When the supply of something is increased sharply relative to demand, the value of that commodity will decline. If the supply continues to increase rapidly and indefinitely, then that item will become worth less and less, with the potential to finally become nearly worthless. This is the Developing Disaster facing the US Dollar and the world.
The comments above & below are edited ([ ]) and abridged (…) excerpts from the an article by Alf Field posted on Gold-Eagle.com almost a dozen years ago that is so insightful it warrants a re-read.
This is the factor that could become the single most important criterion in investment allocation decisions and possibly even for individual financial survival…[Let me explain this further by reviewing the 7 major problems facing the U.S. (and thus the world) and how they all will lead to problem #7 – devolution.]
Most of the major problems facing the USA (and thus the world) commence with the letter “D”, [as follows]:
- DEFICITS (US CURRENT ACCOUNT AND BUDGET)
- DOLLAR (US)
- DEVALUATIONS (COMPETITIVE)
Most readers will be familiar with the first 6 but will be puzzled by the last one, DEVOLUTION. It is included because the first 6 problems, combined with the likely Government responses, will probably lead to a situation where one single investment criterion will become so important that it will transcend all other factors in investment decisions. That situation will lead to DEVOLUTION. We will return to this later.
The first 6 problems have received a great deal of coverage elsewhere and there is no need to regurgitate them in detail here. These problems generally involve huge mind-numbing, incomprehensible numbers of dollars. Those numbers continue to grow so rapidly that they tend to be out of date shortly after they are published. The following brief notes on the first 6 “D’s” deliberately ignore these gigantic numbers.
The U.S. Current account and Federal Government DEFICITS have grown to chronic levels… How will these continuing deficits be financed? The answer, by creating increasing quantities of electronic US Dollar credits.
The US DOLLAR will be under downward pressure while these deficits continue. The lower the US Dollar declines, the greater the pressure on those countries that export to the USA.
Those countries that export to the USA will protect their markets by invoking competitive DEVALUATIONS. This cannot happen in a freely floating exchange rate system, but is effectively done by foreign countries creating massive quantities of their own currencies. These new foreign currency electronic credits are then dumped on the foreign exchange markets, thus weakening their currencies. In this way the American problem is exported to the rest of the world.
DEBT of all kinds in the USA has been reaching record high levels for decades and continues to do so. This is the way the economy is stimulated in a fractional reserve banking system. DEBT must continue to grow. A contraction in DEBT will lead to those other unmentionable “D” words, DEFLATION and DEPRESSION. This will not be allowed to happen. New electronic US Dollar credits will be created to whatever quantity is required to avoid this outcome.
DEMOGRAPHICS refers to the imminent retirement of the Baby Boomers generation and the huge unfunded liabilities that exist in Social Security, Medicare, Pension Funds and other US programs that need to be funded…Those unfunded liabilities will be funded, probably once again by the creation of new electronic US Dollar credits to the extent necessary to meet the unfunded liabilities.
DERIVATIVES have been the fastest growing area in US finance over the past 15 [now 20] years. The numbers involved are truly mind boggling. About 25% of the Derivative instruments in existence are Exchange traded items such as futures and options. The other 75% are Over-the-Counter instruments, privately created and traded between major financial institutions. These tend to be extremely complicated transactions that are often difficult to value. They rely heavily on their counter parties in these transactions actually meeting their obligations when they fall due.
There is a grave risk of counter party failure in the Over-the-Counter derivative area. If one major counter party goes bankrupt and fails to meet its commitments, it could trigger a domino like collapse of major institutions in the financial markets. The numbers involved are so vast that there is potential to bring down the entire financial system in the event of a major counter party default.
If this risk is readily discernible to outsiders, then bankers and others involved in the OTC derivatives must be acutely aware of the problem. Bankers are not stupid. They are extremely clever, cautious people. So how could they allow the OTC derivative situation to grow to such a massive extent with all the concomitant risks involved?
One suspects that they know something we don’t. Do the major players in the market have some assurance that there will be no counter party failure? Without that assurance, the gigantic build up of OTC derivatives over the past decade would surely have been unthinkable. Alternatively, they must have deliberately built up the derivative market without considering the size or risks involved on the assumption that, as with past similar cases, the Federal Reserve and Federal Government would combine and to come to the rescue of a failed major counter party.
The OTC derivative market looks like an accident waiting to happen. Already some lesser players are showing signs of strain. How do the authorities rescue a problem situation when it occurs? Again by creating electronic US Dollar credits to the extent necessary to prevent a catastrophe.
Recap of the Above
The common thread that runs through this brief summary is that when problems emerge in the US financial system, the authorities will solve them by throwing money at the problem, by creating new electronic US Dollar credits whenever necessary and to whatever extent necessary…
When the supply of something is increased sharply relative to demand, the value of that commodity will decline. If the supply continues to increase rapidly and indefinitely, then that item will become worth less and less, with the potential to finally become nearly worthless. This is the Developing Disaster facing the US Dollar and the world. This is the factor that could become the single most important criterion in investment allocation decisions and possibly even for individual financial survival…
We can now return to the final factor, the 7th “D”, which is DEVOLUTION. [A] dictionary definition that is applicable here is: A passing down or descent through successive stages of time or a process.
Imagine an inverted pyramid of various investment type assets where the least secure (and most prolific assets) are in the very wide top layers. The inverted pyramid then narrows down through layers of increasingly more secure asset classes to the small point at the base which consists of the most secure (and least prolific) assets. This is an idea propagated years ago by John Exter.
The theory is that in times of financial crisis investors will cause their investments to devolve downwards (hence DEVOLUTION) through the different asset class layers in the inverted pyramid as they search for greater security. DEVOLUTION is thus a movement by investors out of riskier, speculative asset classes into more secure ones.
This [see chart below] is what can be expected in the months and years ahead as the creation of electronic US Dollar credits gathers momentum and faith is lost in the US Dollar:
- The assets in the most secure category at the tip of the inverted pyramid are gold and silver bullion, assets that have performed the function of protecting wealth throughout the ages.
- In the layer above the precious metals lie the companies that mine and hold large deposits of gold and silver.
- The least secure assets in the envisioned environment, which form the broad layers at the top of the inverted investment pyramid, will be the electronic US Dollar credits and assets or loans that are repayable in US dollars.
The DEVOLUTION of assets into more secure investments is not just an esoteric theory – it is already happening and can be observed in the actions of thinking investors [around the world]… [This] move into precious metals and their associated mining companies…[will bring about a major] change in the public perception of this asset class [and] then the devolution of investments down through the asset classes of the inverted pyramid will truly gather momentum.
The quantity of precious metals and their associated mining company shares is very limited while the quantity of electronic US Dollar credits is infinite. It will be a question of “first come, first served“.
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Other Articles by Alf Field:
I have come out of retirement for this one off, once only, speech to warn that the good ship “Life As We Know It” is sinking. You have the choice of getting into a life boat now or going down with the ship. The life boats consist of precious metals and other assets that will survive the coming currency destruction. [Let me explain.] Words: 1400
The Elliott Wave Theory (EW) gives superb results in predicting the gold price. [While] it is a complicated system with many difficult rules [which] I explain in simple terms in this article, [I have determined that] once this present correction in gold has been completed it should [undergo] the largest and strongest wave in the entire gold bull market. The target for this wave should be around $4,500 with only two 13% corrections on the way. [Let me explain how I came to that conclusion.] Words: 1924
Everyone must be wondering where this “unprecedented global financial crisis”, (the World Bank’s words), is heading. What follows, for what they are worth, are my cogitations on this crisis. Words: 1641
The onset of the world’s worst financial crisis in many decades is one of the most important factors (if not the most important factor) currently influencing investment decisions. The crisis has created chaos and confusion. Not many people understand how the world has arrived at this unfortunate situation. This report endeavours to identify the underlying causes of the crisis and explains why the USA current account deficit has been the main destabilising force in world finance. Words: 3806