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Death Knell for the Dollar

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The U.S. dollar is dead. There ... I've said it.

Oh sure, if you can scrape up some spare greenbacks, you can still walk into your local Wal-mart and score some Chinese-made goods on the cheap. Whether nations like China will remain willing to hold those dollars and related exposure to U.S. debt is another story entirely, and recently, the structural fissures that have threatened the U.S. currency for years are widening further.

Taking the American dream with it
Of course, the prospect for substantial and sustained deterioration of a currency's purchasing power is no laughing matter. The immediate impacts of injected liquidity and hyper-accommodative fiscal policy are dire enough threats by themselves, but the fatal blow is reserved for the time when those policies yield a global crisis of confidence.

That time, I'm afraid, is presently upon us.

When asked in a town hall meeting this week whether the American dream was dead, President Obama replied: "Absolutely not. There is not a country in the world that would not want to change places with us." Although the statement typifies the upbeat and patriotic sentiments we've grown to expect from political leaders, I find it insultingly disingenuous under the circumstances. Try telling that to Caterpillar (NYSE: CAT  ) CEO Jim Owens, who jabbed last year that he "would rather be President Hu than President Obama."

The American dream as we once knew it is still on life support, but unfortunately, I see a crisis of confidence brewing in the currency of the land ... ensuring that the dream remains comatose for perhaps a generation. As we trudge through what Nucor (NYSE: NUE  ) CEO Dan DiMicco has called the "granddaddy of all jobless recoveries," I maintain that the ill-conceived responses of the Federal Reserve and the U.S. government to the prospect of economic stagnation present the greatest threat of all.

Cracks in the foundation
Under the dubious leadership of Ben Bernanke, the Federal Reserve this week reasserted its willingness to further expand liquidity; now that a mythical recovery has retreated into the shadows of a stark economic reality. Kathy Lien, a currency strategist for GFT Forex, explains: "The Fed is actively trying to make the dollar less and less attractive." Although that may sound counterintuitive, or even a touch insane, when debt burdens balloon to epic proportions while failing miserably at triggering growth, intentional currency debasement (including quantitative easing) is the ultra-high-risk, desperation play in many central bankers' handbooks.

Remarkably, in a recent poll of more than 1,400 Bloomberg subscribers worldwide, a full 53% reported perceiving a "big or moderate risk the [U.S.] budget deficit will provoke a crisis of confidence within two years that will spur 'a dramatic rise' in long-term interest rates." This is a key point to consider, because I believe many investors mistakenly believe that inflation can only occur in the context of economic recovery. I have stressed repeatedly that inflation is a currency event rather than an economic event, and I view a comprehensive understanding of currency induced, cost-push inflation as one of the more important topics of inquiry for Foolish investors struggling to ascertain what the future may hold. Stated another way, the currency event that is likely to trigger abrupt inflation is precisely that crisis of confidence now set to unfold for the U.S. dollar.

Expectations of a looming dollar crisis can be found across the globe, and were well expressed by respondents to Bloomberg's global poll. Dieter Buchholtz, head of equities for the Falcon Private Bank in Switzerland, predicts: "When the non-Americans see that efforts by the administration to balance the budget are fruitless, then I think you will get a confidence crisis." Eric Kraus, chief strategist for Otkritie Brokerage House in Moscow, described the U.S. economic situation as "obviously unsustainable," adding: "the concerted attempt to suspend disbelief is playing increasingly poorly abroad."

The race to debase and the future of gold
The U.S. dollar is not the only currency in deep trouble. The euro temporarily traded places with the dollar this year as the world's favorite whipping post, and the British pound is not exactly sterling anymore. The common strategy of counteracting economic crisis with untenable debt places the trio in a twisted race to debase. On the other end of the spectrum, Japan's currency intervention last week to stem the troublesome strengthening of the yen reveals that fiat currencies weak and strong are ultimately embroiled in this race to debase as a consequence of the global financial crisis and the official responses to it.

It is through this macroeconomic lens that the enduring, accumulating strength of gold can best be understood. According to Philip Gibbs of Jupiter Investment Management, "Gold is likely to climb higher as Western nations struggle to de-value their currencies."

In a truly astonishing admission from a former Fed chairman, Alan Greenspan offered this morsel last week: "Fiat money has no place to go but gold ... Gold is the canary in the coal mine. It signals problems with respect to currency markets. Central bankers should pay attention to it."

Central bankers are beginning to pay attention, and investors are just now beginning to understand the enormity of the secular bull market presently under way. Fools have enjoyed a tremendous run of late with high-profile, major producers Goldcorp (NYSE: GG  ) and Newmont Mining (NYSE: NEM  ) . Following in Barrick Gold's (NYSE: ABX  ) illustrious footsteps, AngloGold Ashanti (NYSE: AU  ) signaled confidence in further gold strength by finally closing out its return-choking hedge book. Fools who wish to hold physical gold like the untarnishable currency that it is are advised to consider the Sprott Physical Gold Trust ETV (NYSE: PHYS  ) .

Of all the world's currencies, only one is the scorching hot potato that you absolutely don't want to be left holding when the smoke clears. Dodge that dying dollar, and for goodness' sake grab some gold.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns no shares in the companies mentioned. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool's disclosure policy is a decidedly cold potato disclosure policy.

Read/Post Comments (6) | Recommend This Article (26)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 23, 2010, at 6:56 PM, prginww wrote:

    "Of all the world's currencies, only one is the scorching hot potato that you absolutely don't want to be left holding when the smoke clears."

    Euro, right? Because of PIIGS?

    Oh, you mean yen, since BoJ just keeps trying to kite more and more checks.

    The race to the bottom has no winners.

  • Report this Comment On September 23, 2010, at 8:07 PM, prginww wrote:

    knighttof3: You're correct in stating that all the fiat currencies in the world are in a slow race to zero, but the dollar stands to lose a lot more relative to the others because of the damage, both monetary and psychological, that will occur if (when?) the US $ loses its status as the world's reserve currency.

  • Report this Comment On September 23, 2010, at 9:23 PM, prginww wrote:

    So there's about 1 trillion dollars or so of gold in the world.

    The global economy produces around 100 trillion in goods and services.

  • Report this Comment On September 23, 2010, at 10:09 PM, prginww wrote:

    "Another critical piece of the gold puzzle is the finite scale of the physical market. John Osbon explains: "As we were investigating gold more closely our rough calculation of the value of all gold ever mined was about $5 trillion. That is a huge number, but not all that big compared to equities $60 trillion, bonds $15 trillion, or for that matter our government spending plans." In other words, the global gold market is surprisingly small relative to the scale of heavily leveraged private investment capital and modern governmental fiscal largesse. Since robust investment demand is chasing a small physical market, incremental increases in demand could drive impressive price gains going forward."

  • Report this Comment On September 24, 2010, at 4:47 AM, prginww wrote:

    Thanks Christopher! This is certainly one of your best articles!

    The last FOMC meeting was a lot more worrisome than many people are aware of!

  • Report this Comment On September 24, 2010, at 11:27 AM, prginww wrote:

    I was wondering when MF would submit and start talking up commodities as virtually the only investment worthwhile.

    I run a small family farm. With the amount we're having increases in costs we estimate that, if going at the current rate, food will cost 60-100% more within 2 years.

    Gold will do well, silver will do better, agriculture will do better than either of those.

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