The Little Book of the Shrinking Dollar

What You Can Do to Protect Your Money Now

Addison Wiggin

• Publisher: Wiley
• Year: 2012
• Print ISBN:
  9781118245255
• Edition: 1
• eBook ISBN:
  9781118283172
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

With the weakening dollar a hot topic for retirees, savers, and investors, this Little Book delves into the economic turmoil in the U.S. and shows how to survive it

The United States dollar is losing value at an alarming rate. According to the Organisation for Economic Co-operation and Development (OECD) index, the U.S. currency is 37 percent below fair value against the Australian dollar and 20 percent versus the Canadian dollar. The decline of the U.S. dollar is one of the biggest threats facing American investors today, but with the Little Book of the Shrinking Dollar: What You Can do to Protect Your Money Now in hand, you have the knowledge and the expertise you need to fight back.

Written by New York Times bestselling author Addison Wiggin, a leading economic forecaster, the book explores the reasons for the dollar's decline, and its precarious relationship to other currencies around the world. Filled with invaluable strategies for retirees, savers, and investors who want to keep their money safe no matter what lies ahead, the book is your one-stop guide to weathering the storm.

• Covers strategies for safeguarding your wealth, including safer havens for money, alternative investments, and other opportunities
• Written by Addison Wiggin, a three-time New York Times bestselling author and leading economic forecaster
• Wiggin's predictions about the decline of the dollar have proven true time and again, making him the right man for the job when it comes to predicting what lies ahead

The U.S. dollar is no longer the secure and stable currency that most Americans grew up believing in. Even after recent gains, the dollar remains weak. But with the Little Book of the Shrinking Dollar you have a concise guide to what's driving its demise and everything you need to protect your money today and in the years to come.

Chapter One

Dollar Decline

How Did We Get Here?

Think the dollar hasn’t declined?

It has lost 80 percent of its purchasing power since 1970—the year before the great experiment of cutting the dollar loose from a fixed value in gold.

Back in 1970, if you just stashed a dollar coin under the mattress, today you’d find it buys you less than two dimes worth of goods. That doesn’t even cover the price of a postage stamp or a can of Coke. It’s practically worthless. (See Figure 1.1.)

Figure 1.1 The Dollar Deflated by the CPI

Source: See Testimony, Lewis E. Lehrman, March 17, 2011, before Congress.

Our currency is in a turbulent flux that’s gotten worse and worse as the decades march on.

Today’s dollar purchases five cents of what it purchased in the 1930s. Think that’s too far back? Consider the 1980s. Today’s dollar purchases only 50 cents of what it did back then.

But there will be critics who tell you that purchasing power isn’t the only measure of currency strength.

Dollar’s Popularity Doesn’t Protect It

The U.S. Continental Congress created the U.S. dollar by an act of its own power in 1785. They hoped it would compete with the Spanish currency, which was the popular legal tender at the time.

Sure enough, here we are in 2012, and the U.S. dollar is now a victim of its own success. It’s America’s most successful export ever—more successful than Levi’s, chewing gum, or Coca-Cola. No export is more popular. Let’s look at the hard numbers.

Approximately two-thirds of U.S. dollars are held outside of the United States: 85 percent of global trade is made with the U.S. dollar. But all that stands to change.

I think the role of the U.S. dollar as the world’s primary reserve currency will be gone in a decade. The foundation of our financial franchise, the US$ brand is trust. That’s trust in our determination not to debase the world’s primary exchange mechanism—the world’s primary store of liquid wealth. We no longer deserve the trust, and are rapidly debasing the brand.

—Rick Rule, Sprott Asset Management

The euro is the second most popular currency in the world’s beauty pageant, although it’s taking a pretty ugly beating as we enter 2012. Still, about 26 percent of the world’s monetary reserves holdings are denominated in this 17-nation currency.

We’ll cover the details in later chapters, but for now, let’s look at a few tremors we’ve tracked that predict an earthquake ahead for the U.S. dollar.

The Old Lady of Threadneedle Street to USA: You’re Toast

Let me introduce you to my friend Ralph Benko, of the American Principles Project. We first met at the watershed October 2011 Heritage Foundation Conference on “The Stable Dollar: Why We Need It and How to Achieve It.”

At the end of 2011, Ralph told Forbes readers, “The world dollar standard’s death certificate arrives in the mail this week.”

He’s referring to a paper issued officially on December 20, 2011, by the Old Lady of Threadneedle Street—aka the Bank of England.

The Bank of England, as you can guess from the nickname is the staid, prosaic, conservative bunch on the block of central bankers.

So it’s no surprise this working paper hides its revelation under the dull title, “Reform of the International Monetary and Financial System.” But here’s the dollar bomb: The world was better off when the world’s currencies were tied to the dollar and the dollar was tied to gold—however tenuously.

To understand the dollar’s future, it’s important to understand the dollar’s past.

By now, we have a vast cornucopia of dollar-denominated debt securities. The scale of these markets is unprecedented. The bigger the market the lower spreads it can offer, making deals here the most attractive.

There are also plenty of ways to hedge dollar exchange rate risk (which will be part of the solution set you’ll learn about in this book). It’s the reason why everyone from corporations to governments and central banks consider it a great currency for doing business. Finally, it’s a safe haven that benefits from there being a lack of superliquid, high-volume alternatives. Australia, for instance, has recently made a reputation for stability, but it simply accounts for too small a slice of global financial transactions.

So, basically, the U.S. dollar just so happens to be winning the beauty contest among the ugliest world currencies.

Another friend, resource expert Rick Rule, agrees. “The only reason,” he says, “we still enjoy the status that we enjoy globally—and the benefits of seigneurage—is that other societies have proven even better at debasement than we have. Basing your brand on the attribute of being the least bad has been a consistently faulty strategy.”

How do you know when your branding campaign isn’t working? When consumers start buying from your competitors in increasing numbers. The same principle is at work with currencies.

Increasingly, we’ll have to compete for our dollars to be used, bought, and saved.

Here’s an early sign.

Russia and Iran Are Ditching the Dollar

The two countries will carry out their trade with each other using rubles and rials. Add that to the list. China and Russia abandoned the greenback in their bilateral trade more than a year ago.

The big rumble is that the Middle East will follow suit. Imagine if they no longer trade oil in U.S. dollars. It won’t just be Iran as some “alternative” bourse. Plans are at work for a Gulf States cooperation, including Saudi Arabia and Abu Dhabi.

This shouldn’t be too surprising, given that the United Nations itself has called for a “new global reserve currency.” Why? They say it’s dangerous to allow us the “privilege” of building up our massive trade deficit.

“Pretty soon,” says EverBank’s currency guru Chuck Butler, “having the reserve currency of the world isn’t going to be such a big thing, if all the commodity trade isn’t settled in dollars!”

Chuck is definitely in the camp that questions the safe haven currency status the dollar holds.

He doesn’t blame any country for wanting to remove dollars from their reserves. After all, the dollars have lost so much value over the years.

Sure, he points out, it is the most liquid currency in the world, but if countries keep taking dollars out of the terms of their trade, how much longer can it remain the most liquid currency?

It’s a real conundrum that any dollar earner (and investor) needs to be aware of. It doesn’t mean we’ll lose the world’s preferred currency status today, tomorrow, or even next year.

Eventually, though, there will come a time when the world’s nations will stop adding U.S. dollars to their already swollen coffers. They’ll demand something else instead.

We would argue, like the Old Lady of Threadneedle Street, for something that looks a lot more like Bretton Woods.

We’re betting other nations (especially the gold-hoarding ones we’ll explore in later chapters) would totally agree.

Let us put a period on this by ending with the comment from England’s central bank researchers. The Bretton Woods era “stands out as coinciding with remarkable financial stability and sustained high growth at a global level.”

Sounds pretty nice, doesn’t it?

They go on: “the solid growth outcomes were not simply the result of post-war reconstruction efforts.” They say that in fact, GDP growth was actually stronger in the 1960s than it was in the 1950s.

Makes you wonder: What went wrong?

Chapter Two

Serial Bubble Blowers

Who Controls Our Economic Destiny?

The shrinking dollar is a modern problem. The U.S. dollar has been shrinking since the inception of the Federal Reserve—the very crew assigned the task of maintaining its value. Of late, the decline is accelerating at an alarming rate.

For many Americans, the suggestion that the dollar is losing value is unthinkable—even unpatriotic. The problem is not simply a lack of understanding about the nature of wealth and investment used to sustain it. Our policy makers and economists make no distinction between wealth created through savings and investment in the real economy versus “wealth” created in the markets through asset bubbles brought about by credit policies.

When I tell people this, I feel like I’m addressing a meeting of folks who want to lose weight at the local burger joint. We as individuals—and as a nation—are addicted to cheap, easy credit. What the government gives, we’ll take. We spend at a high level, and we want to accumulate wealth on the same fast track.

Forget hard work, we’d rather our house go up in value like magic! Traditionally, economists recognized that it took time to build an estate. People and countries could build wealth slowly. Those days are far, far behind us. Now we are at the mercy of what I call serial bubble blowers.

All the U.S. economy’s so-called improvements stem from one main reason: all economic growth during the “recovery” since 2001 can be traced to a seemingly endless array of asset and borrowing bubbles.

First, we saw the stock market bubble, then the bond bubble, then the housing...

Table of contents

• Cover
• Contents
• Title
• Copyright
• Dedication
• Acknowledgments
• Introduction
• Chapter One: Dollar Decline
• Chapter Two: Serial Bubble Blowers
• Chapter Three: Economic Reality Check
• Chapter Four: Debts Do Matter
• Chapter Five: Inflation 101
• Chapter Six: Something’s Gotta Give
• Chapter Seven: A Tale of Two Deficits
• Chapter Eight: Dollar Codependents
• Chapter Nine: The Dollar’s Days Are Numbered
• Chapter Ten: Currency Winners
• Chapter Eleven: Dollar Apocalypse
• Chapter Twelve: Tips on Surviving the Next Crisis