DOLLAR COLLAPSE AND THE SILVER INVESTOR
by Jennifer Barry
January 27, 2005
America has prospered since the Bretton Woods agreement enshrined the US Dollar as the world's reserve currency. Today, over 60% of currencies held by central banks are dollars. Half of world exports are priced in dollars, as well as all IMF loans, and OIL. In order to get dollars essential for trade, foreign banks have to buy Treasury bills, or sell goods and services to American consumers. We no longer have a gold standard to restrain the printing of dollars. They cost almost nothing to produce, so we get to buy foreign products very cheaply. Since we run a trade deficit, where we import much more than we export, America has in effect a 0% loan from the world. This is sustainable only as long as other countries consider us a good credit risk.
For many years, the dollar was strengthened by this built-in foreign demand. However, this strength caused our exports to be very expensive, and forced many US manufacturers to outsource or go bankrupt. In November, we hit a record trade deficit of $60.3 billion. The only way to narrow this gap is to print money, that is, pay for foreign products with dollars that are less valuable. Federal Reserve Chairman Alan Greenspan has obliged, but the trade deficit continues to widen. It's now topped 5% of GDP, a level which usually causes a currency crisis.
The value of the US Dollar is based on supply and demand, and right now the supply is too high for the world's needs. Since 1999, countries have a new choice: the Euro. Russia, China, the Philippines, and Japan are currently considering holding more euros in their currency reserves. Until the US invaded, Iraq was selling its oil in euros, not dollars. In 2003, Malaysia proposed that Islamic countries use the Gold Dinar for foreign trade amongst themselves. If this happened, the demand for dollars would drop further.
In the last 2 years, the dollar has weakened significantly against the Euro and other world currencies. Japan and China were buying dollars to bolster our economy, and ensure that Americans keep importing goods at a blistering pace. However, in March, the Japanese changed tactics. They stopped buying US Treasuries, and decided to sell more products to other Asian nations. They've even been talking about establishing the yen as an Asian reserve currency. If China stops propping up the dollar too, its value will fall even further.
So, how can silver investors benefit from this potential currency crisis? First, printing money causes commodity inflation, and silver is not immune. It may be manipulated right now, but eventually, the supply deficit will cause the price to skyrocket. Since the dollar will be losing value at the same time, the price will rise even higher versus the dollar. Silver's artificially low cost is actually a gift, because it lets you stock up before the investing world discovers precious metals.
Second, silver is a real asset, and it serves as a safety net for your retirement savings. Paper investments are a promise to pay, a debt obligation of someone else. What happens if they default? Social Security has $7 trillion in unfunded liabilities, and will eventually go bankrupt, so you can't depend on it long term. Stocks could crash again, and bonds are destined to lose value as interest rates rise. Silver, however, has intrinsic value, and it can never be worthless.
Third, as people watch the dollar decline, inflation heat up, and imports become more expensive, they will start to lose faith in the dollar. Faith is important, since the dollar is a fiat currency, with no intrinsic value to support it. People will dump paper promises, and flee to hard assets like silver. It happened in the 1970's, and the commodity boom didn't end until interest rates passed 20%. Silver might become popular as money again, like it was for most of American history. In fact, it's already started. You can spend precious metals for goods and services, using GoldMoney, the Liberty Dollar, and the Gold Dinar, for example. Monetary demand will make you glad you bought silver when it was cheap!
© 2005 Jennifer Barry