months and years.

This is not a slight against the US dollar, and it does not mean that the dollar will collapse or die a horrible death upon the jagged shores of hyper-inflation.  It simply means that other countries, along with the US themselves, recognize and accept the need to reverse the accumulation of USD in the foreign exchange reserve accounts around the world.

Keep in mind, there will still be a level of USD in those accounts.  The difference will be in the compositional balancing of those reserve accounts, primarily amongst three core reserve currencies, the dollar, euro, and yuan.

Though some countries and regions, such as Japan and the Euro zone, may still utilize non-normal monetary policies, such as QE and low interest rates, for some time yet, the US will now be moving forward on the normalization of monetary policy and will not implement any new QE strategies, and will begin to increase interest rates.

As stated above, this normalization of monetary policy will begin to force the required changes and give both the American administration and the Fed the necessary blame-shifting opportunity which would otherwise not be available to them.

The sole-dominance of the dollar is beginning to erode and nothing will stop this diversification from happening.

When the yuan is finally severed from the USD and stands alongside the US currency and the euro as one of three primary reserve currencies, all three will be competing for dominance in a monetary world of volatility and shifting balances.

We can expect increased instability in exchange rates, financial markets, and the ability of the US to fund deficits, which is directly related to the push for solutions on geopolitical hotspots, like Iran and Cuba.  Reduced deficit spending means less to spend on manipulating the rest of the world and moving military hardware from region to region.

The balancing of the monetary system around three core reserve currencies is also reflective of the geopolitical challenges and tension which has developed in Eastern Europe and the South China Sea.  These are the areas of the competing currencies to the dollar, being the euro and yuan.

The Fed can no longer neglect its dollar policy, and normalization must begin.  Initially, when financial volatility surges (we are in the early stages of this now with just the hint of a rate increase), it will push the dollar stronger and force further action from China and other emerging markets, like Vietnam.

As the broader diversification of foreign exchange reserves deepens, the historical increase of the USD and the decline in the value of other currencies will begin to lessen.  As the USD exchange rate arrangements begin to fragment it will become more important for the US to have the dollar depreciate.

This depreciation will be assured with the diversification of the foreign reserves.  Less dollar demand.  Basic economics.

The corresponding volatility, initially caused by the diversification, will begin to be offset by the additional (and alternative to the USD) safe havens of the euro and yuan.  This is where most analysts have gone astray on future gold valuations.

The nature and history of fiat currencies have been overused to support the conclusions of appreciating gold.  Though historical measures can be used as a reference point, and place of origin for evolving analysis, it does not necessarily reflect a certainty for how future trends will unfold.

What we are witnessing in the monetary world today is the re-balancing of currency as opposed to the collapse of currency.  Some will appreciate and some will depreciate.  All will leverage one another in a new framework which will slowly emerge in the coming months and years.

This transformation will ultimately reach the point where a multilateral asset (the SDR being the obvious selection) will be utilized to further balance the international monetary framework.  How long it takes for this happen will largely depend on the level of expected and unexpected volatility which ensues.

In the meantime, the USD will begin to depreciate.

It can be expected that the decrease in value will be in the 20% to 30% range.  There are a number of reasons this will be the range.  The decrease in the dollar will increase the costs of imports for Americans.  This increase in import costs will be offset by the increase in domestic production which will unfold from the decrease in the cost of American exports.

With the increase in domestic production and jobs, the momentum to increase minimum wage will grow.  It’s hard to imagine the minimum wage increasing higher than the 20% to 30% range which is widely discussed.  Though this is not the tell-all metric by which to measure any dollar depreciation, it is a solid place to begin further analysis.

So, with the much hyped collapse of the dollar unlikely to happen, and the rise of dollar alternatives, found in the expansion of the euro and yuan safe havens, we can expect that gold, after some initial volatility itself, will continue on its downward trajectory of depreciation.

Funny, while we are told it’s the increase in interest rates, and the overall normalization of monetary policy by the Fed, which will push gold into appreciating, it is actually the opposite.  But take heart, the opportunity to buy gold at even lower prices than today will provide future generations with stable wealth growth as the precious metal begins to appreciate again over the coming decades.

Long-term planning is the name of the game.  – JC

Also read the latest post titled United Nations & the Sept 15th Convergence of IMF/BRICS Mandates

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102 Comments on “US Dollar Will Devalue by 20% to 30% (FREEPOM)”

  1. JC, I’m not sure why you let the goldbugs get to you so much. As you know I’m a big proponent of holding gold bullion at the moment, but I don’t do so thinking the world is going to end or that hyperinflation is around the corner. To me it’s a hedge against central banks/governments doing stupid things.

    I don’t pretend to know where the price will be in six months but my guess would be higher. (I don’t believe Asia is sucking up gold bullion in the expectation of seeing its price go down.) Although I agree with the majority of your analysis, the one part that is confusing is that if you believe the dollar depreciates in a world that currently prices bullion in US dollars, then gold should go up in dollar terms.

    Anyway I think the next several months will answer these questions and bring clarity to the new financial system on the horizon. With the turbulence that may lay ahead, I think the price of gold may be the least important issue for most people.

    Btw- I hope all is well up there for you and your family, as I know the oil industry has hurt the local economy for you guys.

    1. They don’t get to me my friend. I’m try to help those who fall for the whole doom and gloom gold bug script. I’m sure there are few that like to think they get to me though.

      Things are okay up here. Lots of job losses, but I’m still chucking along and trying to diversify the company business outside of oil. But with all commodities down it’s challenging for sure.

      1. Holding gold has little to do with Doom & Gloom my friend, but everything to do with a good old fashion run of the mill monetary reset.

        It’s a must own asset during all monetary order transitional periods, which rarely if ever come off without a hitch.

        And trust me, those that control the the current monetary levers are certainly no shatper than all those that came before them, I assure you.

        In fact, they are likely less savy and therefore more dangerous….

      1. Greetings again JC
        What you just said about the U.S. Dollar depreciating against it’s
        Main trading partners can NEVER happen…PERIOD…
        It can only depreciate against GOLD..
        The FX market is rigged…Countries like China will never let their
        Currency appreciate against the Dollar..
        It would destroy their country…
        I treasure your thoughts, but not this one

        Thank you
        Tony

        1. I would suggest you look into how China is in the process of switching from a trade exporting model to a trade services model. The post The Redback Revolution from back in March will give you a good place to start. Nothing stays the same forever, and China has been very open and strategic about transiting from their existing economic model. This transition is fact, not fiction.
          http://philosophyofmetrics.com/the-redback-revolution/

  2. About an hour ago I was going to ask on the September Foreshadowing thread if you had another post cookin’ on the stove because I was feeling really hungry.

    Now I feel full. As always, you rock and thanks for making it a FreePOM. Just reposted it at the usual place.

    Cheers.

  3. Looking to clarify my understanding of your forecast…If the USD declines 20-30% against the Euro, and gold depreciates vs. the dollar (let’s say 20%), are you in effect saying that gold is going down 40-50% against the Euro? This scenario seems highly deflationary and it’s hard for me to imagine the high level of economic activity you are forecasting under this scenario. thx.

    1. I don’t understand the flow of logic in your question. The value of gold is not pegged to the USD. The only reason gold will go up when the dollar goes down is because there has been a lack of an alternative safe havens. With the euro and yuan, and eventually the SDR, there will be other safe havens. As the amount of yuan and euro in the foreign reserve accounts increases, that will build confidence in those currencies to act as safe havens in times of crisis. This will give alternatives to the dollar, and in effect provide three suitable safe havens as the forthcoming crisis deepens. Does that help explain it better?

      1. In addition Adam, as I’ve stated previously, gold could play a role in the SDR. This would likely be the one thing that would stabilize the price of gold. Let’s see what happens. Could take awhile though, unfortunately. Or could happen sooner than any of us think, in response to the next crisis.

        1. Greetings JC
          I respect your knowledgeable opinions and consider your thoughts…BUT…
          Ray Dalio, the manager of the worlds largest hedge fund, with over $150 Billion under management has this to say…

          “If you don’t own gold, there is no sensible reason, other than you don’t know history, or you don’t know the economics of it.”

          I have investments in gold, and I think when the East Asian countries corner the markets by purchasing all the available supply, which they are currently doing to the tune of 40-70 tonnes a week out of the Shanghai Gold Exchange…the amount of which is greater than the annual current world mining supply…some thing is going to happen..

          Some how I still believe in the old adage, the
          “”He who holds the gold, makes the rules””

          Well currently the uS holds the most gold at more than 8000 tonnes..
          This may change

          Take Care

          Tony

        2. I read your ‘The Coming SDR Gold Standard’.

          To me, this the following is the best indicator that gold will become part of the SDR:

          As Bloomberg reports,

          “A bit of gold” could help stabilize SDRs, Lord Meghnad Desai, chairman of Official Monetary and Financial Institutions Forum, says at precious metals conference in Dubai.

          “We could ask that gold be nominated as part of the SDR. That is one thing I think is quite likely to happen”

  4. When? This time frame seems awfully close to the time that Martin Armstrong has said that America loses its #1 economy. In fact I noticed your gold prediction sounds like his too. He doesn’t talk about imf and sdr’s as much as you but, he has mentioned it. I’m curious about what you think happens in 2017-2020 (pre-hyperinflation)?

    1. I’ve never read anything by Martin Armstrong so I can’t honestly say. And what hyper-inflation are you talking about? My analysis does not include hyper-inflation in the foreseeable future. At least not for the US or any other major economy. So the framing of your question doesn’t work for me.

      1. Martin Armstrong is very conservative when it comes to investing in gold, just as you are JC. I use to follow him a lot.not as much now. He uses history quite a bit in his analysis. He has a little bit of a different take on the economy, but as far as gold is concerned he is pretty on point with you JC.

  5. Let me clarify my earlier statement. Your prediction of the value of dollar to the euro being less in 6-9mo. ISN’T similar to Armstongs time frame. He thinks the dollar will enjoy appreciation for a couple years due to emerging market problems.

    1. I’m unable to reconcile the flow of logic in your two separate comments. I’m not sure what you are asking. In addition, I didn’t say 6 to 9 months for euro/dollar changes, I said 3 to 6 months.

      1. Yes you are right you did say 3-6. The dollar seems to be getting stronger and there are signs of weakening emerging markets that seem to point to an even stronger dollar well beyond 6months. The euro appears threatened by a brexit or other exits from troubled countries which weakens confidence in the euro as an investment. What about the euro makes you believe it will not continue to depreciate for the next couple of years?

        1. As stated, the dollar exchange rate arrangements will begin to unravel as a response to the strengthening dollar. There are only a handful of alternative currencies that will be able to handle larger volumes of capital flow and reserve accumulation. The euro is one of those. As is the yuan.

  6. You responded quicker than I could add … But seriously? You never read any of Armstrong…? He is worth a look just like your site is worthy as credible blog! Much respect for your analysis.

    1. Haha, sorry friend. I’m out of town for work and sitting here in the evening responding while eating sugar-ice cream. It’s flowing fast. Yes, seriously, I’ve never read anything from him. Thanks for the respect.

    1. Sorry if I come across as being difficult. I don’t mean too. I’m very literal and don’t often get the subtleties of non-literal and insinuated comments.

  7. I am quite old enough to remember the high inflation and gas shortages during ‘The Peanut’ years (1977-1981). I had to work three separate jobs (days, nights, and weekends) to feed and provide for my family.

    The $USD will be devalued by at least 30% on the first pass and then a few months later after some of the shock is absorbed I strongly suspect that there will be a second devaluation of at least another 30%. A total of a 50% devaluation of the $USD within a 12-18 month period amounts to a ramp towards hyper-inflation.

    Inflation is and has always been a means by which governments and money lenders stealthy steal labor and wealth.

    1. A couple things, the US government will have increased opportunity to tax the population, as there will be more jobs from increased exports. The velocity of money will likely remain stable. And last, I see the amount of USD in circulation actually decreasing as the international demand for dollars erodes further and deficit spending at home decreases. The pieces will all flow together with some rumblings of discontent, but nothing close to being defined as hyper-inflation. I respectfully disagree my friend.

      1. Thank you for you response. I have personally experienced high inflation and its destructive affects. Therefore, in these regards I sincerely hope that you are correct and my analyses and expectations are incorrect.

  8. “What we are witnessing in the monetary world today is the re-balancing of currency as opposed to the collapse of currency.” JC

    Very precise statement. Couldn’t agree more. And I also agree that central banks around the world have to much power and control to let hyperinflation happen. Not yet at least, more like by 2032. And I concur with Casmar about Armstrong, who has built a super computer which predicts markets without bias or emotion and incredible track record. The computer predicts tough choices to be made Oct 1 thru next year but most likely the stock market low in March 2016. But new highs in 2017, panic cycle 2018, bottom 2020 then economic confidence till 2032. Then TSHTF. After all I have come to understand thanks to JC this repeating of cycles fits perfectly with POM.

  9. This IS a compelling article, but what do you say about the track record of fiat currencies? I am not saying this as an argumentative point. It is a legitimate question. In the 5,000 years of monetary history 100% of all fiat currencies have failed. They all return to their intrinsic value, which is zero since they are backed by nothing. Throughout history, precious metals have proven to be the only form of real money. I thought I had done my due diligence, but now I am not so sure about the investments I made to protect my retirement assets. Only the powers that be know how this will all play out. It has already been decided. The majority of us are left scurrying to find a safe place to invest to protect our hard earned money. (Respectfully).

    1. Though I share your view on fiat currency, I have yet seen the conclusive evidence that they all return to their intrinsic value of zero sufficiently quantified to 100% satisfaction. On the flip side of this, gold is deflationary by nature, which is why gold standards are eventually debased and abandoned. Fiat currency today, for the most part, serves a function as the evolution of money. Some currency in existence will inevitably be demonetized and new currency issued, and some currency will carry on in their evolution process to help construct the broader and more representative SDR. The SDR basket of currencies will evolve into a real currency, like the European Monetary Unit basket evolved into the actual euro currency. We will see this evolution/consolidation of most existing currency before we see them reach to zero. This process will take decades. There is a lot of unsubstantiated information out there Diana. Historical trends, both accurate and made up, don’t always equate to future trends. There is a wealth of information on this site, provided by both myself and other readers. Hopefully you can find value in it and realign your own personal due diligence to increase your comfort level.

  10. Hi this is my first time posting but I have been reading here for the last 6 months. Despite being a somewhat intelligent and financial literate person (I’m a CPA) I do struggle to fully understand all of your writing.

    If the USD were to depreciation 20-30%, this would in effect cause price inflation relative to goods/services, correct? Would a good hedge against this be an investment in TIPS treasury inflation protected securities rather than holding cash? (I do not consider any responses to my question to be investment advice and my question is purely hypothetical.)

    1. The cost of imported goods would increase. This would equate to inflation, but will be made up by wage increases and more higher paying jobs. No doubt there will be some losses on those holding dollar denominated investments. I’m not familiar with how TIPS works, so I’m hesitant to express an opinion either way. One measure I use is that countries with trade deficits, like the US, will have their currency depreciate in order to increase exports. Countries with a trade surplus, like China, will have their currency appreciate in order to reduce exports. Currency investment strategies should consider these balance of payments corrections.

  11. Thanks for another great post, JC. I’m not a gold bug particularly, although, with my limited knowledge of monetary history, I can see why many predict collapse/hyperinflation. I can also see why fiscal adjustments and IMF substitution accounts might work to control the dollar’s depreciation, making this time different.
    I would make the observations, though, that China and its SCO partners seem to envisage a more important role for gold in future, and that gold can rise in price whether the dollar and interest rates are falling or rising. At the moment, the reported tightness of supply in the physical markets seems at odds (to say the least) with the price (which is set in the paper markets). Something feels very wrong.
    I’m not an economist either, and I’m genuinely puzzled by why, JC, you think that inclusion in the SDR will give any currency safe-haven status? The USD, GBP, JPY and EUR are all already in the SDR basket, but their real purchasing power does nothing but fall over the medium and long terms.
    I’ve always agreed with “diversification is protection from ignorance” (Buffett?), but see diversification as weakness. I see strength in knowledge and prefer to invest with high conviction and little diversification. Eliminate the ignorance and the diversification. Needless to say, particularly in the present environment, it’s easier said than successfully done!!
    What is particularly difficult, in my opinion, is for people like me, close to retirement, to choose assets for a portfolio which will provide adequate real returns and security of capital over what will hopefully be a long and adequately-nourished retirement. It seems to me that the traditional safe havens (cash and bonds) are at risk from debt re-structurings and bail-ins. SDR futures, assuming the counter-party survives, would neither win nor lose very much? The financial systems of Europe and China (not to mention Japan and the US) are riddled with asset-price and credit bubbles and inspire little or no confidence in me. Perhaps I should buy the shares of US-based manufacturers and hedge the returns into RMB? Or perhaps the new American factories will be mostly Chinese-owned anyway?!
    Decisions, decisions!
    If you were retiring next year, JC, what would your portfolio look like?!
    Thanks again for your wonderful insights and thought leadership.

    1. I would hold mostly currency of emerging economies, especially those with trade surpluses and big foreign exchange reserves. A little gold. More silver. And a constant stream of incoming knowledge from multiple sources. The ability to remain nimble and make quick decisions will be instrumental. In addition, modernization and infrastructure development in the emerging economies will push commodities up again. It’s cyclical. Just may take a year or two more.

      1. Many thanks for your prompt reply, JC. Much appreciated. Your thoughts are very similar to mine. Incoming information is the least of our problems these days! When you refer to “currency of emerging economies,” do you mean bank deposits and/or money market funds in those currencies and, if so, what would your assessment be of the risk posed by bank insolvencies/resolutions/bail-ins during the process of transition to the new Multilateral Financial System, please? I recall this article making a big impression on me:

        http://www.telegraph.co.uk/finance/personalfinance/investing/11686199/Its-time-to-hold-physical-cash-says-one-of-Britains-most-senior-fund-managers.html

        In that context the idea of abolishing cash and making currency 100% digital sounds like a bad one to me.

        Thanks again!

  12. Great post JC!! I think I finally got my head around this now. I also just read your e-pub and really enjoyed it. You have a real gift with words and an ability to see things my mind can barely understand. Since I’ve been a member here I feel better informed and have since pulled back on my metals greatly …. with more money going into currency.

    Do you feel the sanctions will be lifted on Russia at some point in the coming year? That would send the Ruble to a more normal level. Tough for the EU to stay mad at their gas company during winter!

    1. Thanks Shawn. Comments like yours make it all worthwhile. In regards to the sanctions on Russia, they could be lifted when the fate of Ukraine is decided, or they could just eventually rot away through irrelevance, due to some of the changes we are discussing here.

  13. Great post JC. I just read your post and comments with awe and concern. I recently watched the Jim Sinclair video on the increase in cost of gold and was shaken. I was about to change my portfolio into more gold until I read your post. Now I’m unsure if I should do so or wait. As you mentioned I have a diversified portfolio of foreign currency silver and gold. Again thanks for the great information.

  14. JC – Another well written and informative post.

    One thing, you mention alternative “Safe Havens” to the USD, being the euro and Yuan.

    Given what we are currently seeing in both those jurisdictions (Euro – with many of the member nations being technically bankrupt, China which is experiencing multiple bubbles e.g. property and equities) I am interested in why you believe either of them would be safe havens.

    Cheers

    1. Not all euro zone countries have debt issues, and the US equity markets have dropped more than China’s since the beginning of the year. Don’t believe all the hype you hear or read. The euro and yuan are slowly accumulating more and more in the foreign exchange reserve accounts. This will increase in the coming months and years. This is what will build further confidence in both currencies as safe havens in a time of crisis. Along with the USD, this will provide investors with three safe havens.

  15. Off the cuff question JC…the other day I was thinking about when the USD became the reserve currency and how the Bancor was dismissed at Bretton Woods (reason unknown, maybe just wasn’t it’s time as the prototype needed to be tested, i.e. USD?, then a second Beta Test, the SDR?) Does this make any sense or am I waaaay off the mark?

    I mean, if one wants to assure as best they can that something will succeed it needs to be tested and tweaked as it goes along.

    1. That could be the case. You are right, there is a lack on information on this matter. I know you have been researching into this, as have I. Something tells me that to understand why the dollar was chosen over the bancor back in 1944 will tell us a lot about what is going to happen in the coming years. I keep coming back to it. Let’s stay on it.

      1. Greetings again JC
        I think I can interject here, by saying the reason the US Dollar was chosen to be the reserve currency in 1944 is simply because it was backed by 22,000 tonnes of gold….
        History buffs may remember to saying.
        “The dollar is as good as gold”
        Countries could exchange there reserve currency dollars for gold, which France did, and finally Nixon closed to the gold window, because the US was down to 8000 tonnes, in a short 20 years…

        Take Care

        Tony

  16. Another big job, JC.
    Looking at your figures it not seems to be too much interesting exit from euro to yuan, except euro contries adopt domestic currencies, although I see this matter politically delicate. Have you some news about how things are developing now in Greece and arround European crisis?
    Regards

    1. The same trend is continuing in Europe. I would suspect we will see this bubble over throughout the fall. Watch for the introduction of systemic changes in the statements by officials.

  17. An interesting take on it JC. I personally lean towards the freegold take on things and FOFOA. He too believes that the currencies will remain as the main conduit for trade, but that gold will be ‘freed’ from currency to claim it’s proper position as a stable long term wealth safe haven.

    One question I have for you in regards to your article, if the dollar is devaluing and UST’s are coming home to roost…. doesn’t that then push up interest rates. Wouldn’t increased rates lead to a bankruptcy of the USG. Rough math, a 30% devaluation in the currency still leaves $12.8 trillion in debt. Sure, our exports will increase, thus increasing our tax revenue…. but that debt burden is still enormous at higher interest rates.

    Also, wouldn’t the austerity imposed by less demand for UST lead to a large decline in the economy, decreasing the tax base and again making the debt load that much harder to deal with?

    1. There will a level of sovereign debt restructuring for all nations. Watch the upcoming UN General Assembly. The UN has been working on the sovereign debt issue for some time now. But without actual details it’s hard to determine just how this will look. The SDRM of the IMF (sovereign debt restructuring mechanism) could play a role. My post The Sovereign Debt Complex from back in May explains some of this in more detail.

      In regards to a “large decline in the economy”, as the dollar depreciates against other currencies, US production will increase as goods exported from America will now become affordable again to other countries. This is why Trump is screaming “Make America Great Again”. He knows what is happening and how it will improve America’s exporting. This of course will also increase GDP and make the debt-to-GDP ratio more manageable. Add that to sovereign debt restructuring and you have an extremely probably path forward.

      There is literally a small library of information here on POM supporting this conclusion.

      1. JC, I’m stuck on this concept. How does the IMS allow additional safe haven currencies at the same time that it implements debt restructurings? If one is buying sovereign bonds in a safe haven currency, I would think the investor is doing so because the chance of losing capital is so low. I don’t want to buy euro denominated bonds, for example, to protect myself, if I am risking that those bonds receive a haircut in a restructuring event.

        1. You’re assuming debt restructuring will only function, or progress, one way. There can be various methods which don’t include haircuts. Perhaps its time to do another write up on this topic. There has been a lot of info previously provided on POM in regards to this. The Sovereign Debt Complex being one of them. That’s the best I have for you right now my friend. I’m exhausted.

  18. Just checking if my comment was quarantined or something. Do you only post/answer subscriber comments on your public post? Feel free to email your response, thanks!

      1. Sorry about that 🙂 Looking forward to your response. Love your work by the way… different than anything else out there. No one else really seems to understand how the SDR factors into this transition quite like you do.

  19. “It can be expected that the decrease in value will be in the 20% to 30% range. There are a number of reasons this will be the range. The decrease in the dollar will increase the costs of imports for Americans. This increase in import costs will be offset by the increase in domestic production which will unfold from the decrease in the cost of American exports.”

    Could this explain the recent massive investment in the development of 3D printing technology over the last few years?

  20. Greetings again JC.
    Well, what I think is interesting is that China is buy 50% more gold this year, than last year, but people want to talk about SDR’s paper money, and not real money…The Shanghai Gold Exchange is selling 40-70 tonnes of gold per week…where as the Comex has a total of less than 11 tonnes of ‘Eligible’ gold to meet delivery demands this whole month..
    According to the Financial Times article the ‘piper’ is paying more than spot to get ‘delivery’ gold….in other words ‘backwardation’..
    Knowledgeable people would recognize this as an impossibility for gold or silver to be in backwardation….yet the music goes on…believing all is well, when in fact the chimes are ringing the game is over…

    http://www.ft.com/intl/cms/s/0/eae18206-5154-11e5-b029-b9d50a74fd14.html?siteedition=intl#axzz3kcLnPBUf

    Take Care

    Tony

    1. There are multiple ways of interpreting that information, and just as many explanations for why it is happening. None of which may have anything to do with gold increasing in value. I do appreciate the input you’ve been contributing though. Keep it coming. It’s great for readers to consider other possibilities.

  21. This entry is awesome. I can honestly say this is the best explanation of what is coming around the bend for the dollar that I have ever read. You have laid everything in a sequence of events that just makes it so easy to understand. This is why I love your site and I respect your work so much.. I can’t even tell you the level of respect I have for you. Thank you for this entry as I have had a difficult time talking to friends of mine who still are harping on the dollar “collapse”.

    Did you say that interest rates in the US will rise in September..did I remember that correctly?

  22. Hey J.C, thanks for another beautiful article and it’s amazing that you respond to every question. Lately, I’ve been thinking that the problems in Russia&China are long term and I’m somewhat convinced that Russia, particularly, will disintegrate some point in the future. Too many problems there and if and once the overly-Putinized Russian dream fades away, Caucasus&Siberia&Tataristan will become a nightmare for them. Turkey is succesfully being used as a trojan horse in the Southern Corridor to diversify away from Russian gas lately and stir up Turkic nationalism in Russia(Crimea,Tataristan) and to some extent as well. China, has also started to feel local problems in addition to renewed fighting in Afghanistan.

    I’m not being naive to claim this is going to stop SDR with yuan from being implemented; on the contrary likes of Asian Currency Unit, or ECU makes more sense to me as they act as anchor for divided&weakened countries,or so I imagine. Would you agree with such analysis, or am I exaggerating the current events in Russia and China? Dripfood often correctly points out to the emerging city-state structures in the world and this also fortifies my belief. Finally in Turkey, we’re getting our dose of secession and heavy fighting, a Kurdistan state will finally become a reality perhaps by 2020.

  23. Hello.

    Only as a curiosity:
    USD will devalue by 20/30% … Ok.
    Gold will continue to depreciate… Ok.

    and the gold priced in euros, where do you think it could end within a year?.

    Thanks.

    1. Gold will continue to depreciate. A lot can happen in a year. Gold could be added to the SDR. China, and others who are repatriating gold, could place gold on deposit with the IMF instead of the US. Pending any of these things taking place, gold will continue to depreciate. If those things happen it will stabilize.

  24. Gold = Goofy?

    I’m not so sure that’s a fair description of the best performing asset class of the new Millennium which has over 6,000 years of long standing value. Not to mention acts as the last common denominator of the existing monetary order, once the trust, as well as the existing means of exchange between nations has been violated by grossly issued credit which can never be repaid,

    Same as it ever was;-)

      1. I stand corrected JC, you are quite right.

        In my haste I completely missed the “all in” qualifier. And for the record, I certainly concur that going all in anything is off the hook bonkers;-)

        Although, in defense of those that advise gold as an essential wealth protection asset, I’m hard pressed to find anyone or any firm that advocates for an “All-in” investment thesis……..

        Who are these goofy buffoons you speak of mate? Poetic license Hyperbole to emphasize your point perhaps.

        All the best my brother in arms…..

        1. I’d hate to specify names (as that seems to have gotten a lot of negative reaction from others before) but there are certain sites and personalities which are constantly promoting the slightest movement in pretty much anything as a sign that it’s time to put everything into gold and silver. It’s almost comical in its delivery. That is mainly what I’m referring to, as it is upsetting that anyone would suggest to others something which could cause them major financial strain.

          As humans we always forget that we are meant to be in service to each other. Providing such “goofy” advice is definitely not in service to one another. It is more in service to ourselves. Unfortunately that is the state of the world today. Everyone in service for themselves.

      1. Well, what I said is that they would be well advised to stay clear, not that they have or are staying clear. Although, I would surmise that they do have their doubts now, having being rebuffed eternally on this score.

        Moreover, I do maintain that the IMF/ SDR is primarily a tool controlled by the western monetary authorities, not sure their intent has China’s best interests in mind sir.

        1. But Bruno, they have not been rebuffed. That is the big twisting of facts which has been spread around the internet like a disease. The IMF stated that the decision will still be made by the end of this year. The delay is in the actual effective date of the new basket. I’ve written on this extensively, and the new post on the United Nations and IMF/BRICS convergence puts any doubts to rest that China and BRICS are not integrated within the larger international financial order. The IMF and its SDR are tools of the international bankers, not western bankers. In fact, there are only bankers. And they no longer require the US to be at the center of the game. This shift is happening, pretty much as I’ve presented it. The US is being isolated, as predicted, and the multilateral movement is building, as expected. Also read Meet the Asian Monetary Fund for further details on what I’m talking about.

          1. Well, I guess I’m not as altruistic as you are JC. Bankers like all others rarely cooperate or reason for the common good.
            I expect major turf wars to ensue on that score.

            Furthermore, the fact that all of the BRICS are still looking in from the outside today in terms of the IMF, demonstrates to me that they have been egregiously kept out of the club. In my estimation, the U.S. & it’s western proxies still own the IMF, and the United States has by far the largest military force on the planet for a reason. Thus, I’m not sure we can count on reasoned moderation here, nor that the U.S. will simply stand down without a fight, in order to rebalance the gross excesses it has gorged itself on, particularly in the last 35 years.

            That is precisely why I postulate global conflict prior to the sober cooperative reset you envision.

            Men typically come to terms after conflict, particularly in matters of money.

            I do think you are right that we are heading for a global means of exchange, but where we differ is what comes first before we get there. I see conflict where you see cooperation and reason.

            We shall soon find out, at least in our life times.

            Best,
            Bruno

          2. I’m not sure on full reason and cooperation, as there will be some rumblings and challenges (as there are now), but let’s hope I’m right on the avoidance of all out war.

          3. I certainly hope you are right, and that I’m wrong about this. However, the manufactured Ukraine conflict and the Russia’s recent counter moves into Syria are ominous to me. Seems like the chess pieces are being positioned. Not to mention, that Japan & Taiwan are rapidly arming themselves for a reason, as they certainly look like isolated vulnerable targets out in the Pacific, and the Chinese have not forgotten the atrocities of Nanking Massacre….

            Also, what is really happening in MENA & Oil………Seems to me like the two opposing sides are quickly developing there as well.

          4. I agree that we may see some regional conflict, and the Syrian situation also worries me, but I don’t see the large all-out war between the major players.

          5. We shall see sir. Things tend to escalate in these matters, especially when the global economy freezes up, and there are certainly many early indications of that.

  25. I am a longtime small-scale miner and I never really bought into large advances in the price of gold other than the one that happened in the past decade (+). There is an estimated 100 million artisanal miners (dis-organized) now that produce 20% of the gold worldwide (WorldBank). This number of miners would swell greatly if the old workings were to become workable again in a great increase in the price of gold.With it, already known remote deposits also become profitable so their would be an increase in production with the big guys also . I haven’t seen where these aspects have been covered by those whom call for an exploding price of gold. Seems small-mining would be outlawed in a huge increase of price. I must say, although, it’s really hard for me to trade some color in for some Yuan…it seems downright backwards and traderous.Something for nothing.

    Then again I never made money in anything other than what I do,and just barely… so $1500 come on now, pretty please!

    1. I guess the name of the site above should say it all Economic Collapse. The part that kind of jumped out at me was the part that said..Putin is going to pass legislation to ban the dollar..paraphrasing..Where is this coming from JC?

    2. What they’re not saying Dottie is that they want to eliminate the dollar in trade by 2025 – 2030. Hardly a panic. Like everything else, these characters take everything and twist it.

  26. One last comment, if I may.

    Gold may well have one final leg down, but I assure you those that are and will continue to do the most buying of the undervalued hard asset are the very same ones driving down the price via the free counterfeit funding to their multinational banking agents, encouraging them to short the existing paper derivatives markets with abandon, in order to drive down the price of physical right into their awaiting hands. Namely the central banks of the world.

    They know a monetary reset is at hand, and those are typically not orderly, and nearly always very messy, which is why the last viable common monetary denominator always stands so tall, as the trust between the nations has been ruptured.

    For the SDR to truly establish itself, it requires mutual trust and monetary order between the nations, and that will only arise after the coming monetary mayhem storm subsides.

    In the interim……………Got Gold?

    1. If I may, one additional point to underscore the above.

      JC, you often make reference to Bretton Woods as the previous cooperative monetary conference which decided the fate of the world’s monetary order moving forward. I would like to underline that it only came about after the absolute mayhem that was WWII.

      What makes you so confident that today’s global actors will be so much more sober / civilized in setting up the coming new global monetary reset / order?

      I for one, don’t have much faith in today’s global leaders. In fact, there may well be a good case to be made, that they are perhaps even less astute………;-)

      1. I’ve often considered that. I feel like the powers in this world have been at war for the last 15 years anyway. If not longer. I think we are further along on this monetary transition than many of us even consider. We can use the pass as the absolute determining reference for what will happen in the future.

        As for the clowns leading this, I believe they are only representing a far stronger and more intricate network of internationalists who are very aware of exactly what they are doing. As Carol Quigley stated.

  27. Short term history (80’s and 90’s) teaches that average people (99%) wil turn to the next best paper currency in times of crisis. Gold played no substantial role for the vast majority of people confronted with sudden crisis.

    Todays cash is predominantly paper and digits, trending towards digits. Nothing suggests us going back to using hard and heavy materials as payment ever again. Not even in severe crises.

    On this planet, for this ‘civilization’, gold will never be a method of payment for the masses again.

    1. Yes, dripfood you are correct…

      There is an old saying;

      “”Gold is the money of kings and sovereigns
      Silver is the money of gentlemen
      Barter is the money of peasants
      Debt is the money of slaves
      Fiat is the money of fools”””

      Think about that one if you will !!!

      Take Care

      Tony

      1. Appreciate the input Tony. Dripfood, myself, and others here who comment about gold do understand the importance of gold. We just don’t think it will play as big of a role as many openly predict. Even if it is added into the SDR, it will play a similar role as it did under the original Bretton Woods. For the record, I’m not anti-gold. I think everyone should own some. I simply don’t agree with the majority of the predictions on where gold is going.

        1. Greetings again JC;

          Well I think you are probably correct in your thought process about gold playing a vital role…It won’t…
          There is, however, a thought process espoused by “” FOFOA””
          He has a website named after it…
          He foresees “FreeGold”..
          eg; Letting the price of gold reach it own price, NOT controlled or
          manipulated by market participants..
          I’m not sure that will ever happen…but for right now it seems like a good theory
          I agree with you that at some point in the future, somethings
          will happen….
          I’m just not smart enough to know what it will be, and that’s why
          i continue to search for answers,
          Like “”POM””

          Thanks & take Care

          Tony

  28. I have watched, JC, that Danish Krone has had little variation against Euro during 10 years (+,-,1,5% mainly in the last 4 ). I have a couple of questions about that.
    a) Why D.K. has been so pegged to the Euro?
    b) Is it conceivable that this trend will be the same when triggering events happen?
    Regards.

    1. Rodriguez, maybe it has something to do with the fact that the Danish Krone had always been part of the ECU basket and Danmark is in some kind of long term holding pattern to joining the Eurozone? Just a guess though…

  29. Hi JC,
    I really want to invest in the RMB but not sure the best way to do this as I am a retail investor living in the U.S. I was thinking one of the three ETFs that currently track the yuans performance. Namely the CYB, FXCH or CNY. In your opinion are these good vehicles to play the coming appreciation?

    I also travel to China quite a bit… Wondering if setting up a bank account there would be of any advantage to me in the coming years…
    Thanks in advance.

    M

  30. . Surely you are right, but will it keep this pattern when things move up? I think yes, but…… Here where I live is difficult to buy some yuans. In any case thank you very much, Dripfood four you kind answer.

  31. Dear JC
    I see your point and agree with the general idea of “larger play” with consequences to dollar value etc.

    However, some months ago while I started to read your valuable blog (v. sad it is not free but i understand that value is not for free) you surprised me with astonishing argument – convincing and logically correct (well supported with links i cannot find now) – that increase of interest rates causes inflation – not the opposite. Do you still think it is correct?
    Well taking that into consideration it is difficult to expect a decrease in gold. Inflation is to come, regardless of the “larger play”, as an effect of salaries adjustment.
    I think the dollar will lose maybe 30% but in real terms as a lost of purchasing power. In such a case cannot see both dollar going down together with gold. Unless we assume gold does not represent real value/exchange.

    Best regards
    platos

    1. Platos, there is always a level of inflation. Even when interest rates were 18% there was a level of inflation. The best way to look at it, the higher the interest rate the higher the costs of running a business. This equates to increased prices and inflation. These are the key components of the Consumer Price Index (CPI). Increasing interest rates will accompany a depreciation of the dollar through exchange rate changes, leading to higher costs for imports, which is inflation. The relationship is symbiotic, the inhaling and exhaling of the economy, and one is not exclusive of the other.

      1. Greetings JC

        While I agree with your premise, I think there are OTHER things happening that could derail the situation…
        the collapse of China’s economy….This article from ZeroHedge;

        A Major Bank Just Made Global Financial “Meltdown” Its Base Case: “The Worst The World Has Ever Seen”
        Tyler Durden’s pictureSubmitted by Tyler Durden on 09/12/2015 19:13 -0400

        China Global Economy Japan Meltdown Nomura Reality Yuan

        inShare
        2

        When it comes to the epic bubble in China’s economy, it really boils down to one – or rather two – things: a vast debt build up (by now everybody should be familiar with McKinsey’s chart showing China’s consolidated debt buildup) leading to a just as vast build up of excess capacity, also known as capital stock accumulation. And/or vice versa.

        It is how China resolves this pernicious, and self-reinforcing feedback loop, that is a far greater threat to the global economy than even what happens to China’s bad debt (China NPLs are currently realistically at a 10-20% level of total financial assets) or whether China successfully devalues its currency without experiencing runaway capital flight and a currency crisis.

        One bank that is now less than optimistic that China can escape a total economic meltdown is the Daiwa Institute of Research, a think tank owned by Daiwa Securities Group, the second largest brokerage in Japan after Nomura.

        Actually, scratch that: Daiwa is downright apocalyptic.

        In a report released on Friday titled “What Will Happen if China’s Economic Bubble Bursts”, Daiwa – among other things – looks at this pernicious relationship between debt (and thus “growth”) and China’s capital stock. This is what it says:

        The sense of surplus in China’s supply capacity has been indicated previously. This produces the risk of a large-scale capital stock adjustment occurring in the future.

        Chart 6 shows long-term change in China’s capital coefficient (= real capital stock / real GDP). This chart indicates that China’s policies for handling the aftermath of the financial crisis of 2008 led to the carrying out of large-scale capital investment, and we see that in recent years, the capital coefficient has been on the rise. Recently, the coefficient has moved further upwards on the chart, diverging markedly from the trend of the past twenty years. It appears that the sense of overcapacity is increasing.

        Using the rate of divergence from past trends in the capital coefficient, we can calculate the amount of surplus in real capital stock. This shows us that as of the year 2013, China held a surplus of 19.4 trillion yuan in capital stock (about 12% of real capital stock).

        Since China is a socialist market economy, they could delay having to deal directly with the problem of capital stock surplus for 1-2 years through fiscal and financial policy. However, there is serious risk of a large-scale capital stock adjustment occurring in the mid to long-term (around 3-5 years).

        Daiwa then attempts to calculate what the magnitude of the collapse of China’s economic bubble would be. Its conclusions:

        Even in an optimum scenario China’s economic growth rate would fall to around zero
        We take a quantitative look at the potential magnitude of the collapse of China’s economic bubble to ensure that we can get a good grasp of the future risk scenario. If a surplus capital stock adjustment were to actually occur, what is the risk for China and how far would its economy fall?

        Chart 7 shows a factor analysis of China’s potential growth rate. The data here suggests that (1) China’s economy has gradually matured in recent years, and this has slowed progress in technological advancement, (2) Despite this fact, it has continued to depend on the accumulation of capital mainly from public spending to maintain a high economic growth rate, and (3) As a result, this has done more harm than good to technological advancement. Between the years 2012-15 China’s economy declined, yet still was able to maintain a high growth rate of over 7%. However, 5%pt of the growth rate was due to the increase in capital stock. Labor input and total factor productivity contributed only 2%pt.

        The major decline in the rate of contribution from total factor productivity is especially noteworthy, as it had maintained an annualized rate of 5% for thirty years straight since the introduction of the reform and opening-up policy and on through the era of rapid globalization.

        According to a DIR simulation, if a capital stock adjustment were to occur under such circumstances, China’s potential growth rate would fall to around 4% at best. This adjustment process is shown in the bottom left Chart 7. As far as can be determined from the capital stock circulation diagram, capital spending at the level seen in 2014 should not have been allowable without an expected growth rate of over 10%. Hence if adjustment progresses to the point where the potential growth rate is only 4%, the situation for capital spending will continue to be harsh. If the adjustment process lasts from the year 2016 to 2020, capital spending will likely continue in negative numbers on a y/y basis. If this scenario becomes a reality, the real economic growth rate will hover at around zero as is shown in the lower right portion of Chart 7.

        All of this is well-known by most (or at least those who are willing to accept reality at face value instead of goalseeking it away with Keynesian theories that serve to merely perpetuate fallacious groupthink). It does, however, underscore the severity of China’s economic situation and the follow-through linkages to the rest of the world.

        But where the Daiwa stands out from every other report we have read on this topic, and where it truly goes where no other research has dared to go before, is quantifying the probability of China’s worst case scenario. Here is what it says:

        Meltdown scenario: World economy sent into a tailspin

        We have already stressed that the scenario discussed in the previous section is the optimum or bestcase scenario. What is just as likely or possibly more likely to occur is the following. If the expected growth rate declines and the progress of the capital stock adjustment causes the bad debt problem to become even more serious, the economy could spiral out of control, lapsing further into a meltdown situation.

        The stunning punchline:

        “Of all the possible risk scenarios the meltdown scenario is, realistically speaking, the most likely to occur. It is actually a more realistic outcome than the capital stock adjustment scenario. The point at which the capital stock adjustment is expected to hit bottom is at a much lower point than in the previously discussed capital stock adjustment scenario (see Chart 8). As shown in the bottom right portion of this chart, the actual economic growth rate will continue to register considerably negative performance. If China’s economy, the second largest in the world, twice the size of Japan’s, were to lapse into a meltdown situation such as this one, the effect would more than likely send the world economy into a tailspin. Its impact could be the worst the world has ever seen.”

        Translated: Daiwa just made a Chinese “meltdown” and global economic “tailspin” its “realistically speaking, the most likely”, base case scenario.

        And here we were thinking our calls (since 2011) that China’s debt and excess capacity bubble would negatively impact global growth, are audacious.

        The question, now that Daiwa has broken the seal on Chinese and global doomsday scenarios, is whether and how soon other banks will follow in Daiwa’s path, and predict an armageddon scenario which sooner or later, becomes a self-fulfilling prophecy even without the help of China’s increasingly clueless micromanagers

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