In a recent article I postulated that the dollar could lose all its purchasing power at an impending speed as an unpleasant bomb, even for those who have seen inflation as the society's biggest problem in the future. The key to understanding why this might lie in human reactions to the monetary consequences of the subsequent credit crunch. Dollar damage as a currency affects all other fiat currencies, because it is a reserve currency and all financial markets use it as a medium of prices for commodities and for many international trades.
An understandable analysis of the dynamics of currency exchange should concentrate on the dollar, bringing only a wider picture when needed. In the context of this article, currency dynamics refers primarily to events that lead to changes in the purchasing power of the dollar.
The dollar has experienced monetary inflation since the Federal Reserve Board was formed, both in terms of expansion of base money and bank credit. The effect in terms of loss of purchasing power so far comes in two shifts. The first was in 1934, when the dollar was devalued against gold by 40%, and the second following the collapse of London's gold pool in the late 1960s, since when the dollar had lost 97.4% further.
Therefore precedents have been set for sustainable trends, which will eventually end with the destruction of the current monetary system. We know this because the monetary regime comes and goes, leaving behind gold and silver as the only form of solid money throughout human history. Therefore, the end of the dollar, along with the fiat currency system, just like the end of the kingdom, is one of monetary certainty. But only a small proportion of analysts are aware that this is so and it seems to assume that the current monetary conditions will continue indefinitely.
This article states the end of the current monetary regime can be closer than the uber-ugar think. If so, that's partly because of the extraordinary circumstances that are currently developing.
Gold and silver, in terms of their purchasing power, are and always a safe place of inflation caused by the state and historically remain relatively stable measured against other commodities, except in times of escalating financial violence during a credit crunch. However, the amount of fiat currency relative to available monetary gold is now too great for this relative stability to continue even before the next credit crisis, with gold and silver values having the potential to increase significantly, measured against fiat and commodity currencies.
Potentially, fiat currencies face a perfect storm from the upcoming credit crisis, from the consequences of the central bank's wrongful efforts to make the banking system a disaster, and from the spontaneous development of alternative asset systems in crypto currency.
The prospect of the dollar has worsened. The US budget deficit has risen at the most inappropriate stage of the credit cycle, leading to an increase in the US trade deficit, and therefore net sales of more dollars on foreign exchanges. Government funding through Treasuries is set to accelerate when foreign ownership of US dollar-denominated bonds, which increases while the dollar is strong, is likely to be sold, now the dollar weakens. A falling dollar means rising commodity prices on the exchange, rising domestic inflation and sliding bond markets. The Fed, which is concerned about risks to the private sector and government debt, is likely to be too slow to counter this negative force.
In the credit cycle, always rise in price, the consequences of previous credit expansion, leading to the stage of the final crisis. To combat the rise in price inflation beyond their 2% target, central banks will be forced to increase their deposit rates, while time preferences on loans and bonds are rising on market orders.
This increase only ends when the cost of financing and refinancing commercial projects exceeds their returns, and the malinvestment is revealed. At that point, rising losses on lending banks forced banks to reduce, especially on loans for working capital. And without working capital, business failures are rapidly increasing.
Consumer debt is now a major factor
The sequence of events in the classical definition of the credit induced cycle of business has gradually changed in one important respect. Instead of bank credits taken by companies that want to satisfy consumer demand arising from the disappointment of saving from low interest rates, the marginal consumer demand itself is supported by rising borrowing rates. This is because the transfer of wealth due to monetary inflation is now heavily burdening American consumers, who have abandoned the habit of saving and instead borrowing to maintain their standard of living. Therefore, changes in the savings rate, an important signal to business in the past, are not as relevant as they once were.
When the credit crunch comes, the composition of all consumer debt is also important. By the end of 2017, US household debt stood at $ 13.15 trillion, and comprised $ 9.33 trillion of mortgage debt and £ 3.82 trillion of non-housing debt. Much of the mortgage debt is held by government agencies, taken to the conservatory by the US Treasury Department during the last credit crunch. We can safely assume government policy will prevent the seizure of delinquent mortgages. It leaves a non-residential debt, which is largely unsecured.