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Wednesday, July 27, 2011

7/27/2011 - The dollar is following a well-worn path of destruction

The mighty U.S. dollar’s fall from economic grace didn’t happened overnight. It’s been a long and painful process driven by bad judgment, irresponsible fiscal policies, and arrogance.
Like many fiat currencies before it, the greenback’s paper and the ink printed on it is only worth what individuals are willing to assign to it. Otherwise it becomes as worthless as green wallpaper with numbers on it, just as happened in Rome.
Devaluing the Currency—
A Proven Recipe for Collapse
Nero and other Roman emperors debased the currency in order to supply a demand for more coins. Sound familiar? By debasing the currency, instead of a coin having its own intrinsic value, it was only representative of the silver or gold it had once contained. That’s all well and good as long as the silver content is what they say it is.
But by the time Claudius II Gothicus (268-270 A.D.) took power, the amount of silver in a “100 percent” silver denarius coin was only 0.02 percent. This led to widespread severe inflation and instability. The chart below shows just how that inflation occurred, eerily much like it is today in the U.S.
Soldier’s wages went up. But silver content went down,
making the currency worth less — considerably less.

Tax and Spend —
Didn’t Work Either!
In addition to recklessly devaluing the currency, the Roman Empire tried to ratchet up revenue through extreme taxation and finding new sources of wealth. We’re now seeing this in the U.S. as municipalities boost taxes while home values plummet. Plus they’re slapping citizens with fines and tickets for even the most minor violations, all in a desperate effort to stop the flood of red ink.

In Rome, the poor and wealthy alike were taxed extensively. Eventually the wealthy and powerful were no longer rich or powerful.
To escape the burden of tax, some small landowners actually chose to sell themselves into slavery, since slaves didn’t have to pay tax and freedom from taxes was more desirable than personal liberty. Eventually that didn’t even work, and Rome essentially imploded. The once mightiest empire on earth simply disappeared.
The same thing could happen to the United States. Let’s face it: The middle class and business owners are struggling, and disappearing fast! Unfortunately they’re also vital to the U.S. economy, and any hope of recovery.
Printing and Borrowing
Failed, Too!
One modern day example of inflation run amuck is the African nation of Zimbabwe. The country is famous for having issued 100 trillion dollar notes during a period of inflation, which reportedly reached 231 million percent at the height of the disaster.
Much like Rome, and the United States today, the inflation was largely self-imposed.
The Zimbabwe government resorted to slashing 12 zeros from its currency as hyperinflation eroded its value.
And the main cause of hyperinflation, whether in Rome, in Zimbabwe or in the U.S. today: The massive and rapid increase in the amount of money in a system that is not supported by growth in the output of goods and services.
Can you imagine walking into Wal-Mart and a gallon of milk going for more than U.S. $150? This is what it was like when Zimbabwe’s currency was destroyed by inflation.
When hyperinflation occurs it results in an imbalance between the supply and demand for money, including currency and bank deposits. Eventually a complete loss of confidence in the money is almost inevitable. The public panics, and global market participants dump the currency.
Just like in the U.S. today, Zimbabwe’s hyperinflation was a result of the monetary authority irresponsibly borrowing money to pay its expenses and obligations.
History Repeats Itself
One of the biggest factors that has gotten the U.S. into the disaster we’re in, is the arrogance of the nation’s leaders. The belief that what happened in Rome and Zimbabwe could not happen in the U.S.
Fed Chairman Bernanke has said over and over that the United States can always just print more money as needed. I’m pretty certain that the people of Rome had a hard time believing that their empire would collapse too. After all it ruled the majority of the known world. But that’sexactly what happened.
So as the powers that be grapple over how to raise the debt ceiling, the money pit is sinking deeper and deeper. Prices for most everything we buy, especially food and energy, are soaring! And it seems the dollar loses more and more ground each day.
Indeed, the dollar is skating on very thin ice. Already many nations are shifting out of dollars and into gold and other forms of hard assets; I expect that trend to continue. Another way countries are avoiding trading in dollars is to barter instead.
Abandoning the Dollar
Most recently China and Iran have forged a deal to barter oil for goods from China.
According to The Financial Times …
“Tehran and Beijing are in talks about using a barter system to exchange Iranian oil for Chinese goods and services, as U.S. financial sanctions have blocked China from paying at least $20bn for oil imports.
“The U.S. sanctions against Iran, which make it extremely difficult to conduct dollar-denominated business, mean that China could owe the oil-rich nation as much as $30bn, according to people familiar with the problem.”
OPEC has also repeatedly discussed trading oil in another currency, instead of dollars. A move such as this would shake the very foundation of the dollar and certainly have an adverse impact. In fact, OPEC members have called for a fully convertible, gold-backed dinar for oil sales, instead of U.S. dollars. So the possibility of this happening remains a real risk.
As investors what can we do to protect ourselves from this hyperinflation and collapse in buying power of the dollar?
There are a few key ways to …
Be Smart While
Rome Burns
The risk to your dollars is real. The time for self defense is now.
I’m pretty sure those Romans who saw the true writing on the wall, converted their wealth into tangible assets such as gold, silver and hard commodities. They knew the Roman coinage was basically becoming worthless and that rule of law and order was evaporating.
A similar situation is occurring in the U.S. right now. Individual liberties are being taken away, higher taxes are crushing small businesses and consumers, and the value of the currency is collapsing.
So we must look at ways to move some of our paper dollars into precious metals and other tangible assets that have real physical value. I also suggest ETFs that are actually backed by physical assets.
Here is my 3-step action plan to help hedge against the inflation disaster:
Step #1— Reduce your U.S. dollar holdings. Move into precious metals … gold, silver or both.
Step #2— Once you’ve made the decision to add precious metals to your portfolio, do it in a diverse way. Some physical gold and silver bars are good; coins are good too if you know how to buy them.
Step #3— In addition to physical gold and silver, you may want to add key ETFs. I prefer ETFs that are backed by physical gold and silver.
Remember though, when you buy gold and silver physically backed ETFs, you do not own the physical metal, you own a paper representation. Depending on the ETF, the amount per share can range from one ounce to one tenth ounce.
Five physically backed ETFs traded in the U.S. are the SPDR Gold Shares (GLD); the iShares Comex Gold Trust (IAU); the ETFS Physical Swiss Gold Shares (SGOL); the iShares Silver Trust (SLV); and the ETFS Physical Silver Shares (SIVR).
The bottom line is that the dollar’s risk is real. And investors must take control of their own destiny, or face seeing their wealth disappear along with the once mighty greenback.

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