Scary read, just forward: With the weakening of the greenback, investors are more likely to sought out higher yielding assets in the AsiaPacific region.
http://pair.offshore.ai/38yearcycle/ Paper Money vs. Gold Money - US 38 year cycle (Embedded image moved to file: pic00041.jpg) If history is any guide, the US dollar will be devalued very soon. For longer than America has been an independent country, an economic cycle about 38 years long has troubled America. Each time paper money drops in value and there is an economic/financial collapse while gold increases in value. This has taken place like clockwork. By this clock the dollar should be devalued within the next year. 1742 To help pay for debts from The Seven Years War, England issued the British Resumption Act of 1742 devaluing American paper money and requiring the colonies to pay taxes to England in gold. This brought in years of recession and was one of the events leading up to the revolution. 1781 = 1742+39 By the end of The American Revolution hyperinflation made the Continental Currency worthless. In order to save the new union of American nation-states from financial collapse, the Bank of North America is founded by the Congress of the Confederation. The Netherlands and France loan this new central bank physical gold and silver which was then used to back a new currency. 1819 = 1781+38 Public debt from the War of 1812, and the Louisiana Purchase meant that the government was short on gold to pay banks it had borrowed money from. Since it could not pay the banks in gold, it said the banks did not have to pay their customers in gold (even when contracts said they did). This meant banks could print notes without worry about having to back them. This led to the Canal Craze Bubble and then the Panic of 1819 when it became clear there was not enough gold to back all the paper. 1857 = 1819+38 The economic bubble of land speculation near new railroad lines and fraud in major banking institution led to the Panic of 1857 when people lost confidence in paper money, in part because the SS Central America sank with 30,000 lbs of government gold. There was a run on physical gold at banks as notes were handed in for redemption. The stock market crashes, unemployment soars, manufacturing is at a standstill, and people in the northern States begin to starve as most banks are shut down for more than two months. The southern States are less effected due to a high international trade demand for their crops which foreigners pay for in gold. 1895 = 1857+38 Paper money led to a speculative bubble in railroads which then burst. In 1895, in the depths of the Panic of 1893, the government did not really have enough gold to redeem all the paper money it had printed. President Grover Cleveland through J.P. Morgan was able to get $65 million in physical gold and save the U.S.. Treasury. However, in 1896 Cleveland lost his reelection bid to William McKinley who ran on a gold standard platform. 1933 = 1895+38 In 1914 the Federal Reserve was created and allowed to print paper money with only $0.40 backing in gold for every $1 in paper even though claiming all paper was convertible. As the paper came into circulation there was the Roaring Twenties and a stock market bubble. When the Fed approached the limit on the amount of money it could create given the gold it had, it restricted credit. This led to the Wall Street Crash of 1929 and the The Great Depression. Since there was not enough gold to really back all the paper money, in 1933 President Roosevelt confiscated private gold and no longer let people exchange paper money for gold or own gold. When they took people's gold they paid them $20.67 in paper and then shortly after raised the price to $35/oz (so they really paid people $0.59 for every $1 worth). Foreign countries could exchange gold at $35/oz and for awhile after this gold flowed into the US. 1971 = 1933+38 With the Vietnam War and the Great Society the US had been printing money again. Other countries were quickly exchanging their paper US dollars for US gold, as it was clear there was not enough gold to cover all the paper at the $35/oz price. To keep from running out of gold in 1971 President Nixon removed the dollar from the gold standard. This violated the US commitment in the 1946 Bretton Woods System to redeem $35 US dollars for 1 oz of gold, and a defaulting or bankruptcy really. This, and more printing, reduced the value of the dollar around the world, leading to the inflation of the 1970's and the 1973 oil crisis where oil prices went up by a factor of 4 to compensate for the dollar going down by a factor of 4. After the price of gold went up several times Fed sales of gold were able to keep the price from going up further and so support the dollar. At the new higher price for gold the dollar sort of had a fuzzy backing in gold. 2009 = 1971+38 Usually paper money increases from either war spending or credit for speculative bubbles, this time we have both. This time we have the Financial crisis of 2009 with a housing bubble, insolvent banks, collapse of manufacturing, trillions in derivative contracts, rapidly growing unemployment. Now official US gold reserves are 8,133 tons which at current prices is about $260 billion. Some of this gold has been leased out to companies that can not pay it back, and the Fed has not really been audited, so we don't really know how much physical gold they actually have. In the last 12 months the US government has spent $2 trillion more than it took in and printed over $1 trillion. Before this the record deficit was about $0.5 trillion and most of that was borrowed not printed. With this much printing, fewer people are willing to lock their wealth in US dollar debt. When the government can not borrow as much, it will print more. In each of the above American economic collapses there has been too much paper money for the amount of gold and people lost confidence in the paper. Today the US paper money dwarfs the US gold. In 1895 the government could be saved with $65 million in gold, today all the US obligations are more like $65 trillion, a million times higher. With nothing to support this huge number of dollars, it seems hyperinflation will be coming soon. In hyperinflation the currency is dropping in value, so people don't want to hold it, so they spend it fast. With less people holding the money, the amount the government prints has a bigger impact. The government can't sell bonds and so prints more money, which makes people want it even less. Soon the printing spirals out of control. Those who cannot remember the past are condemned to repeat it. "Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement: and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it." - George Santayana It is interesting that paper money has a long history of failing, not just in the US. Several failures happened when empires fell. There is no history of paper working well, paper money has always failed. Is 38 years how long it takes for new generations of Americans to forget the past and trust paper money? Dollars Worldwide, Boiling Frogs, and the Inflation Tax Many central banks around the world hold dollars as a reserve currency. Under the Bretton Woods System where the US agreed to exchange $35 dollars for 1 oz of gold, holding dollars was "as good as gold". When the US removed the gold backing it was like the table cloth trick, inertia meant that everything stayed the way it was. The government and Federal Reserve have been able to keep economist saying that government printing money makes the economy grow. The truth is the US economy was more stable and grew faster before the Federal Reserve. By printing money the government takes wealth from everyone who has dollar savings, so it helps government grow faster. This is the Inflation Tax. The US has been able to extract a moderate Inflation Tax from people all around the world for the last 38 years. There is a story that if you slowly heat a pot of water with a frog in he will not jump out. But if you heat it too fast he will jump. Recently the US printing of money has increased to such a rate that the rest of the world is now worried they are losing value too fast by holding US dollars. The dollar has lost nearly half its value compared to other paper currencies in about 10 years and more than 10% in the last few months. If US bonds are paying 1% per year and the dollar is dropping by 1% per month, or even 1% per week, then holding US bonds is foolish. When the US prints another $1 trillion, it is stealing this much value from all the existing dollar holders. Over time people around the world will realize the US dollar is in trouble. They will also realize that saving money in a form where the US can steal as much of it as they want is foolish. As the world gets rid of their US dollars, the value of US dollars will drop more. The more it drops the more people will be in a hurry to dump their dollars. This could result in the dollar falling faster over the next 10 years or in a sudden panic or crash in the value of the dollar. It would be a mistake to assume that since the Roman dinar, the Spanish reale, and the British pound each took many years to lose reserve currency status that the dollar fall will be slow. Back then they did not have instant worldwide information flow, computers with automatic trading software, etc. Things are different this time.. If the rumors that oil countries are going to stop pricing oil in dollars are true, the change could be very sudden. The US ability to quietly take wealth from dollar reserves all around the world was like the Golden Goose. But now they have pushed too far and that golden goose is going to die. People or countries do not pay any inflation tax on their gold and silver holdings. This is where the frog is free. Related Phenomena In Henry Petroski's book Success Through Failure he notes that there is a 30 something year cycle for bridge collapses. It seems that success breeds hubris and catastrophe nurtures humility and insight. So the longer people go without a failure the more confident they get, till they fail again. And other engineering fields like spacecraft and nuclear power plants have a similar pattern. The patterns of failure go way back. Austrian Economists call 3 crashes in a row 1. Ludwig von Mises was one of the first of the Austrian School Economists and he published a book in 1928 predicting the 1920s bubble would end in a crash. So he predicted the start of the great depression. 2. Harry Browne, another who understood Austrian economics, called the devaluation and inflation in the 70s in his book How you can profit from the coming devaluation in 1970. 3. Peter Schiff, a current Austrian economist, wrote a book called Crash Proof in 2006, published Feb 2007, that explained in detail both what was going to happen and how politicians would react to make things worse. He became particularly famous when a youtube video called "Peter Schiff was Right" came out. He expects the dollar to crash. John Maynard Keynes did not call the great depression and other Keynesian economists had no idea the current mess was coming. Obama's government and the Federal Reserve make sure their economists are Keynesians. Keynesians think printing money is good. The government likes having economists say it is good to print money since the government gets the money the government prints. How Much Devaluation It is very hard to guess how much the dollar will be devalued. The 1933 trouble resulted in about a factor of 2 devaluation. The 1971 trouble caused about a factor of 4 devaluation. In the 1985 Plaza Accord about $10 billion was enough to get the dollar to drop by a factor of 2 or 3. Now the US printed around around $1 trillion in the last 12 months and other countries have several trillion they probably want to get rid of. My guess is that international commodity prices, like oil and gold, could go up by a factor of 8+ over the next few years. The risk of runaway hyperinflation seems very real. History of article The original version of this article was written by Michael Edward. I, Vincent Cate, tried to see if other panics during this period had been ignored. Then I started evolving the article to my current version. Anyone is welcome to modify this document further, just include credits to earlier authors and links to earlier versions. Powered by bussBerry® "buss offers a comprehensive & holistic proven business model for entrepreneurs interested to own a long-term and sustainable distribution business." www.bussindonesia.com
