Monday, August 18, 2014

Crisis of Confidence in the Dollar is Coming

On August 15, 1971, a quiet Sunday evening, President Richard Nixon took to the airwaves, preempting the most popular television show in America, to announce his New Economic Policy. The government was imposing national price controls and a steep surtax on foreign imports and banning the conversion of dollars into gold. The country was in the midst of a crisis, the result of an ongoing currency war that had destroyed faith in the U.S. dollar, and the president had determined that extreme measures were necessary.

Today we are engaged in a new currency war, and another crisis of confidence in the dollar is on its way. This time the consequences will be far worse than those confronting Nixon. The growth in globalization, derivatives and leverage over the past forty years have made financial panic and contagion all but impossible to contain.

The new crisis will likely begin in the currency markets and spread quickly to stocks, bonds and commodities. When the dollar collapses, the dollar-denominated markets will collapse too. Panic will quickly spread throughout the world.

As a result, another U.S. president, possibly President Obama, will take to the airwaves and cyberspace to announce a radical plan of intervention to save the dollar from complete collapse, invoking legal authority already in place today. This new plan may even involve a return to the gold standard. If gold is used, it will be at a dramatically higher price in order to support the bloated money supply with the fixed quantity of gold available.

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