Investment Forecast 2011: History And The Doomed Dollar
January 5, 2011 by John Myers
The administration of President Barack Obama continues to work furiously to float the U.S. economy in order to facilitate his re-election.
Pumping up the U.S. economy has been ongoing for more than two years. Trillions of dollars have been created out of thin air to offset the deflationary destruction of assets that began three years ago. But opting for inflation at all costs is nothing new.
Since the first civilizations there has been a need for money — an instrument which could be a store of value and thus used to expedite trade. Universally, hard assets, most notably gold and silver, have backed money.
But since ancient times there has been the temptation to debase the money in what seems to be an overwhelming desire to have something for nothing. Pontiffs and politicians have for centuries achieved their goals by creating more money. The tendency to inflate the money supply seems to be rooted in human nature.
Julius Caesar understood power came with money and that if he could control Rome’s vast stockpile of gold he would reign supreme.
It was a lesson not lost to his grandnephew, Octavian, who won a civil war largely because he secured Rome’s bullion. Unfortunately, the Empire would list and then sink because of overspending and progressive inflation.
Yet Ancient Rome was not the first great power to fall into ruin from inflation. A thousand years before Caesar, Babylon implemented hard-money and became the center of world power and wealth: A city of gold.
But eventually inflation brought down Babylon’s Tower. King Nebuchadnezzar leveraged the kingdom’s gold to create short-term wealth. He issued receipts — IOUs — and loaned out at interest the great wealth from Babylon’s treasury.
First he doubled and then tripled the empire’s money supply. There was no stock market, but if there had been, it would have soared.
Eventually, foreign claims exceeded the amount of gold in Babylon’s treasury.
Still, the money supply continued to grow. But just as is happening today with the dollar, the growing debt had people demanding more money for their goods and labor. Back in the days of Babylon, inflation went into high gear.
Yet the Babylonians remained undaunted. Their treasury still had lots of silver, so King Merodach-Baladan pulled an interesting trick: He declared that the value of silver equaled the value of gold. Eventually the King declared that copper had a value equal to silver, which had equal value to gold.
You can probably imagine this didn’t work too well. Copper was in far greater supply than silver, which was in even greater supply than gold. Money began losing its value and confidence began to crumble. So did the world’s first great empire.
Babylon’s wealth had been the foundation for its society. The economic crisis led to a civil war. Babylon didn’t fall; it was buried beneath an avalanche of worthless money.
Five hundred years later, the city-states of Greece were issuing metallic coins, the silver obol. Another historical record of monetary inflation soon followed.
After Sparta captured the Athenian silver mines around 400 B.C., Athens was faced with a grave shortage of coins. Over the next couple of decades Athens issued bronze coins with a thin plating of silver. The shortage was made even worse as citizens hoarded the old coins and spent the new. It was the world’s first experience of what has become known as Gresham’s Law: Bad money drives out good money.
Empires Come And Go
It is amazing to think that in 1490 Spain didn’t even exist. Yet within a century it was the greatest power on earth.
The discovery of new lands was the major factor in Spain’s success. In 1492, Christopher Columbus, exploring for Spain, discovered land in the Bahamas, which he named San Salvador and claimed for the Spanish Monarchy. His claims paved the way for future Spanish imperialism. With land came the most important of resources of the age — gold and silver.
The Spanish government seized all of the riches, including the silver mines of the Aztecs. In Peru the Spaniards tapped the richest silver mines in all of the New World.
But Spain would spiral down into decline. Riches from the New World poured into the port of Seville. Spanish expansion was based on finding and bringing precious metals back to the monarchy. Yet no matter how much was brought back, more was spent.
Inflation completely ruined the Spanish economy. Additionally, precious metals being shipped from the Americas often didn’t reach Spain because Spanish ships were pillaged by the English. King Philip had to pay debts to his armies and foreigners, but to pay them he produced more money, making the money worth less and less.
Creditors soon caught on and, when they refused to lend, the Spanish Empire dissolved.
Inflation Boils Even In The 21st Century
History has shown that manipulating the volume of money leads to hyperinflation and economic collapse. Consider what happened in Germany, Zimbabwe, Argentina, Brazil and Peru.
During the era of 1918-1923, the Weimar Republic in Germany began printing money at a dizzying rate, setting off hyperinflation. Prices were rising so fast that workers receiving their pay would immediately run to the store to buy foodstuffs before prices climbed again. Business and industry were paying their employees with wheelbarrow-loads of cash.
In trying to keep up with the falling currency rate, Reichsbank printed a 1,000-billion Mark note that was so worthless that when it was spent few bothered to collect the change. By 1923, with one dollar equal to one trillion Marks and inflation at 30,000 percent, the collapse of German currency was complete.
During the 1980s the South American countries of Argentina, Brazil and Peru all experienced triple digit annual inflation.
In Zimbabwe in late 2008, inflation hit 11 million percent. The government finally acknowledged that its own currency was done and began issuing licenses allowing stores and businesses to begin accepting U.S. dollars, South African rands and other foreign currencies.
The economy had to be “dollarized.” The local currency was worthless as legal tender. Barter trading took over, with the most prominent bartered item being a fuel coupon worth about $30 U.S.
None of these lessons have made an impact on the Obama administration which continues to use the Fed and the Treasury Department to create trillions of dollars in fresh money. The consequences for this reckless action will be felt this year beginning with the…
U.S. bond market, which has a gun to its head despite the fact that during the fourth quarter the U.S. government had no problem selling $36 billion in two-year Treasury notes yielding an unbelievably low yield 0.441 percent. To date, low yields have not fazed bond buyers. That’s because dollar inflation is still coming down the pipeline. This will change as the U.S. Treasury continues its massive sales program to prop up the Obama administration. Warren Buffett was correct when he said, “Debt is a four-letter word.” Once foreign investors, especially the Chinese, understand this it will have a devastating impact on the…
U.S. dollar, which continues to flounder. Last week the Aussie dollar broke above parity with the greenback while the Canadian loonie can almost be exchanged at a one-to-one ratio. A decade ago the Canadian dollar was under 70 cents U.S. and the only relief the greenback has had in a decade-long decline was during the deflationary scare that happened during the banking crisis in late 2008. A weakening dollar and accompanying higher U.S. interest rates will hurt the stock market and the end result will be a continuing bull market in…
Precious metals, which are showing new strength in the New Year. Silver, which has long been a laggard, is at $30 per ounce after reaching a high of $31.10 on Monday. Gold broke through $1,400 before giving up some of its gains. In many ways the precious metal markets are behaving the way they did in the 1970s during the latter part of President Jimmy Carter’s single term. My expectation is that we have yet to see the spectacular blow-off for either gold or silver. I think we will see it this year, with gold moving close to $2,000 per ounce and silver hitting $50 per ounce. Therefore there is more leverage in silver than in gold, but both are worth buying and holding.
Action To Take
Look for an investment crisis in 2011 as inflation makes itself felt on the bond and stock markets. Sell blue chip stocks and all bond instruments. If you want to hold large amounts of cash then do so only in the form of 3-month Treasury bonds. You can always roll those over. You are not losing any income in buying longer term Treasury notes or bonds, just incurring massive risk. Other than money necessary to pay monthly expenses and cover emergencies, I would not keep additional cash in U.S. banks.
Yours in good times and bad,
Myers’ Energy and Gold Report