Everyone is Busily Debasing Their Currency


The US is dedicated to debasing its currency. Are you ready?

There is a risk in holding cash in an environment of asset price inflation – a condition that usually occurs when governments create large fiscal deficits and inflate the money supply. The practice is endemic to banana republics and declining empires…and it is happening in the US at this very moment.

The global recession and financial crisis have refocused attention on government stimulus packages. These packages typically emphasize spending, predicated on the view that the expenditure ‘multipliers’ are greater than one – so that gross domestic product expands by more than government spending itself. Stimulus packages typically also feature tax reductions, designed partly to boost consumer demand (by raising disposable income) and partly to stimulate work effort, production and investment (by lowering rates).

The existing empirical evidence on the response of real gross domestic product to added government spending and tax changes is thin… But the evidence is quite strong that these policy responses usually trigger inflation.

I suppose that even someone without any common sense might understand that a “strong currency” over longer periods of time reflects a high degree of prosperity and economic success, whereas a chronically weak currency is symptomatic of economic imbalances, such as a lack of competitiveness or overconsumption, arising usually from excessive supply of money and credit.

I would also suppose that even if someone never travels overseas, he would understand that if the US dollar loses 50% of its value against all the other world currencies (everything else being equal), it means the US is 50% poorer relative to the rest of the world. (Now, this is not entirely correct, since the US has overseas assets that would appreciate in value in USD terms).

Moreover, stock price movements become extremely volatile and erratic in countries with a depreciating currency. In the long run, the depreciation of the currency will usually more than eliminate the gains in local currency terms. So, whereas in 2007 both the Dow Jones and the S&P 500 exceeded their previous highs reached in 2000 in US dollar terms, these indices failed to make new highs in Euro terms. In addition, whereas the US economy expanded in US dollar terms between 2001 and 2007, in Euro terms it actually contracted!

Even with the S&P 500 having shot up since the beginning of the year by over 25%, it has merely kept pace with the price of gold. And during the last 10 years, the S&P has lagged behind the official US inflation rate…while lagging VERY far behind both the euro and gold. Since the end of 1999, the S&P 500 has delivered a total return after inflation of about MINUS 25%.

Gold, Stocks and Oil

Unfortunately, the US is not the only country that is busily debasing its currency. “Everyone” is doing it. Because of the current collective debasement of all paper currencies by central bankers, I believe that precious metals and mining companies will maintain their purchasing power.

In the 1980s the US dollar was a very strong paper currency compared to the Mexican Peso. Today, there is no paper currency that is as strong relative to the US dollar as the US dollar was relative to the Peso in the 1980s! The only “currencies” that have a chance of becoming as strong against the US dollar as the US dollar was against the Peso between 1979 and 1988 are precious metals such as gold, silver, platinum, and palladium.

Also, I should add that precious metals could appreciate even if the US dollar miraculously recovered strongly against foreign currencies for an extended period of time. Such dollar strength would probably be a symptom of some horrible economic or political problems around the world, which could be friendly to precious metals.

Central bankers and pundits seem to believe that they have averted the second Great Depression, while ignoring the fact that more and more debt produces less and less GDP and fewer and fewer jobs.

For now, though, the low ten-year bond yield is the lifeline from which all support flows. Much of the investment universe holds together because money can still be had for cheap – not by the volition of a cooperative private sector, rather induced by a US government that simply distributes money for free. Such an ill-conceived idea could only have been born in the test tube of a central banker.

Private lenders comprehend the difficulty of making profits when being forced to lend for nothing, so the government increasingly finds itself to be the interest-free lender of last resort.

Ultimately, if central bankers continue this process for long enough, it is the dollar, and any currency or economy still pegged to it, that could eventually crash. Therefore, we investors find ourselves in the precarious position of having to maintain sufficient liquidity, but not too much in case the real value of these liquid reserves is wiped out by politicians and central bankers gone mad.


Dr. Marc Faber
for The Daily Reckoning Australia

Dr. Marc Faber
Editor of the infamous Gloom, Boom and Doom Report and a major contributor to Strategic Investment. Dr Faber has been headquartered in Hong Kong for nearly 20 years, during which time he has specialised in Asian markets and advised major clients seeking down and out bargains with deep hidden value, unknown to the average investing public.
Dr. Marc Faber

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  1. Is it a phase of human evolution? Technology is the function of human society that evolves of itself and thus can decay. Markets are bits of ownership in things that can decay. Dr Faber was telling a bunch of shiny arses in Aus, that the structure of financing is going to undergo a……revolt (or words to that effect) that they (shiny arses) should buy a farm and learn how to drive a tractor…..

    But that was in 2008, and the bastards have made things even worse and have learnt nothing…..well they are not listening to Dr Faber or anyone else with sense, the hard choice is going to get a lot harder.

    At least Aus has a lot of physical land assets that can support its currency given all the lousy US$ the Asians are dumping on us for Aus bonds…..we already sold our gold.

    Does the bond market thus evolve into a junk bond market….something tells me that I need to invest in a block of land and a small tractor whilst my money is worth something. Maybe kick a bit of arse.

    tar and feathers
    November 15, 2009
  2. Very true and very good points.

    The current rally is nothing but an illusion of the classic asset-price bubble due to a depreciating currency from governments loading on massive massive debts. While a few months ago the world was rushing from assets to dollars, everyone is moving from dollars to assets… problem is, US dollars are moving to overseas assets causing asset bubbles in overseas nations such as Australia and Asia. In reality the recovery is not ‘real’, the fundamentals of the economy have not turned around yet! unemployment still rises!

    I imagine you are comparing this current US situation to the lost decade of Japan, which is a valid comparison. However, I would like to hear your comments on whether the silence of the Feb, Treasury and the Obama Administration is a good thing? I.e. maybe the depreciation of the US dollar should happen.

    The past 20 years of world economic growth and the rise of China was built on the idea that the US would spend all their savings and wealth on cheap chinese goods. And that wasn’t enough, the US has mortgaged the entire nation to continue on this lifestyle. The trade deficits and negative savings rates is nothing but a sign that the US has ‘fallen’ behind the wheel. The EU, China and indeed the world wants a strong US dollar, so that the US can continue to spend, borrow, spend, borrow and spend! Otherwise who else would buy the exports of these nations? There is a reason why Obama is asking China to not rely on the US for growth, there is a reason why China needs to growth its domestic consumption. While many might think that China is doing this, think again, yes China’s domestic consumption has grown as a dollar amount, however, as a percentage of GDP it has fallen! While at the beginning of the 1990s domestic consumption was around 10% it is now around 6-7% (i don’t remember the exact numbers from the economist, forgive any mistakes). The short term policy China is adopting and continues to pursue (a undervalued currency, regulated domestic consumption, and a focus on exports rather than domestic consumption) is causing a long-term issue. It has locked China into ‘the kindness’ of strangers, without exports, the chinese economy would indeed come to a grinding halt… Even with the depreciating US dollar, China continues to peg the yuan (i get the image of a drug addict and a drug dealer)… China needs to float the yuan (or at least value the currency more fairly) and move towards a focus on domestic consumption if the nation and indeed the world is to survive. The on going battle between the US and China needs to end, one nation cannot continue to exploit the other… It reminds me of a Wilson quote “There must be, not a balance of power, but a community of power; not organized rivalries, but an organized common peace.”

    The world has screwed over the US (of course they had apart in it too), we’ve essentially raided the houses, burnt the timber frames and offered them to rebuild it their homes… at a price.

    A depreciating dollar might do the whole world a good deed, a rise in US exports, a correction in trade imblances, a return to a producing nation, a return to ‘true’ wealth generation… after all the US is broke, do you force a homeless man in bankruptcy or help him find a job to slowly get back up?


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