Facing the Cold, Hard Truth Behind the Dollar's Historic Decline
With help from the Fed, the dollar has been in a decline for some time now. While most of us know that isn't good news, it's hard to make heads or tails of what it all means. Addison Wiggin clears it all up...and sounds a dire warning about the future.
Hoboken, NJ — In recent months, the dollar has hit historic lows, and we're witnessing the results: celebrities requesting to be paid in currencies other than the dollar, desperate US retailers opening their doors before dawn the day after Thanksgiving, and overseas visitors packing the streets of New York City scooping up bargains.
The sinking of the dollar didn't just happen when all the recent recession talk started. It's been a growing problem for quite some time, says Addison Wiggin — it's just that many Americans don't quite know how to put it in perspective.
"The dollar is a victim of its own success," says Wiggin, author of The Demise of the Dollar (Fully Revised and Updated) and Why It's Even Better for Your Investments (Wiley, April 2008, ISBN: 978-0-470-28724-8, $19.95). "It is America's most successful export ever—more successful than chewing gum, Levi's, and Coca-Cola put together. Trillions of dollars flow through the global financial markets every week from Kiev to Karachi. But today, as a result of a government and a populace living beyond its means, we are going deeper and deeper into debt, and the dollar is quickly losing its worth."
While you've probably read or heard the concerning media coverage about the falling dollar, it can be hard to see the big picture. Wiggin hopes to clear that up.
"In November 2007, government debt officially passed $9 trillion," says Wiggin. "To make that easier to comprehend, that's about $30,000 for every man, woman, and child in the country. That leaves us with a falling dollar and a weakened economy."
Unfortunately the news only gets worse. Wiggin says the federal policymakers, who could help correct the falling dollar, are suffering from denial. Our leaders have convinced themselves that the falling dollar will improve the economy by eliminating the trade deficit, reducing inflation, and improving our GDP.
"Seeking to spur the economy to growth, the Fed and the Treasury have been actively devaluing the dollar," says Wiggin. "Many dubious excuses are given—protecting American exports, saving jobs, preventing deflation, for instance—but there is no question that Capitol Hill is actively engineering the dollar's demise. Seventeen rate cuts since 2001, three tax cuts, massive deficits, and record money creation bear cold witness to its manipulations. But it's an illogical plan that is doomed to fail. You can't spend your way to prosperity; no nation ever has or ever will."
Wiggin warns the near future could prove to be a financial disaster for people who pin their wealth to the strength of the dollar. He says a collapse is inevitable, and it's only a question of how quickly it is going to occur.
Here are some of his insights on how the dollar reached this economic low point—and why it's only going to get worse.
Want historic evidence that our government is taking the wrong approach? Look no further than Japan. After years of growth in Japan's GDP, 1997 saw the numbers begin to slow down and the country was quickly in trouble. That year, the government made modest cuts to its budget deficit, and the result was an economic free fall in 1998.
"Taking a page from Greenspan's book, the government instituted record levels of deficit spending hoping it would fix a failing economy," says Wiggin. "But it didn't; the Japanese economy got worse and worse.
The solution from the Japanese government was to launch 10 financial stimulus packages—ring any bells?—between 1992 and 1999, but during that period its debt grew by $1.13 trillion. The ratio of government debt to GDP soared from about 60 percent in 1992 to 105 percent of GDP in 1999. The Japanese history lesson reveals that you can't spend your way out of trouble, and yet that seems to be exactly what the Fed is trying with the US economy."
Outsourcing has changed the face of the worldwide economy. Our government likes to minimize just how damaging the trend in outsourcing jobs has been for the American economy. They cite the creation of millions of new jobs in the retail and health care sectors as a sign of growth.
But the reality is these new jobs are very low-paying compared to the high-paying manufacturing jobs that have gone overseas. So people may be working, but they are earning less. The flailing labor economy results from the roughly three billion new capitalists who have entered the market by way of China, the former Soviet Union, Vietnam, and India, citizens who are glad to work for dirt-cheap wages.
"As a result of the cheap labor overseas, we haven't seen growth in manufacturing—defined in terms of jobs, output, or profits—in more than 10 years," says Wiggin. "What has resulted is a trade deficit that has us spending more of our money overseas than we're making at home, which would be fine if the trade deficit resulted from a high rate of investment, but it doesn't. We are spending, not producing."
Leaving the gold standard was the start of the problem. We see repeatedly from history that when countries operate on the gold standard, they thrive—and when they go off the gold standard, they get in trouble. The problems seem to appear after 30 years. So if we count from the Nixon decision of 1971 to go off the gold standard, we should have seen these problems soon after 2001. It stands to reason then that it was in 2002 that the value of gold started rising.
"The gold standard works because it forces spending discipline on politicians, despots, demagogues, and democrats," says Wiggin. "When a country is on the gold standard, it has to live within its means. But when it goes off the gold standard and begins using fiat money — or floating money — the sky's the limit.
As long as any government is able to print money indefinitely, you can bet that it will. Unfortunately, even the best economic experts can identify when the printing of money has gone too far by only one yardstick: when the system implodes. By then it's too late to prevent the damage."
Our nation is drowning in debt. Consider this: At the rate the US debt is growing — $1.4 billion a day or $1 million a minute — the most famous debt clock in the country, located on Times Square in New York City, will become obsolete once it hits the $10 trillion mark. It's unfortunate, but today, many people, including most of those running our country, simply accept as a fact of life that the national debt is unimaginably high.
"One way corporations justify growing debt is that it enables the expansion of markets and capital assets," says Wiggin. "But that isn't the case with the federal government. It produces nothing. Money tied up in the debt may go partially for necessities or entitlements that large segments of the population want to continue, but the debt itself is not an example of productive debt. So the arguments that it's okay because (1) we owe it to ourselves or (2) our assets are greater than our liabilities are both false justifications for a problem that, ultimately, may define the collapse of the entire US economy.
"In the nineteenth century, a series of presidents took debt seriously and, other than in periods of war, diligently paid down the national debt," he adds. "Today, deficit spending has become the rule and balanced budgets the exception. The concept of actually paying down the debt is an oddity. The even more distant idea of eliminating the federal debt is viewed as idealistic, even un-American."
The world's de facto dollar standard will come tumbling down. Americans are not the only ones to blame. We have codependents and enablers in the form of foreign exporters who love selling their goods to Americans. The governments in those foreign markets are as concerned about the US dollar's fall as Americans are (or should be). That's because the fall of the dollar is the same thing as a rise in other currencies. So the competitiveness of the foreign export economy is damaged more and more as foreign governments' currencies increase in value.
"America is only one side of the problem," says Wiggin. "As the consumer, our dollars have tremendous influence throughout the world, if only because so many central banks—China, for instance—have pegged their currency to the dollar. At the same time, many exporting nations are seeing their currencies go up in value, making it untenable to continue exporting at the same rates as in the past. So we have, through trillions of dollars of debt accumulation, created a de facto dollar standard in much of the world economy—not good news as we watch the dollar sink."
It's time to prepare for a dollar dump. So, if all of these foreign currencies are tied to the dollar, isn't it in their best interests to keep dollar values high? The answer is yes, but only to a point. They'll be looking out for their own best interests, so Asian central banks will ultimately allow the US dollar to fall to contain inflation in their countries. And the more debt those central banks control, the greater their control over the US dollar — and over the standard of living in the United States.
"When foreign investors start dumping their dollars, the stock market will take a big hit," says Wiggin. "Because the dollar has been falling in recent years, foreign investors in US stocks — representing over 10 percent of the whole market — have been getting lower returns on their investments. When the dollar takes an even sharper turn south, those foreign investors will sell. That will mean that the supply of stocks will increase rapidly, or, putting it another way, prices will plummet as foreign investors start dumping US shares."
The US economy faces three big problems down the road. There are economic contrarians out there who anticipate a rally and unexpected growth in the dollar's value. But, unfortunately, a bear market rally alone will not make other facts disappear. We are facing three huge obstacles that make a huge dollar rally seemingly impossible.
"We need to set things in motion if we expect the dollar trend to reverse," says Wiggin. "And addressing what's at the core of these three problems is a great place to start."
The dollar's purchasing power is sliding relentlessly downhill. The theme that "a dollar is always worth a dollar, but inflation results when businesses raise prices," just isn't accurate, despite what the government would like for us to believe. In fact, it is the decline in the dollar's value that leads to higher prices. It would be more accurate to define inflation as "a reduction in purchasing power of the dollar." Instead of deceiving ourselves by saying that "prices are up 10 percent over the past year," it would be more meaningful if we simply acknowledged that "last year's dollar is worth 90 cents today."
"Higher prices are only symptoms following the debasement of currency," says Wiggin. "If we examine why those prices go up, we discover that the reason is not necessarily corporate greed, inefficiency, or foreign price gouging. At the end of the day, it is the gradual loss of purchasing power, the need for more dollars to buy the same stuff. That's inflation. And it's the reason why food prices swelled 5.5 percent in 2007, and the average price of a gallon of gas more than doubled from January 2000 to July 2006, jumping 130.5 percent."
"The dollar is a currency fated to tumble," says Wiggin. "The dollar's resistance to its debt load, fueled by the machinations of central banks and the misguided faith of dollar investors, undoubtedly qualifies as a trend whose premise is false. Sometime soon this trend will be discredited."
"But there is good news in all of this, if you are willing to be proactive," continues Wiggin. "There are many ways you can capitalize on a falling dollar. I highlight four of those strategies in The Demise of the Dollar. The important thing is that you take your financial future into your own hands. The days of the strong dollar are over, and it's time to start making financial decisions based on that truth."
Addison Wiggin is the executive publisher of Agora Financial, an investment research firm based in Baltimore, Maryland. Agora publishes The Daily Reckoning, a financial newsletter with more than 500,000 readers in the United States, Great Britain, and Australia, and is translated daily into French, German, and Spanish. It has received praise from mainstream publications, including Money, New York Times Magazine, and Market Watch.
Mr. Wiggin is the author of the first edition of The Demise of the Dollar. He is also the executive producer and a writer of I.O.U.S.A., a feature-length documentary film nominated for the Grand Jury Prize at the 2008 Sundance Film Festival. The film is inspired by the international bestsellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis, which he coauthored with Bill Bonner.
The Demise of the Dollar (Fully Revised and Updated) and Why It's Even Better for Your Investments (Wiley, April 2008, ISBN: 978-0-470-28724-8, $19.95) is available at bookstores nationwide and major online booksellers.
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Updated: November 6, 2009