Personal Financial Planning is one of the most important things you should do, but it is often overlooked. Today’s world has financial risks that have never existed before, so much of the “traditional” planning logic is wrong or has voids. For example, most (over 95%) of investors assume it is appropriate to have their assets denominated in US Dollars (USD) if they are a US citizen. After all, the USD is the world’s primary reserve currency (banks hold it as reserves – good as gold -, and any Seller will accept it; when India buys coffee from Brazil, they use USD), and the US is the world’s largest economy (and military power), so it must be safe. Wrong! The USD’s value has been falling for over 100 years, and is now heading toward a crash in value because other nations are starting to avoid using it, thus reducing the demand that has kept it propped-up before.
Why the US Dollar is Declining in Value and May Crash
Here are the two major reasons the USD is dropping in value (purchasing power; example, how much bread would $1 buy in 1913, 1950, and 2013? Answer, 62% less in 1950, and 95% less in 2013!).
1. Monetary Inflation Causes Price Inflation: “Monetary Inflation” means excessive expansion of the money supply (the amount of cash and credit available) by the government and its Central Bank (ours is the “Federal Reserve System”, the “Fed”) which leads to “Price Inflation” (reduced value, i.e., purchasing power, of each monetary unit, such as the “US Dollar”). Since the Fed was created in 1913, the value (Purchasing Power) of the USD has dropped by over 95% due to excessive expansion of the money supply by the Fed (urged by the big-spending U.S. Congress). The fastest rate of dropping has been since Pres. Nixon ended the last ties of the Dollar to gold in 1971. Until then, nations could redeem 35 paper dollars for one ounce of gold. FDR ended redemption by mere citizens in 1933. We can all remember that a family car cost about $2,000 in the ’70s, but is about $20,000 in 2013; a ten times increase! The same also applies to meat, bread, and clothes, etc. Housing spiked even higher (until the 2008 crash) due to phony loans, low rates, and easy terms from the Fed and Federal government (Fannie, Freddie, etc.). Thus, investors should be concerned about future losses due to the still-falling USD. The solutions (precious metals, and stronger foreign currencies) are discussed below.
2. The USD is Losing its Reserve Currency Status: Dealers in international transactions always choose a strong currency (or several, with one dominant) for use between all nations because it is more convenient than keeping a supply of money from every nation you deal with. Banks use the same strong currencies for their “reserves” so they are viewed as strong and safe. The French Franc and British Pound held this status in their glory days, but lost it as their empires failed. The USD has been 70% of world transactions since the 1920s, but since the 2008 crash, has dropped to 60%, and is still falling as “Empire-USA” declines, and may crash. We don’t have traditional “colonies” but control over 50% of the world with our economic and military “agreements”. All empires in history have failed, and all primarily due to: a) the high cost of maintain a widespread military and constant wars, and b) parasitic decadence at home, where people work less and expect the government to care for them using “other people’s money”.
An Historic Time in World Economics
For the first time in history; a) The primary reserve currency is worldwide (not just in areas it controls as when the British pound was dominant), and b) The currency is not convertible to precious metal (typically gold or silver), so is considered “Fiat” , where the issuing government declares its “Face Value” and it can be created out of thin air, as with the fiat USD since 1971. ALL fiat currency in history has failed (become worthless) and the USD is on this path of decline! We have created so many new dollars (to pay for wars and welfare) that it is losing its value (purchasing power) and nations and businesses are now avoiding using and owning it, or holding assets denominated in USD. Major nations (in particular Brazil, Russia, India, China, and S. Africa, the “BRICS” , are trading with each other in their own currencies. This is an ominous sign and could lead to the end of the USD as a dominant reserve currency and thus limit our ability to create new money to pay bills. When (not if) this happens, our debt and interest rates (and thus payments) will spike up and the value of the USD could fall by 50% to 80%.
When I ask my friends and investors what they predict for the US economy during the next 20 years, I most often get one of these four scenarios:
2) There will be a rapid inflation (of the money supply and prices), then a depression, but it’s hard to tell when. A few economists think we will have a deflationary depression (falling prices, increasing currency value), but I predict that Congress and the Fed will keep using their QE methods of stimulation by creating more money, which always leads to inflation.
3) Congress will fear a crash and vote to end the US Dollar, and become about 20% of a new world currency (a “basket of currencies” ) run by the IMF. This means we will no longer be the world’s primary reserve currency and thus cannot create money to pay our bills. We will have to raise T-bill interest rates to attract buyers. Debt interest expenses will soar and we will default, but survive. Government spending (at home and abroad) will be cut, those people dependent on personal or corporate welfare (or in the military) will suffer.
4) The President will start a war (any reason or fake event will suffice) so then all bets and debts are off! Russia and China will join forces to fight with whomever we attack. Whether we win or lose, we will emerge broke and in a depression.
In my opinion, the best, and least likely, choice would be for Congress to terminate the Fed and return to the gold standard. This ALWAYS works to bring more peace and prosperity for all (wars of aggression are expensive, so there are fewer or none). The essay in the link below shows a detailed plan to implement conversion from our present Fed Notes to “gold-as-money”, with private mints, redeemable paper notes, and gold weight as the unit of account.
Now is the Time to Make Changes
No matter which of the above happens, or some other calamity, the USA is in grave economic peril and it is time to consider protecting your wealth by:
1) Converting your cash, bonds, annuities, CDs, and other assets out of the USD to denomination in a stronger currency (issued by a country with low debt and spending, and a strong economic future, such as resource-based), and
2) Purchasing precious metals as a hedge against losses in the value of currency (metal values tend to go up as currency values fall). Take physical possession of your metals; a) because “paper gold” stocks, and ETFs can disappear or have no “backing”, and b) store where the the government can’t confiscate it (domestic vaults and banks are easy for them to lock-up). Many investors are concerned about the drop in gold and silver prices since 2011, but they should expect recovery to new highs soon because; a) Governments and central banks fear/hate rising precious metal (PM) prices because they indicate currency values are falling. Thus they intervene in the market by selling some of their gold to distort the supply-demand pricing. FDR created the “Exchange Stabilization Fund” in 1933 for this purpose, and it has been active since 2011, along with other governments, to drive down PM prices, b) Private investors fear the “paper certificates” they own (such as “SPDR Gold Shares”, ticker GLD) have little or no gold “backing” so have been dumping this paper, and buying physical gold (“allocated” with their name on it! or personal possession). The sales of “paper gold” affect the spot price more than purchase of “physical” from dealers, so, along with part “a)” above, the PM prices have dropped, but c) Now that prices are lower, the banks and private investors are buying tons of physical gold (banks to boost their reserves, and people to replace the paper) supplies are short. As this demand continues, basic economics says that prices will rise. Experienced Advisors like Eric Sprott, CEO of Sprott.com, are predicting new highs within 12 months or less. Thus, today’s low prices should be viewed as a buying opportunity.
3) Talk to a professional Financial Advisor (or ‘Planner’) to get guidance. Look in the phone Yellow Pages, or ask friends for referrals. The problem here is that most only offer “traditional” advice.
In choosing a foreign currency you must look beyond and beneath today’s prices and currency exchange rates, and look at fundamentals such as national debt , spending, and unfunded future liabilities (health, pensions, etc.,) to forecast trends in a nation’s economic strength and currency value. Foreign exchange markets determine the market value of one currency vs. others, but this can be deceiving because since 2000 most are falling in value together. These values and trends are ignored by virtually all “traditional” brokers and dealers of insurance, annuities, CDs, stocks, and bonds. This is not surprising since most cannot make commissions by selling precious metals or foreign currency.
To help you get started, items 1 to 4 below are excerpts from Chapter 6 of my book Investor’s Guide to Avoiding Currency-Related Losses. All of the firms shown work with metals and currencies, either as Advisors or Sellers of products. Most are “contrarian”, and not likely to be mentioned by “traditional” Brokers and Advisors. Search the Internet for others. Many offer newsletters and reports (free and paid).
1. Precious Metal Dealers: Europacmetals, InvestmentRarities.com, Caminocompany.com, Monex.com, JimsCoins.net, Blanchardonline.com, Goldmoney.com, and HardAssetsAlliance.com (click on choices at top of HardAssets home page; also go to caseyresearch.com/2013-gold-investors-guide). The above are ‘established’ and there are many others. (check the Internet or your phone Yellow Pages). When choosing a dealer, investigate to try and be sure they are reliable.
2. Precious Metal Storage: Once you own some precious metal (PM), where do you keep it? Most dealers work with domestic or foreign “vault” firms you can use. But banks and commercial vaults are not safe (even overseas) because the US government can use “lockouts”, “bank ‘holidays”, “Bail-ins” like Cyprus, or “forced exchange” for bonds or fiat cash, etc. to prevent access by you. This is “confiscation” (theft?) they claim is legal based on the 1917 Trading with the Enemy Act!). If you keep it in your possession, it must be safe from burglars. Most gun stores sell lockable cabinets. A somewhat bizarre, but useful, choice is to bury your PM in a sealed container in a private place such as your backyard. A two- to four-foot piece of 4 to 6 inch diameter PVC pipe from your local hardware, with end-caps glued on, will work. Plant a bush over it to mark the location. Tell 1 or 2 trusted people where it is in case you die, or forget.
3. Foreign Currencies and Equities: a. Euro Pacific Capital, Inc. (EuroPacificFunds.com, EuroPac.net) is a broker-dealer that offers a variety of services and products, including seven mutual funds they created (for “nation diversity”), and precious metals. They promote geographic and currency diversification. b. Merkinvestments.com offers 4 foreign currency funds (merkfunds.com), and reports. Also see vanguard.com, c. EverBank Financial Corp. (EVER, Everbank.com) is a US bank that offers savings accounts in foreign currencies. Find more on the Internet.
4. Consultants and Advisors: a. EuroPac.net, and EuroPacificFunds.com/about (Asset Management), b. Hardassetsalliance.com, and Caseyresearch.com, c. Windrockwealth.com, bfi-capital.com, d. Sprott.com, and e. Fisherinvestments.com. Some ‘traditional’ sources of info are; a. cnnmoney.com/expert, b. ‘101 Ways to Build Wealth’, c. marketwatch.com , newworldinvestor.com , and d. theprudentspeculator.com. Find more on the Internet.
The key point is; “How much will your dollars buy when you eventually cash-in these ‘traditional’ investments if prices have gone up faster than your investments?” Everyone born after 1933 (now 80!) has always lived with “price inflation” caused by excessive “monetary inflation” (new money and credit issued by the Fed), so tends to treat it as normal. The bad news is, all factors (USD value, spending, debt, wars) point to things getting worse, ending in a possible crash of 50% or more in the USD value!
If the USD loses its reserve currency status (which I think is 90% likely in 1 to 10 years), its value will crash and prices (in USD) will soar. Wise managers of their personal and family assets will study the above issues carefully, and make changes before it is too late. Good Luck!
Dave Redick is Chief Economist for www.SaferInvesting.org .