The Dollar Starts Dying One Month From Today
- The countdown begins: Stage one of the dollar’s death starts on Sept. 4
- Operation Dollar Rescue, 1974: The plan to invade Saudi Arabia…
- … and the alternate plan that’s falling apart four decades later
- Meanwhile, up-and-coming India implements landmark tax reform
- The IRS taxes Olympians’ winnings… and medals
- Bank of England makes its move… why the feds will never return to honest inflation measures… the overwhelming response you gave us (or not)… and more
“Sept. 4, 2016, will be the day the dollar died,” says Jim Rickards — “‘not with a bang but a whimper’ in the words of T.S. Eliot.”
Golly… Sept. 4 is a month away.
We confess we left you hanging yesterday, dear reader. With Jim’s considerable help, we were describing how the Federal Reserve hopes to buy itself some time this fall by trashing the value of the dollar, relative to the globe’s other major currencies. “You can bet a cheap dollar will be on the agenda Sept. 4, 2016,” he said, “when the G-20 Leaders meet in Hangzhou, China.”
As a reminder, Jim believes the G-20 is the closest thing we have to world government right now. It’s been driving the bus ever since the Panic of 2008. So rest assured this meeting won’t be just another photo-op.
Today, we bring you the next installment in the story…
This installment of the story begins more than 40 years ago — on the night a young Jim Rickards attended a White House discussion about U.S. plans to invade Saudi Arabia.
It was February 1974 — four months after the Yom Kippur War in which Israel emerged victorious over Egypt and Syria. The Arab oil states sought to punish the West for supporting Israel by jacking up oil prices, and then imposing an embargo.
This was the “oil shock” that triggered the worst recession to that time since the Great Depression.
On that clear but cold night, Jim was ushered into the White House along with Professor Robert Tucker from the Johns Hopkins School of Advanced International Studies and four other foreign policy mavens of the day. There they met with Helmut Sonnenfeldt — Henry Kissinger’s most trusted aide.
“The idea,” Jim recalls of the invasion plans, “was to secure the oil fields, pump enough oil to supply Western and Japanese needs and price it at a level that would not be inflationary, to avoid undermining confidence in the dollar.”
In the end, America’s foreign policy establishment hit on another solution to their conundrum — an arrangement that’s come to be known as the “petrodollar.”
Rather than plot an invasion of Saudi Arabia, Kissinger cut a deal with Saudi Arabia: The House of Saud would price oil in U.S. dollars and use its clout to get other OPEC nations to do the same. In return, the U.S. government agreed to protect Saudi Arabia and its allies against foreign invaders and domestic rebellions.
“It was the ultimate win-win,” Jim says. “The Saudis got weapons, safe investments, high oil prices and increased demand for their oil. The U.S. got debt financing, weapons sales, increased Middle East influence and a dominant role for the dollar in international reserve positions. Once oil was priced in dollars, every country in the world would need dollars because every country in the world needed oil.”
The petrodollar has had remarkable staying power. “Both Republican and Democratic administrations under Reagan, Bush 41, Clinton and Bush 43 were committed to the mantra of a ‘strong dollar.’ For 35 years, from 1975-2010, the petrodollar deal remained intact despite some oil price increases and dollar volatility along the way.”
And then Barack Obama started a new currency war.
In his State of the Union address on Jan. 27, 2010, the president set a goal of doubling U.S. exports over the next five years.
As a practical matter, there was no way to double the labor force — or to double productivity. “The only way to double exports,” says Jim, “was to improve the terms of trade by cheapening the U.S. dollar.”
[And it didn’t even achieve its stated goal: Last year, at the end of that five-year span, we noted that exports had grown only 50%.]
An explicit plan to cheapen the dollar was brand-new — and it amounted to a repudiation of the petrodollar arrangement. The Saudi princes, who’d agreed to price their precious commodity in dollars all those years ago, took note.
Nor were they alone: The following year, in 2011, the International Monetary Fund issued a 42-page paper laying out its plans for “world money” — specifically, a bigger role for the IMF’s existing supercurrency known as the SDR, or special drawing right. Implicit in the paper was the notion the SDR would supplant the dollar’s role as the globe’s reserve currency.
Chinese and Russian leaders also saw the writing on the wall. That’s why they’ve been so busy accumulating gold since 2010.
Which brings us back to the G-20 summit in China one month from today.
“All of these trends — IMF support for SDRs, Russian and Chinese support for gold and Saudi Arabia’s search for a new benchmark for oil — will come to a head,” says Jim.
“Saudi Arabia could easily price oil in yuan and then swap the yuan for Swiss francs or SDRs and use the proceeds to add to its reserves or buy gold. Saudi Arabia could also price oil in SDRs or gold and hold those assets or swap them for other hard currencies to diversify away from dollars. The possibilities are numerous. The conversion of oil prices away from dollars to some alternative is just a matter of time.”
Our 5 Mins. don’t allow for the next installment of this story. Suffice it to say the G-20 summit begins a 26-day countdown to an event Jim says amounts to “D-Day” for the U.S. dollar.
“By my best estimate, what’s coming will go down around 4 p.m.,” Jim says. “And when it does, you’ve got no idea yet how radically this could end up impacting your financial safety.”
Rather than leave you hanging in suspense, however, we encourage you to jump to this next installment right away. You can come back to the rest of The 5 later.
Oh, you’re back? Well, let’s survey the markets…
Stock traders appear to be marking time until the release of the July job numbers tomorrow morning: The major indexes are little moved, the S&P 500 at 2,164.
Gold is recovering some of yesterday’s modest losses, back to $1,362. But the big mover is Treasuries, the yield on a 10-year note back to 1.49%.
The few traders on duty are chattering about the Bank of England — which followed through this morning on its intention to cut its benchmark interest rate in the wake of the Brexit referendum. Since 2009, the rate has stood at 0.5%. Now it’s 0.25%. Stimulus, baby!
More interesting from our perch is the news from the world’s fastest-growing economy, and we don’t mean China anymore: India is about to simplify a byzantine tax regime.
After 10 years of wrangling, parliament has approved the biggest tax reform since independence in 1947. “The Goods and Services Tax,” reports the BBC, “will replace [a] confusing jumble of existing taxes — ranging from lottery and entertainment tax to VAT, sales tax or luxury tax — with one single tax.
“There also will be no more taxes at the different state borders within the country. Currently, goods brought, for example, from the northern city of Haryana to Chennai are taxed in six different states.”
Credit goes to Prime Minister Narendra Modi, says our friend Chuck Butler at EverBank Global Markets. “He pulled a rabbit out of his hat with this one, and India was in dire need of a kick in the rear! I’ve been waiting so long for someone to unlock the Indian economy, and this just might be the key.” Sure enough, the rupee is rallying today…
“Amateur” athletes? Not in the eyes of the IRS.
As it did during the 2012 Olympics, Americans for Tax Reform is pointing out today that American Olympians’ winnings are treated as ordinary income.
Gold medalists receive $25,000 from the U.S. Olympic Committee. “A gold medalist from Team USA,” writes ATR’s Brady Wilson, “could end up facing a tax bill of $9,900 per gold medal.” Well, that’s assuming the winner is taxed at the highest possible rate of $39.6% and has zero deductions, but we get the point.
It turns out Mr. Wilson overlooked something his own organization pointed out four years ago, noted in our virtual pages. The medal itself is also taxed as ordinary income.
How much are they worth? As we also noted in 2012, “gold medals” consist mostly of silver. They vary in size from one Olympics to the next; the International Olympic Committee specifies only that the medal contain a minimum six grams of gold and approximately 92.5% silver.
The 2012 London gold medal was worth about $675 at 2012 prices. The 2016 Rio gold medal is somewhat heavier… but with silver prices down about 27% from this time four years ago, Investopedia says the metal content is worth about $566. Nothing like a bargain…
“Maybe the current lack of inflation,” begins today’s mailbag, “will prompt the feds to go back to the old standard of calculation measures.
“The present standards are a joke by any measure and are not a true indication of a darn thing meaningful that reflects the inflation experienced by consumers.”
The 5: Yes, we know. It’s why when mentioning the government’s monthly numbers we add the disclaimer that any resemblance to your own cost of living is purely coincidental.
But it can’t and won’t happen. Remember the reason the feds started monkeying with the CPI numbers in the first place 30-odd years ago — to bring down the yearly cost-of-living adjustments for Social Security.
Too, if the feds fessed up to the true inflation rate, holders of U.S. Treasuries might start demanding a far higher interest rate. As it is, ultra-low rates make it possible for Uncle Sam to pay less interest on the national debt now than it did eight years ago, even though the national debt has nearly doubled since then.
“The grim reality,” economic blogger Charles Hugh Smith wrote this week, “is that real inflation is 7%-plus per year, and this reality must be hidden behind bogus official calculations of inflation as this reality would collapse the entire status quo.”
“A rising tide does elevate all boats,” a reader writes after we revisited a favorite chart on Tuesday. “But the sloshy economy we have now is not a rising tide.
“Money, like water, seeks its own level. The government and the Fed build ‘dams’ and ‘pumps’ and ‘hoses’ to counter this law of money, usually to the point of failure, often catastrophic. They are responsible for making waves, bubbles and floods.
“The free market would be much gentler and fluid.”
The 5: Good analogy!
The 5 Min. Forecast
P.S. “Dave, how could you be overwhelmed by my response when I didn’t have one?” a reader responds to our most recent sales message, sent yesterday.
“I realize,” says another, “this email is a form letter sent to thousands, but please don’t suggest I ‘responded’ to you in some way you are ‘shocked’ about when I did no such thing.
“That said, I do appreciate the rest of the content.”
Touché. We should have said “reader response” rather than “your response.”
But it was overwhelming, going by the numbers we use to evaluate such things.
If you missed out — and you’re wondering what the buzz is all about — you can scratch the itch right here.