Dollar Collapse

Why it’s inevitable, and How to Prepare for it

This substack usually only comes out once a week, on Thursdays, but this is a special today because of the bank scare this week

The Problem: The Government Has no Money

Some people are under the misconception that the government (gov) has money. The only real money our gov has is what they take from us by taxation. When the gov gives money away, we do well to remember they either had to take it from someone else first (tax), or borrow it, or print it out of thin air.

Bank bailouts, covid relief checks, student loan debt cancellations, etc.,etc.

The bank bailouts started in earnest during the savings and loan crisis in 2008. Then gov largesse soared again during the covid outbreak. Then there was a push to forgive student loan debt. And now here we go again, with the gov backstopping all bank deposits, even in the millions, not just up to $250,000. All of this money printing causes pressure on inflation.

Moral hazard

Besides the inflationary pressure, gov giveaways are almost always immoral. In 2008-9, people who were behind on their mortgages were allowed to stop making mortgage payments. So a lot of people deliberately quit making their payments and got behind on purpose so they could qualify for the gov program. Not all recipients truly needed help. The program rewarded those who weren’t keeping their loan commitments and failed to reward those who tightened their belts to keep their commitments.This wasn’t right.

The gov checks sent to everyone during covid was even worse, if possible. It took away the incentive to work.

The same with student loans. (The executive order is being challenged in court by 7 states.) The students who faithfully paid their loans are being snubbed. This isn’t right either.

And now the bankers and investors at SVB who took too much risk are being bailed out at the expense of taxpayers who have worked hard for every dollar. No accountability for poor management.

What will be the consequences of gov handouts and bailouts?

As soon as we get through the coming recession, if not before, prices will increase (inflation). Taxes will be increased. Interest rates will rise. The gov will not be able to pay the debt off. They won’t even be able to pay the interest on the debt. That is known as a default.
As of this writing on 3/16/23, the total debt is $31,619,727,680,780 and climbing.

Servicing the debt is one of the federal government’s biggest expenses. Net interest payments on the debt are estimated to total $395.5 billion this fiscal year, according to the Office of Management and Budget.

That’s burdensome enough, but if interest rates keep rising (they reached 20% in 1979-80), and the debt also keeps rising, along with a simultaneous slowdown in business, the interest costs on the public debt will be more than the gov can raise in taxes, which means a default.  

Printing money

The gov’s only recourse will be to print money. There’s a limit to how much people and businesses can pay in taxes, and it will be hard for the gov to borrow, because investors will be more and more reluctant to lend out money that’s going to be worth so much less when the gov pays them back.
Printing money and putting more money into circulation results in more dollars chasing fewer goods. In the past, the gov got away with it because of our country’s great productivity, private sector earnings, and resulting sufficient tax revenue. Those days are gone.
Interest rates have been going lower for 40 years. But things have a way of reverting to normal, and even overshooting in the rebound. The downward interest rate trend has reversed, and rates have started going higher. A financial panic could set in, causing rates to rise even more and even faster.

What will be the trigger?

As investors realize that prices will be bound to keep rising due to reckless gov spending, they will demand higher interest rates before loaning out their money. When prices rise, it’s the same as saying that the value of the dollar is going down. The same dollar will buy less goods. It’s not smart to loan out money if you know it will be less valuable when you get it back.

The currency will collapse.

We will either see runaway inflation (like Germany in the 20s, or Zimbabwe in 2008*,
or Venezuela today) or some kind of a “reset” to the value of the dollar, perhaps in the form of a global currency.
see

· Zimbabwe: https://www.dallasfed.org/~/media/documents/institute/annual/2011/annual11b.pdf
· Venezuela: http://theconversation.com/what-caused-hyperinflation-in-venezuela-a-rare-blend-of-
public-ineptitude-and-private-enterprise-102483

“By August 2018 the Venezuelan currency was worth so little that it was more prudent to use cash for
toilet paper rather than buy toilet paper.” Naomi Shalit, the conversation.com

We’ve been living through an unprecedented combination of fear of the pandemic, shut down of business, and wild printing of money. With businesses shut down and people out of work in a recession, the gov’s tax revenue will drop like a rock, at the same time as they’re spending money they don’t have - like never before.

How can we protect ourselves?

Things of value will usually hold their value. But values themselves can change when there is a huge shift in circumstances. For example, when water is plentiful, we may not realize how valuable it is. But a man dying of thirst will give everything he has for water.

Priorities

Food, water, clothing and shelter should be your first considerations.
Freeze-dried food is said to be good for 25 years! A home garden also makes you more independent.
Water can be collected in rain barrels and filtered and sterilized as needed.
Your home is your shelter. Consider getting it free and clear*. Maintain it. Secure it.
Share with family and friends who didn’t get this message.

   *A fixed rate, low interest mortgage is a good thing to keep, if you have enough liquid assets to pay it off any time you want to. During inflation, it gets easier and easier to make your mortgage payments if your income go up.

Investments

Real estate has value based on its usefulness.
Art always has value to those who appreciate it.
Gold and silver have value for several reasons: They have actual uses as metals, especially as electrical conductors, as jewelry, and as a compact store of value. One ounce of gold is priced at about $1900 right now.
Good businesses have value because they generate income and profits – as long as they’re still in business.
Stocks have value in relation to their ownership in successful businesses.
All of the above can be good protection against inflation, if chosen carefully.

Prepare, but don’t hoard – it’s immoral

If runaway inflation hits, hoarding of things you need is a temptation, because you know it would cost more to buy those same things in the future, but hoarding is immoral if it deprives others of the things they need. However, stocking up on necessities gradually, before a crisis, is prudent.

What to avoid

Runaway inflation causes terrible suffering.
Savings, usually in CDs nowadays, get wiped out quickly during high inflation.
Cash is no good when it starts losing value by the hour.
Fixed income investments get killed during high inflation. Money loaned out comes back less valuable than when you loaned it, especially if interest rates have risen in the meantime. Same for bonds, annuities, and pensions that aren’t indexed to inflation.

Trust in the Lord

Christians have the assurance that there is nothing to fear because God is with them. No matter what is happening in the world around us, Jesus gives us a peace that goes beyond our normal understanding. I like to think about the parable of the minas (a mina 60 shekels, or about 18 ounces in silver coin) in Luke 19:12-27. When the nobleman, symbolizing the Lord, entrusted his servants, symbolizing us because we are the Lord’s servants, he commanded them to “Do business with this until I come back.” Jesus is coming back, and he expects us to keep working and investing as we are able, until then.

scroll down to make a comment or ask a question - (not sure yet how this works- you might have to subscribe to make comments - but you can subscribe for free and unsubscribe any time)