From Porter Stansberry in The S&A Digest:
Friday, June 07, 2013
Bear with me…
Today’s Digest addresses what I believe is the core financial issue of our generation. These concerns are so important, they dwarf all other financial considerations.
Unfortunately, few journalists have any idea what these things mean. That means you likely haven’t heard of most of these things. So please… allow me a bit of basic reporting.
Last April… in a little-noticed move… Australia announced it was transferring 5% of its currency reserves from the U.S. dollar to the Chinese yuan. The deal was part of a broader currency agreement between the two countries that allows Australia’s leading banks to handle trade settlements between the two countries without the use of the U.S. dollar as a reserve currency.
As CBS Marketwatch explained, “The agreement does away with the need for companies and currency traders to first convert their Australian dollars or yuan into U.S. dollars.”
Similar direct-exchange agreements, swap lines, and bilateral trade agreements have now been established between China and virtually every major economy in the world: Japan, Brazil, Russia, India, Britain, and France – not to mention every economy in Asia. These agreements will allow China, the world’s dominant consumer of commodities, to completely avoid using the U.S. dollar in virtually all of its raw-material sourcing.
Similar “dollar exclusion” agreements have been formed by Russia with its major trading partners. London-based HSBC, one of the world’s largest banks, now predicts that by 2015, the Chinese yuan will equal the U.S. dollar and the euro in cross-border transaction volume.
In December 2008, I began warning about the risk that the U.S. could lose its “world reserve currency status,” something I termed the “End of America.” It’s worth looking at what I wrote almost five years ago because so much of what I feared would happen has come true. Here’s precisely what I wrote in my Investment Advisory in the days following the huge crash of the stock market and the near-collapse of the world’s banking system…
It seems redundant at this point to tell you massive changes are taking place worldwide in the structure of capitalism. It is difficult to know what impact these changes will have on stocks, but I believe in general they will drive up stock prices…
The United States, has become fantastically indebted at every level of society. Entire industries exist today purely because of the widespread availability of easy credit – a trend that has ended. U.S. consumers have refused to save any significant portion of their earnings for more than a decade. This trend was unsustainable and has come to an abrupt end.
As I’ve covered previously, fueling the debt and consumption binge in America were phony insurance schemes (AIG’s bogus default swaps), record-high levels of mortgage debt, and global investors (primarily Asian) buying American mortgage paper. In the most basic analysis, China and Japan lent us endless sums of money so we could keep buying their exports. America’s real estate bonds became the world’s collateral, supporting ever-greater amounts of borrowing. This global game of credit expansion has come to a crashing halt because the creditworthiness of American consumers and financial firms collapsed…
With a currency and a budget process totally untethered to any reality, nothing limits the amount of foolish spending Congress can (and will) authorize… It controls the world’s only reserve currency – meaning it is the only country in the world that can print money to cover all of its debts, bar none. And yet, for all of this power, [the U.S. dollar] is still doomed. It is only a matter of time now before our creditors realize America’s government is just as bankrupt as Iceland’s.
We are witnessing the end of the paper-dollar standard.
Like every experiment with paper money in history, our paper dollar will be destroyed in an all-out attempt to paper over deficit spending, bad investments, and war debts…
Federal spending is now up 48% over last year. I hope for your sake you understand this is completely unsustainable. At some point, America’s creditors will balk.
In addition to the Treasury’s vast increase in spending, the Federal Reserve has opened the monetary floodgates…
By the end of November (2008), the Fed had purchased almost $900 billion worth of questionable assets via its new “Maiden Lane” facility. It also increased its lending to banks (and, for the first time ever, brokers) to more than $700 billion, up from a mere $481 million in November 2007. The result has been a truly fantastic expansion of the Fed’s total assets, from less than $900 billion to more than $2.1 trillion. [Editor’s note: As we know now, the Fed also lent tens of billions to European banks without disclosing these actions to the American people, or even to Congress.]
What you must understand is these assets form the basis of our currency. As the Fed’s balance sheet expands, so does the lending capacity of the money-center banks. At the moment, they’re not lending. But sooner or later, these resources will find their way into the economy. (The money will most likely be recycled back into Treasury bonds.) This huge increase to our money supply and the inevitable huge, new stimulus spending plan by the Obama administration, positions our economy for cataclysmic inflation…
Folks worried about a lasting deflation (as opposed to a temporary liquidity crisis) simply don’t understand there are no limits to the amount of money and credit the Federal Reserve can create at will… No other central bank in the world wields this amount of power. The Fed is the ultimate source of the world’s money and credit because the dollar is the world’s reserve currency.
The huge inflation underway right now will be what I call the “End of America.” I don’t mean an end to our political union. I mean an end to the special role America has played in the global economy since World War II. The coming great inflation will destroy America’s economic leadership. It will lead – eventually – to the return of settling international obligations in gold instead of paper dollars. And this will happen much faster than anyone expects.
By the time Obama leaves office, you will not be able to exchange dollars for any sound currency in the world without permission from the U.S government. The price of gold will be well over $2,500 per ounce. Most importantly, commodities will no longer be priced in dollars either, but instead in the currencies of the leading producer. Americans haven’t experienced anything like this since the Great Depression.
As you now know, almost everything I foresaw in December 2008 has happened. The Fed went on to print and spend more than $3 trillion. The prices of stocks and commodities soared. The dollar fell versus sound currencies around the world. And the prices of U.S. goods and services, even domestically made products, soared.
Now, some folks who have followed my research from the beginning might point out that I predicted the U.S. would begin suffering from severe inflation as early as 2009. With the consumer price index hovering around 1%, isn’t that inflation overdue?
If you look beyond the government’s manipulated numbers and focus on the real prices people are paying… you’ll see price inflation is here and getting worse…
As I’ve written extensively… inflation is found everywhere in our economy, except in the government’s statistics. Corn, the most important food crop in America, is up 75% since 2008. Gasoline is up from $2.25 a gallon to more than $3 a gallon – an increase of more than 30%. The nationwide minimum wage is up by 40%. Rents are up by 25% nationwide and up 40% in most urban markets.
And my favorite example, the base price of a Ford F-150, the best-selling passenger vehicle in America, has gone from $18,225 to $23,670 – a 30% increase. That’s a domestically sourced and manufactured product… something whose price is completely dominated by the value of the U.S. dollar.
Meanwhile… the government says there is no inflation… and that continuing to print $85 billion to buy government and mortgage debt is merely “interest-rate policy by other means.” What could go wrong?
Billionaire investor Warren Buffett has sagely warned that buying all of those bonds and manipulating interest rates to stupidly low levels will prove to be much easier than selling them. The fact is, the moment our central bank begins to sell U.S. Treasury bonds, the whole world will follow. After all, our dollars aren’t needed in trade for most of the big commodity countries. So the free ride will be over. All the traders who’ve enjoyed the free ride on the back of the Fed’s buying will surely change course the moment it starts to sell.
And what, you might wonder, have our noble leaders done with all the money and credit they’ve created? Mostly, they have expanded the welfare state at the fastest pace in history, creating more dependency in your fellow citizens than has ever existed before in the history of our country. There are now almost 100 million people collecting food stamps, disability, or long-term unemployment. Barely 60% of the adult population of America bothers to go to work, even on a part-time basis.
On the backs of the poor schleps in America who paid their mortgages and still go to work, a gargantuan pile of debts and obligations have been piled higher and higher over the last five years. Total debt now approaches $60 trillion. Federal debt has nearly doubled in the last five years, from $9 trillion to $17 trillion. And our governments (state, local, and federal) continue to take up more and more of our economy – comprising more than 40% of our roughly $15 trillion gross domestic product (GDP) today.
It seems completely obvious that none of this is sustainable. The few Americans who still work and pay taxes can’t possibly support the income demands of nearly 40% of the population… especially considering the debt load our economy suffers under. We cannot possibly afford our existing debts, if we were to pay them back at a fair rate of interest in sound money.
And so… we race toward a day of reckoning when the Fed cannot continue to print new dollars to bail us out because our trading partners have abandoned our currency.
Of course, not every American is an economist. Most people don’t understand why the real value of their wages continues to fall, even as the government swears there’s no inflation. I doubt even one in 100 Americans understands the risks our country faces as we attempt to manage total debts (public and private) that represent about 400% of GDP (not counting any of the future costs of the entitlement programs) while our trading partners abandon our currency as the reserve standard.
But… most people know something is wrong.
Gun ownership in America now stands at 47% of all adults – that’s near the highest percentage ever recorded by Gallup. It marks a significant increase since 2008. The percentage of self-described liberals who own guns has grown from 30% to 40% in that period. So even folks who don’t believe you should own a gun have been buying them.
I believe most people know that something isn’t right… that we can’t go on like this forever… printing money day after day. Most people simply know that far too many people are on the dole. And they can see that our Treasury has fallen into the hands of the voters, a fact that has spelled doom for every democracy in history.
So while they might not fully understand all the factors that I’ve written about here… they can see the hallmarks of a crisis. And that’s why… despite the central banks’ efforts to manipulate the paper price of gold down… there are never any gold coins left to buy. That’s why the price of farmland has soared (as I predicted it would). That’s why more and more wealthy people are leaving America. And that’s why… I firmly believe… this ongoing bull market will end very, very badly.
Many people who read my End of America warnings over the years replied that it would take decades for America to lose its world reserve currency status. But if you simply look at the data on cross-border currency exchanges, you’ll find that so far this year, more than 40% of the exchanges involved the euro. Only 33% involved the dollar.
Today, more than 60% of bank reserves around the world are still held in U.S. dollars. Mark my words: In less than a year, the dollar will no longer make up even a majority of these reserves.
The End of America isn’t coming. It is here.