Mike Zullo is an impressive man. When he strides into my office, I can immediately see him carefully observe and analyze his surroundings. This is a result of his years of law enforcement training. Mike spent a number of years as a cop, and then as a detective.
After a successful career in law enforcement, he left to become a trader of equities. Here, Mike also excelled. But recently, he has focused less on making money and more on protecting America – a country we both agreed had given us much but was now in grave danger.
As our conversation progressed, we agreed that America is insolvent. Most importantly, we wanted to understand this insolvency so we could protect our families. We also agreed that a dollar collapse is ahead. Yet, because of good economic decisions by leaders in the past and the dollar’s status as the world’s main reserve currency, America keeps putting off the day of reckoning.
Today, America is like the fourth generation heirs of a fabulous fortune. We may be making all the wrong moves; but our fortune is large, so it takes time for our spendthrift ways and bone-headed policies to erode the legacy bequeathed to us by our forbearers.
Our current standard of living is entirely reliant on the dollar’s world reserve currency position. Outside of that, it’s nothing more than a trashy paper currency. Fortunately, more than 60% of all foreign currency reserves in the world are in U.S. dollars. But when this special, reserve status changes, the U.S. Dollar will be toast.
That almost happened in the 1970s. The United States cancelled the gold standard; but luckily, the Secretary of State, Henry Kissinger, made a smart move. He negotiated a deal; in return for military protection, the Saudi and Gulf oil states agreed to conduct their oil dealings in the U.S. dollar.
As a result, the dollar more or less converted into a de facto oil-backed currency. Though not backed by gold, it was now secured by the strength of the U.S. economy and intimately attached to another cherished commodity, oil.
Still, it was a close call for our currency. And today, the dollar is a “fiat” currency. The U.S. Federal Reserve (Fed) produces fresh dollars by either printing them or injecting electronic “reserves” into the banking system. The supply of dollars hinges upon the determinations of the board of governors of the Fed. The dollar itself has no intrinsic value.
Like the dollar, the euro, Japanese yen, and British pound are all fiat currencies. This is dangerous for the world’s economy because every fiat currency in world history has eventually collapsed. They’ve all been destroyed by their controlling regimes.
If country after country experiences a serious currency crisis, I’m worried we could see a rolling series of collapses in the bond markets.
U.S. bond prices have started to fall recently, which is just another way of saying that U.S. interest rates are rising. If mortgage and credit card rates increase too much, consumers will send the weak U.S. economy over the cliff into a deep recession.
The Fed already has the monetary floodgates open, printing more dollars than is prudent. Eventually, this surge in dollar supply will destroy the value of the dollar. Costs for just about every product would then skyrocket. People whose life savings are in cash, bank CDs, or dollar-denominated bonds could be wiped out. Many U.S. companies will be bankrupted, along with their shareholders.
The only reason this isn’t happening right now is because deflation winds are countering the forced inflation. The problem will come when the Fed attempts to unwind the easy money. You see, the easy money has been like heroin to the financial classes on Wall Street. There’s no way to get unhooked without catastrophe.
Elsewhere, the only reason Japan and the European Union have been able to generate their meager rates of growth is the willingness of American consumers to purchase their Sony TVs and Mercedes Benz autos. If the dollar plunges too far, Asian and European goods, priced in their domestic currencies, could become prohibitively overpriced for U.S. consumers. European and Asian leaders would likely respond with monetary inflation, too, as the Japanese are now doing. The Japanese are buying bonds and flooding world markets with yen. This could result in a series of “competitive devaluations,” which may result in a death spiral for all the major fiat currencies.
Before we part, Mike Zullo and I agree… We live in dangerous times for America, and we all need a plan to prepare ourselves and our families. In the weeks ahead, I’ll share more about what to do to prepare.
This article originally appeared at CapitolHillDaily.com and is reprinted here with permission.
Photo credit: MoneyBlogNewz (Creative Commons)