It’s Not at all What You Think
For some strange reason, most people are totally convinced that the dollar is going to collapse in the next few years. It almost seems like they want to believe it, and they’re usually willing to accept any reason that is put forth, regardless of how little sense it makes.
They think that ongoing stimulus, or another financial crisis, or runaway inflation, or a strengthening yuan or euro, or even a geopolitical fiasco will prompt a dollar downfall.
Furthermore, as with many things that go against the common “wisdom”, you can profit handsomely by taking the right steps. Watch this new presentation from Dent Research to learn what you need to do today to prepare.
It’s all About Debt
Dollar naysayers claim that rampant stimulus, in the firm of money-printing, will create high inflation, possible even hyperinflation. They expect a return to the 1970s when inflation levels were the highest they’d been in centuries. In response, traditional safe assets like gold soared in value while the dollar plunged.
But things are different now.
Today, inflation is barely above 1%, even though the government has pumped trillions and trillions of dollars into the system during almost six years of quantitative easing. Clearly, inflation is not a concern.
The issue is debt.
Private debt, which is much larger than public debt, continues to deleverage in most countries. Although unprecedented stimulus and money-printing have slowed the process, they can’t stop it… and that’s where the problem lies.
The U.S. created more debt than any other country or region in the world during the Great Boom from 1983 to 2007. Total debt, private and government, grew at 2.54 times GDP for 25 years, while private debt grew even faster at 2.7 times GDP.
Debt is how we really create or print money. The Fed’s money-printing programs are just a sideshow in comparison. Three trillion dollars in quantitative easing is a drop in the ocean when measured against the $42 trillion in private debt and $17 trillion of government debt in the U.S.
When the next crisis actually hits, debt will start deleveraging and deflation will take hold. As we deleverage or write off these mountains of debt, we’ll be destroying money far faster than we’re creating it. As a result, U.S. dollars will become scarce and, therefore, more valuable. That’s why — just like during the last financial crisis when the dollar surged 27% and the traditional safe havens crashed — the greenback will again emerge as the one real safe asset.
Why Else is the Dollar Safe?
The U.S. has consistently imported more than it exported since the early 1970s. This has flooded the world with U.S. dollars as we borrowed to buy more than we made. It also created liquidity in dollars for world trade.
But when we stop building our empire, as we clearly have after so many failed wars, imports slow and exports rise. That’s why our trade deficit has been declining since the Great Recession of 2008. As that deficit shrinks, or perhaps even swings to a potential trade surplus from the U.S. energy revolution, fewer dollars will flow abroad, so their value will increase.
This effect is compounded by the fact that the world is using more and more U.S. dollars. According to the Bank for International Settlements (BIS), the U.S. dollar was involved in 87% of all foreign currency transactions in 2013 (the most current data). That’s an increase of two percentage points from 2010. During the same time, euro, the second most prevalent currency in foreign transactions, fell 5.7% to 33.4% of all transactions, while the Chinese renminbi moved from being included in 1% of transactions to a whopping 2.2%.
Final Thought on the Safe Asset
If you want to look at the concept of a safe asset in the truest sense of the word, then there’s nothing safer than the U.S. dollar.
The U.S. has 20 large aircraft carriers, whereas the rest of the world combined has only 12. To put it more simply, we have 70 acres of flattop space versus just 25 acres for everyone else put together. That means we’re still the Great Britain of this era, even though we are backing off of our global policeman role.
That, more than anything else, makes the U.S. dollar the ultimate safe asset for a world in turmoil. Click here to learn how you can profit from this fact.