August 27th, 2014
Published Daily

How Quickly Could the Dollar Collapse?

by Rick Ackerman on August 20, 2009 1:07 am GMT · 20 comments

We popped up on the “wrong” side of the inflation/deflation argument here the other day with a hyperinflation scenario that seems to us not just possible but likely. Although we hold fast to a prediction that deflation is going to run its course, throwing tens of millions of Americans into bankruptcy, before relief comes to debtors, we are persuaded that at some point well down the road the U.S. will throw the switch to hyperinflate.  Even so, we believe that the attendant collapse of the dollar will play out far more quickly than the collapse of the German mark during the Weimar hyperinflation of 1922-23. So swiftly will this occur, in our opinion, that the hyperinflationary spike will begin and end in mere weeks, leaving deflationary to dominate both before (as it continues to do now) and long after.

1-bill-small

 A contributor to the Rick’s Picks forum, Ed M,, disagreed — mainly, he said, because there is no precedent for so swift a collapse of a sovereign currency. We present his argument below, followed by our response, but also some interesting thoughts of Ed’s concerning barter.  

Here’s Ed:

“The idea that a hyperinflation would come and go in a few days or weeks has no precedent, and, as such I give it little credence.  However, the question for those owning [precious metals] concerning what to ‘transfer’ one’s ‘profits’ into, is very relevant.  Furthermore, there is the issue of taxes on what could be, at least nominally, outsized profits. So, while leaving the question of what to buy momentarily behind, let me offer that arranging some sort of barter might be the way forward for [precious-metal] holders.

“Choices of what to purchase will be more or less the same in future as they are today, but in what will likely be a chaotic environment, some items will be, for a variety of reasons, difficult to acquire expeditiously and economically.

Fungibility

“But here are some of the choices that, depending on where one resides, and what connections one has, may be possible.  Each choice has obvious advantages and disadvantages having to do with relative liquidity, availability, perceived value, maintenance costs, taxes, ‘fungibility,’ etc.

1) Raw Land

2) Food Stuffs

3) Currency

4) Developed Property- commercial and/or residential

5) Precious gemstones

6) Objets d’art

7) ‘Services’ unspecified

8)  Other commodities

9) Heavy equipment

10) Businesses unspecified

11) Stocks

12) Bonds

“I haven’t done much research on this question yet, but I imagine that bartering [precious metals] for raw gemstones might be worthwhile.”

Our reply:

History Rarely Repeats

When we try to guess how long it will take for the dollar to collapse, why should precedent matter? History almost never repeats itself in a way that can be clearly foreseen and easily predicted. There’s always a twist, and in this case the speed of the collapse is exactly what we might expect to undo even those who profess to be “ready”.  Bear in mind that the dollar is already a fundamentally valueless IOU, not money, and it is therefore only mere perceptions that need change to make this so in practice. That could happen — globally — in the space of time it takes to air the evening news.

Moreover, it is not the reichsmark or Zimbabwean dollar that we are talking about, but a currency in which nearly everyone on the planet has a crucial stake either directly or indirectly.  Under the circumstances, and given the lightning speed at which news travels these days, it is not difficult to imagine how a global run on the dollar might become unstoppable in mere hours.

The world may be ready and perhaps even resigned to the dollar’s collapse; what few seem to be imagining, however, is how very quickly the collapse could run its course around the world — as quickly, even, as a run on a single bank.

****

Let’s Trade the E-Minis

Drop by today during trading hours for some real-time action using the Hidden Pivot Method. Rick will be closely monitoring the E-Minis in particular, calling trades from 9:15 a.m. until the closing bell.  This will be an informal session, and you’re invited to look over Rick’s shoulder at any time during the day. Seats are going fast, so register now by clicking here.

(If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)

Take the Hidden Pivot course at your leisure, in recorded one-hour segments. The real-time Wednesday Tutorial sessions, the HP Tutorial video library and a confirmed seat at the next live Hidden Pivot webinar on August 27, 2014 come as part of the package.



{ 20 comments }

Phil C August 20, 2009 at 1:40 am

I’m afraid you could be right. That might be why we hear of stories here and there where they are preparing camps and posting jobs on monster.com for correctional facility officer. The amount of violence could turn ugly. We already have people angry just on the Health care issues right now. This is cranking up slowly… getting more and more vocal as the economy is collapsing.

I need to prepare my boat for my family and head for some place where war, famine, disease and violence are the least likely. How about Greenland? My second choice could be that island that Tom Hanks got stuck on for 4 years, if I only knew where it was and it wasn’t as tiny.

Seriously, I wonder Rick what do you perceive will be the situation (currency et al) in other western countries? Like Canada, Australia, and western Europe?

billwilson August 20, 2009 at 2:38 am

I too am interested in the prospects for those of us outside of the US, particularly Canada.

Canada had as of late kept a pretty neat fiscal house (at least until the Conservatives attained power). With balanced trade, an energy surplus, and a relatively smaller fiscal problem Canada is in a different “economic” place than the US. But as the most integrated economy with the US, the fall-out of a US$ collapse would be interesting to say the least.

Would we see a rush by Americans into C$?
Would trade over the border grind to a halt ?
Would Canada become a safe haven, or be sucked into the whirlpool?

Thoughts?

Paul August 20, 2009 at 2:52 am

The best thing going for the USD is that almost no one holding dollars has a vested interest in it going down. And there are many no one’s out there.

One great mind (please help me with an author) has proposed that there will be a a “waterfall” event taking all currencies to a watery grave, suddenly.

Maybe Rick’s time frame of 12-18 months will give the dollar a chance to “win” the race, downstream, to the brink, accelerated by creation of “thin air” dollars to fund Stimulus I (II, III?).

During the journey of the dollar towards the Falls, some will find other “homes” for their dollars, say, using Edward’s list. But I don’t think that most dollar-holders have pre-conceived list of go-to asset classes when the dollar crises occurs. As one astute contributor to the Forum wrote, it becomes a crisis because most people haven’t planned for it.

As the Mises article showed, many people in 1920s Germany, Austria and Hungary held on to their local currrency and their financial condition went over the falls, too, as the currency collapse. Many US Dollar holders will think back fondly to the Fall of 2008 when the dollar was a safe haven. And, maybe they may get a partial repreive when the other major currencies follow the dollar over the falls, and those non-USD holders scrabble for USDs.

The best to you all.

P.S. I know that bartering is not the main issue here, but the IRS doesn’t go easy on barterers, if Edward is thinking that bartering is a tax-advantaged strategy. Search “Bartering” in irs.gov for the boring details.

Myron August 20, 2009 at 5:25 am

Paul makes a good point in saying that no one has a vested interest in the dollar going down. I suspect that is all that is holding it up right now; everyone around the world is afraid of a dollar drop and governments and central banks everywhere may be pulling out all the stops to prevent its utter collapse. I don’t see why this show can’t go on for quite a while, but these are unprecedented times, and I have to agree with Rick that a collapse could come quickly and severely. This would be especially true if it turns out that other countries have been quietly planning to suddenly dump the dollar after all.

As far as Canada is concerned, I think its currency would initially spike up well over the US$ in the event of a sudden collapse, but in a matter of weeks, if not days, it would likely start aligning itself with the US$ in accordance with Canada’s near-total integration with the US economy.

Occdude August 20, 2009 at 5:45 am

First off nobody will be dumping a currency like the dollar as long as there is deflationary forces pushing this very sick currency upwards. People like Bob Prechter (of Elliot wave fame) believe that the dollar is headed towards a multi-year bull market.

The fundamental theory behind this is that the dollar is the most sick (indebted) currency out there, that during a deflationary liquidation people cant get enough of that crappy currency to settle debts and scurry towards “safety” ie. cash. So I know all you dollar haters out there (which I count myself as well) have a hard time palating this concept.

After this liquidation period happens though and everyone gets their “safety trade” all the money the government has printed to prevent us from going back into the stone age, is going to come back out with a vengence. The result will be the unique scenario of intense inflation in a post deflationary landscape, possibly a brief period of hyperinflationary depression before people realize the ruse is up and the dollar gets devalued so the healing can begin. I reiterate, nobody is going to squawk about money printing if the dollar is going up in value, thats why the government will print money, but overwhelming deflation will cushion the blow initially. When money velocity returns and people realize that cash is the riskist investment, then inflation will be off to the races.

Occdude August 20, 2009 at 5:52 am

PS. Gold will do suprisingly well in an intense deflationary environment not due to inflation fears but because the desire for money will be so intense that the monetary value of gold will come forth again. We saw a very brief episode of this when we were in the deepest part of this last deflationary period where you saw both the dollar AND gold going up TOGETHER. This is the “hell in a handbasket” trade where “old money” seeks to maintain its status and gold is a hedge against armageddon.

Dean August 20, 2009 at 11:09 am

I find it hard to believe that we are the only ones thinking about this possibility of dollar collapse. What we have seen over the last thirty yesars was fully explained by former Treasury Secretary Simon in his book writen over twenty years ago. Almost the exact sequence of events has taken place, with the exception of the Clinton years. (Harken back to those days a mere ten years ago when there was talk of retiring the national debt.) I believe there is a plan going on here but the best scenario available to us, the unwashed, is beyond me except to be as diversified as possible.

Peter Montgomery August 20, 2009 at 11:37 am

the fact of the dollar being THE reserve currency will make the devaluation even more severe

its takedown will be not just for economic but political reasons to further destroy US supremacy

there is precendent for this, FDR devalued the dollar in his 1933 gold grab by 67 % overnight

Mercurians for Mercury August 20, 2009 at 1:08 pm

I can’t remember his name, but the French-Swiss founder of SafeWealth services has had a pretty good long-term record, refusing to jump in too early on gold, buying into it as it ascended etc. He said the USD would be the first to go, to be followed shortly by all other fiat currencies…in other words, all others. He said that at some point, he would recommend and 80% position in gold before the collapse but most readers would ignore him, get caught in a rapidly imploding USD or other funny money and have zip to show for all the years of accumulation. I used to read him just to lift my spirits.

Dean August 20, 2009 at 1:25 pm

By the way, the name of the book is “A Time For Truth” published in 1978 by William E. Simon, Treasury Secretary under Ford.

Edward August 20, 2009 at 2:34 pm

Bartering is cheaper than taking profits on one’s coins or bullion, paying the (last time I checked) 28% tax on items defined as collectibles, (as near as I can tell, PM coins are) and then turning around and exchanging one’s paper for______.

My reading of the IRS provisions for bartering is that while it may be crystal clear to them what is what, where bartering is concerned, it certainly isn’t to me as per the IRS website.

http://www.irs.gov/businesses/small/article/0,,id=187920,00.html

Rich B August 20, 2009 at 3:43 pm

This is the Latest from Martin Armstrong. Say what you like about his personal life but he has a stellar record as a market timer/cyclist. This quote is from his current article which is the first link and the second link is his article titled “How All Systems Could Collapse Overnight” which is relevant to your article. This is a detailed look at the collapse of Rome through currency debasement, political corruption and multiple wars. He ties this to the current calamity in the U.S. with stunning comparisons.

I believe Armstrong’s predictions are some serious cement for Jim Sinclair and Alf Field’s views on Gold and hyperinflation. And to believe that hyperinflation will be short lived after it took since 1974 to get to this point is hard to believe. There would be not one fundamental to bring the dollar back. The treasury/fed would have to tie it to gold somehow to save it.

From Armstrong;

“Gold continues to consolidate below $1000. This is a critical sign that confidence is swinging away from the government. Just as China is concerned for the dollar, they speak the truth, unlike the BS from Washington. They are speaking from self-interest and so is Washington. China is concerned about its holding in dollars and has been reducing the maturity of their holdings. The Washington crowd has been speaking out of their self-interest insofar as they do not want to face reality and keeps telling everyone “don’t worry-be happy.””

It appears that gold is building a base from which a rally up to $2,500 – $3000 area is very likely. There is even a possible rise to the $5000 level, but that is the most extreme projection. This is suggesting that confidence in the dollar is declining. This is not the classic, “Inflation nonsense, but a collapse in currency value consequence.”

http://goldsilver.com/news/newsID/6135/tPath/3/
http://www.scribd.com/doc/17880556/How-ALL-Systems-Can-Collapse-Overnight-709

Ryan August 20, 2009 at 3:47 pm

I think that the currency will collapse slowly (but at an increasing pace) with periods where it drops suddenly. These sudden drops will probably be preceded by announcements or “discoveries” of scandal related to federal book keeping or the federal reserve.

Inflation will be caused not necessarily by the printing of money, but by individuals and corporations who will start to realize that the money sitting in their bank is worth less and less every day. This will encourage and promote rapid buying of hard assets. This sudden demand for real assets will drive prices of those assets higher, and the cycle will continue. While the printing of money may be the impetus for all of this, the real driver will be when everyone is trying to dispose of all of their dollar holdings to convert into anything that will hold value. PM’s will be the most desirable since PMs are money, but other assets will be good too.

I personally think that -if credit is available- buying rental property by borrowing as much as possible would have one of the best payoffs since the loan amount and payments will be fixed but rents will be rising.

Ricklenov McCahill August 20, 2009 at 5:32 pm

I disagree with the following: ““Choices of what to purchase will be more or less the same in future as they are today, but in what will likely be a chaotic environment, some items will be, for a variety of reasons, difficult to acquire expeditiously and economically.”

I would imagine that choices of what to purchase would soon be much less than today as so many things are made overseas and with “just in time” distribution, desireable products would get snapped up. A currency mess would wreak havoc with importers and exporters.

Thanks to Liberals blocking almost EVERY domestic energy source and drilling here, along with new oil refineries, one can only guess at what foreign countries {read hugo chavez etc} would be willing to part with their oil and gas for!

Marxine Waters alluded to nationalizing oil Co’s last year so we know what the Leftist Dem gov here would do in a real crisis. We could almost bet on “Central Planning” being imposed and it’s resulting “efficiencies” as shown in the former Soviet Union.

As far as moving to a “safe” country at least the US can feed itself and at least for now we haven’t fallen into the trap that England, Australia and Canada {in varying degrees did} where their citizens are unable to protect themselves from criminal elements/angry looting mobs. Cities here, especially Dem run ones with a history of entitlements replacing a “pull yourself up by your bootstraps” ethic, organized and armed gangs, disarmed populations, would likely soon resemble New Orleans right after Katrina. That “only” devastated large swaths of three states. Imagine how thinly spread FEMA would be now?

An awful lot of people will lose an awful lot IF the currencies collapse and that includes the EU where their teetering welfare system cannot possible take care of their aging populace due to their low birthrates. Some in the EU of course will argue that their increases in mostly low-skilled Muslim immigrant populations will save them but that seems a slender thread imho.

Best of luck to all! With luck we won’t need it and things will bumble along with Pelosi, Reid and Obama choosing policies that hark back to FDR and as long of a recession, unless voted out for some pro-business party that unleashes the entreprenurial spirit still residing in enough Americans to make a difference.

I’m mostly in goldmining stocks by the way.

Junior August 20, 2009 at 6:05 pm

I think domestic hyper-inflation is almost impossible at this point. The only hyper-inflation nightmare we face is the rest of the world rejecting our dollars. You know, and I know, that all bids can instantly be retracted. Likewise, all offers to sell gold in dollars would vanish. The dollar could become worthless in a matter of weeks. No deflation afterwards either. There is nothing left deflate or inflate. The dollar has been defaulted on.

Soon after we would get a new script of money (most likely commodity backed). I wish everyone the best in making profit on gold. But, I agree with the writer than it’s going to happen so fast only a few will be lucky. My plan is to just hang on to most until the smoke clears and then use it to start fresh. An ounce of gold today will purchase the same goods after the crisis.

Richard J August 20, 2009 at 7:52 pm

Quick hyperinflation might serve the same purpose as devaluation. Devaluation would lead to demands for adjustment of tax owing as a result of örchestrated windfall gains, whereas inflation is more likely to pass muster as a caveat emptor event.
The advantage to speed is the preservation of order in society which otherwise would not be possible. The aim is to raise the boats causing most of the trouble and eliminate (devalue) the debt. So if all the obligations of US guv go down by 60%, if housing can be made to go up even 50%; then maybe the bankruptcy cycle is stopped and a recovery can begin. Tax revenues skyrocket.
Perhaps a secret strategy exists whereby holders of the right derivative transactions will be unharmed and profit from the event.

Rich August 20, 2009 at 8:16 pm

Still the lone bull here.
That alone might make UUP above 23.04 worth considering.
Haven’t seen anything to change my mind.
Folks, the dollar fell in half under the last President, down 98+% in terms of 1913 gold with a succession of Fed Governors sworn to maintain full employment with currency and market stability. Right. So now Ben Franklin’s going to turn down for a change and collapse?
Too many trade partners holding dollars manufacturing vital goods to let that happen, unlike all other hyperinflations. This includes the Civil and Revolutionary War hyperinflations, when smart people held the silver dollar Mexican Piece of Eight and spent Greenbacks and Continentals or papered their outhouses with them.
Folks, the dollar bottomed in March of 2008 at 70.70, when gold peaked and trade nations were screaming for a dollar substitute. $USD climbed upward since then despite destructive DC policies.
Armchair financial generals fight the last war, namely two generations of inflation. If true, the Sachwerte solution of material things would make sense.
During a scarcity of cash due to widespread credit default implosions, insolvency and breakdown of the financial system, despite liquidity bailout stim for select banks and corporations, just try to get cash for magic beans, coins, land or even declining foreign currencies of smaller imploding economies, including BRIC.
Try to sell your internet gold at $5000 during a bank-exchange holiday or convince Safeway to take your silver coins. They still want bucks, particularly if the ATMs and Internet close like Iceland, India and Japan or the 1904 earthquake.
Folks, credit card delinquencies and foreclosures are more than a third higher this year than last, GM and C were given to the unions, and most big banks still refuse to mark their balance sheets to market reality.
Stocks may be way ahead of free market reality selling at 127 times earnings. The 1974 S&P bottom was 7 times earnings. With Shilling’s forecast of $40 S&P500 earnings, we could be looking at a 280 SPX. (Am I now the lone S&P Bear after a 50% rise?)
Judging from the rally yesterday on Stim II rumors, maybe a few people still think more of the USA deficit spending which got US into trouble is somehow the answer. The joke is that John Q left the market for at least a decade last year and is trying to sell his home before it falls further or handing in the keys. Half of mortgage modifications default in 60 days.
Even DC nudniks know defenestration, petards, tar and feathers are not far behind confiscatory taxes and inflation rates with a dead economy. Who believes the ebullient DC Wall Street headlines?
With Treasury debt coming to market at a $5T annual rate and few left beside the Fed buying, we may be about to see the end of fresh monetary creation for some time. The fear of insanely higher interest rates or insolvency choking banks, capital markets and the economy may put a further lid on M-3 money supply, which has been contracting -12%, and makes bills in circulation even more wrinkled. Increasing demand or declining supply mean higher prices.
A 5% decline in collateral puts even the Fed out of business. With the repudiation of credit, a negative money multiplier and a failing Fed pushing on the demand string, there is no inflation or hyperinflation, hello.
The underlying causal problem may not as much be the overflogged credit consumer cycle as technology trade transfer to low wage nations which flooded the world with more supply than demand. When credit lines are tapped out and defaulting before the 60th Anniversary of the Glorious Revolution, will China just give away their manufacturing surplus as America did her agriculture? Or will it just sit in the warehouses? The Baltic Dry Index down 39% so far from June 2009 highs may have answered the question. Then the sad question may become, How soon until world war III gets rid of the glut and hungry populations?
Folks, the stupid paper dollar may become the preferred holding of last resort, particularly when only 3% believe it, and even fewer have it…

Junior August 20, 2009 at 9:26 pm

The dollar hoarders out there are playing Russian roulette which I’ve never played personally even though the odds are in my favor. Maybe you deflationists are right. But I AIN’T playin’. I’ll stick with gold and silver.

Edward August 20, 2009 at 9:34 pm

In the meantime, the following view is, if not precisely on point, relevant.

http://www.nakedcapitalism.com/2009/08/why-austrian-keynesian-monetarist-and.html

david biondi September 9, 2009 at 1:51 am

ed do yourself a favor stop smoking pot ,people who have silver and gold stockpiled have plenty of food stocked!

Comments on this entry are closed.