The Great Dollar Shortage (for Real)

Posted On Sep 8, 2016 By Dave Gonigam

  • Fed is printing dollars to a fare-thee-well, but Rickards says it’s not enough
  • Global elites ride to the rescue: How they’ll solve the dollar shortage at your expense
  • Weird taxes and new fees: Jersey rules for cross-state commuters
  • Reader’s glimpse of the future: When self-driving cars are mandatory

There’s an alarming shortage of dollars worldwide. And that fact is setting up the dollar’s value to be cut in half — maybe by as much as 80%.

How’s that for paradox?

It was around this time five years ago that the dollar began to strengthen relative to other global currencies. In the summer of 2014, it really started taking off. For the last nine months or so, it’s hit a plateau… but still near highs last seen more than 10 years ago.

Big moves like that don’t take place in isolation. They have consequences. And one of them is a global dollar shortage.

“The idea of a dollar shortage sounds strange to many observers,” Jim Rickards allows. ”Didn’t the Fed print $3.4 trillion of new money from 2008–2015? How could there possibly be a dollar shortage with that much new money around?

“The answer,” says Jim, “is that the world created new dollar-denominated debt faster than the Fed created money.”

This comes back to a critical forecast Jim made in these virtual pages early in 2015: “The next financial collapse,” he said, “will come from junk bonds, especially energy-related and emerging-market corporate debt.”

Many U.S.-based energy companies loaded up on debt assuming oil would forever stay priced at $80–110 a barrel forever. (Oops, it’s in the mid-$40s now.) Many emerging-market companies loaded up on dollar-denominated debt assuming a weak dollar forever. (Uhhh… see chart above.)

“Over $60 trillion of new dollar-denominated debt was created from 2009–2015,” says Jim. “This huge debt pyramid was fine — as long as global growth was solid and dollars were flowing out of the U.S. and into emerging markets.”

But soon after the dollar started to strengthen in 2011, the U.S. budget and trade deficits began to shrink dramatically. By 2013, the Federal Reserve began to tighten policy. And global growth was slowing down.

“The dollar shortage took hold,” Jim continues our story. “It seemed that everyone wanted his money back.

“Chinese corporations began to default. European banks started to show signs of stress. The spread between fed funds and the OIS (the overnight index swap rate) began to blow out. Now, in late 2016, the dollar shortage has started to morph into a debt crisis and potential liquidity crisis.”

We’ve been here before — in the late ’60s, in fact. It’s the first time the United States came face to face with “Triffin’s dilemma” — so named for a 20th-century Belgian economist.

“Triffin hypothesized,” explains Jim, “that an international monetary system that depended on one reserve currency (the U.S. dollar) contained a fatal flaw: In order to expand world trade, the U.S. would have to keep supplying the rest of the world with dollars through its trade and budget deficits. But if the U.S. ran deficits long enough, it would eventually go broke.”

Which brings us back to the “D-Day for the Dollar” forecast Jim has been making in recent weeks — an event now only 22 days away.

After the close of business on Friday, Sept. 30, a revamped form of “world money” comes into play — a new composition for the special drawing right. The SDR is a currency issued by the International Monetary Fund, circulated only among governments and central banks.

It’s the SDR that will re-liquefy the world. It’s the SDR that will solve the dollar shortage. But at an immense cost to you.

“The SDR solves Triffin’s dilemma,” Jim explains.

“The reason is that SDRs are issued by the IMF and the IMF is not a country. Since the IMF is not a country, it cannot have a trade deficit. It cannot have a budget deficit. It theoretically cannot go broke. Therefore, the SDR is a source of potentially unlimited global liquidity.”

The IMF has issued SDRs three times since they were developed nearly four decades ago. All three times have coincided with a dollar crisis of one sort or another — most recently in the aftermath of the Panic of 2008.

“Since 2009,” Jim goes on, “the IMF has proceeded in slow steps to create a platform for massive new issuances of SDRs and the creation of a deep liquid pool of SDR-denominated assets.”

A few key developments…

  • January 2011: “The IMF issued a master plan for replacing the dollar with SDRs. This included the creation of an SDR bond market, SDR dealers and ancillary facilities such as repos, derivatives, settlement and clearance channels and the entire apparatus of a liquid bond market
  • November 2015: “The executive committee of the IMF formally voted to admit the Chinese yuan into the basket of currencies into which an SDR is convertible
  • July 2016: “The IMF issued a paper calling for the creation of a private SDR bond market. These bonds are called ‘M-SDRs’ (for market SDRs) in contrast to ‘O-SDRs’ (for official SDRs)
  • August 2016: “The World Bank announced that it would issue SDR-denominated bonds to private purchasers. The Industrial and Commercial Bank of China (ICBC), the largest bank in China, will be the lead underwriter on the deal. Other private SDR bond issues are expected soon.”

And then… on Sept. 30, three weeks from tomorrow, “the inclusion of the Chinese yuan in the SDR basket goes live.

“Thereafter,” says Jim, “the international monetary elite will await the next global liquidity crisis” — when that tsunami of emerging-market and energy-related debt comes crashing ashore.

“When that crisis arrives, there will be massive issuances of SDRs to return liquidity to the world and cause global inflation. The result will be the end of the dollar as the leading global reserve currency.”

That’s the plan. It will be an event of the same magnitude as Nixon cutting the dollar’s last tie to gold in 1971. The dollar lost 70% of its purchasing power over the following decade… and 95% of its value relative to gold.

“Based on past practice,” Jim concludes, “we can expect that the dollar will be devalued by 50–80% in the coming years.

“A devaluation of this magnitude will wipe out the value of your life’s savings. You’ll still have just as many dollars, but they won’t be worth nearly as much.”

And that critical turning point in the process — a massive reversal on that chart above — comes on Sept. 30.

Jim is sounding the alarm as loudly as he can.

Are you hearing it? Click here for the full import of Jim’s warning… and access to an action plan that will keep you both solvent and sane.

Off to the markets…

Stocks are flashing red this morning. S&P, down 5… Dow, down 40… Nasdaq, down 21. The proximate cause?

The European Central Bank (ECB) threw a wet blanket over markets this morning when it punted on any new stimulus. It left interest rates unchanged, saying it doesn’t see an immediate threat to European recovery.

ECB President Mario Draghi said policymakers haven’t discussed extending its bond-buying program, adding that the ECB will have to study how to maintain its QE program without running out of bonds to buy. Let us know what you come up with, please.

Meanwhile, crude’s up $1.71 today, while the yellow metal slipped $1.60, to $1,347.60. Nothing serious.

Here comes “new taxes and weird fees,” Jersey style. And it’s Pennsylvanians who’ll take the hit.

New Jersey Gov. Chris Christie let it drop just before Labor Day weekend that he’s scrapping a long-standing agreement between New Jersey and Pennsylvania. Since 1977, Pennsylvanians who work in New Jersey have paid Pennsylvania income taxes — which are generally lower.

With the deal going bye-bye, a Pennsylvanian earning $50,000 a year in New Jersey will see her effective state income tax rate nearly double next year.

Christie made no bones that this is a revenue grab; he said he expects $180 million in new money for state coffers.

“Pennsylvanians who are unhappy with their higher tax bills,” writes Eric Boehm at Reason, “can perhaps find solace in the fact that they will be helping to pay for the retirements of New Jersey state workers and to close a budget gap created by years of questionable spending on corporate welfare.”

Yup. Like many politicians, Christie borrowed from state pension funds to cover day-to-day expenses. And he really loves doling out tax breaks to big businesses — despite overwhelming evidence that such favors don’t create new jobs; they only steal existing jobs from other states.

“After some thought,” says a long reader email we haven’t had time for until today, “it seems to me that the real question with respect to the rise of autonomous vehicles is how much longer anyone will be allowed to drive his or her own car, or how much it might cost to do so if human driving is not completely outlawed.

“Earlier this year, I was talking with my auto insurance agent about this new technology, and he — hardly surprising given his position — was already thinking much further ahead than I would have believed. So too, apparently, is State Farm, and they are clearly seeing a very different business model from what currently exists.

“Among the most important considerations for insurers will be not only the projected large reduction in the number of accidents, but the greatly reduced number of people who will likely continue to own private cars. Clearly, the car insurance business will be very different in the future.

“What really grabbed my attention, however, was when my insurance agent casually observed that, in the not too distant future, the human driver would become the ‘weak link’ in the emerging new constellation of institutions that will shape the way in which vehicles are owned, used and insured.

“The chilling thing — if you have the sort of libertarian bias that I do, LOL — is that no one vested with authority in such institutions (and those involved in government regulation most of all) tolerates ‘weak links’ very well, and it seems inevitable that they will try to eliminate them. At the point that autonomous vehicles become commonplace and accident rates (and insurance claims) begin to seriously decline, there will be the expected clamor to take things to their logical conclusion and get the ‘unsafe’ human drivers off the road.

“Even if human driving is not completely outlawed (for our ‘own good,’ of course),” this reader goes on, “there remains the question of what kind of insurance might be required to manually operate a vehicle under these new circumstances.

“Given what will be the demonstrably increased risk of human driving, how much more will rates have to go up to offset this statistical liability, and at what point will ordinary people simply not be able to afford to purchase private automobile insurance? Indeed, given the Uber model, how many people will even continue to own their own vehicles?

“Recreational driving — that is, driving manually with only the kind of technological assists that are already available today, let alone driving classic vehicles — may in theory be possible, but the cost of insurance may become so high that nobody but millionaires may be able to afford it. Perhaps a few people in rural areas may be given exceptions in such things as operating agricultural equipment, as well as piloting off-road service vehicles and perhaps in law enforcement, but most people in urban areas will quickly forget what ‘car culture’ was all about or why anyone would even want to own a car…

“In observing all of this, I have to admit that I am getting old enough to actually look forward to the day that my continued mobility will no longer be directly tied to my declining ability to drive an automobile, and I acknowledge that my independence and freedom of choice will be greatly enhanced. At that point, I will be more than happy to dial up some kind of autonomous Uber vehicle and tell it where I need to go. For the aging, the too young to drive and the disabled, this will be a new era in transportation, and it will be much more safe and cost-effective as well. The ‘price’ for all of this may be that the vast majority of people — the weak links in the system — will no longer be allowed to drive, even if they might wish to, and something very fundamental to life in America will have passed away.

“Cue up the Eagles’ ‘Take It to the Limit,’ Springsteen’s ‘Racing in the Street’ or a hundred other odes to the freedom of the American road and you might begin to have some idea of what will be lost. So too any careful reading of our literature, from Steinbeck’s The Grapes of Wrath to Kerouac’s On the Road. And every epic, rite-of-passage road trip — whether its events were recorded in writing or not — that any young person has ever set out on. For better or worse, it will be a very different country…”

The 5: Gee, and your editor still pines for a stick shift now and then…

Best regards,

Dave Gonigam
The 5 Min. Forecast

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