IS A CURRENCY CRISIS COMING?

During the past few months we have had more than just a handful of clients asking us about this so-called currency reset that has been discussed in various forums recently.  And of course we have received a large number of phone calls from people asking about banking in other jurisdictions (away from their home country), how to secure their 401K or pension funds from possible government asset grabs, and related kinds of concerns.  But before anyone jumps to the conclusion that all this is simple conspiracy quackery, former US Congressman Ron Paul recently participated in a few public interviews this year (2015) whereby he discussed his belief that a currency crisis is coming to the United States.  While there have been a large number of things posted on so-called conspiracy sites, we have to believe that when someone such as Dr. Ron Paul basically says that something wicked this way comes, you have to sit up and take notice.  After all, they said that Ross Perot was off his mind when he warned about what would happen to US manufacturing and the resultant loss of American jobs if NAFTA and other similar trade agreements were put into place, and to be honest, the man was eventually vindicated (although even he did not fathom the loss of manufacturing not to Mexico alone, but of course to China).  Now the new item on the agenda is the TPP or Trans Pacific Partnership Agreement that has not even been fully made public due to the so-called sensitive nature of it (interpret this as the general public is too dumb to know what is says, and it's none of their business anyway, or so would seem to be the US Government's attitude about it).  

In fact, a few people that actually did read it claim if the American people knew what was in the document, there would be open revolt in the morning.  So, the point is, in a so-called free democratic open society, if the learned and esteemed politicians are willing to conduct themselves in such a manner regarding a free trade agreement – what else are they prepared and willing to do regarding other issues?  Never the less and getting back to the fate of the US Dollar, such a crisis would basically result in the rejection of the US Dollar both for trade internationally and a store of value for central bank reserves world-wide as well.  So, you can call it by whatever moniker or term you may wish, but the idea that there will be some kind of future crisis effecting or involving the US Dollar is not so far-fetched.  Something has to give and changes are certainly in motion with respect to the pecking order of nations (in terms of economic power) and subsequent issues pertaining to trade settlement as well (and thus what currencies will become important, and what currencies will fall by the wayside).

What is the basis for this assumption and predictions about the long term future of the US Dollar (and other currencies as well)?  Some people will refer back to August 1971 as the starting point when then former US President Nixon took the US Dollar off the gold standard and closed off the gold convertibility of the US Dollar to foreign central banks.  And it certainly is true that date might be considered to be the start of the backing of the US Dollar by oil, or better said an agreement that was constructed so that ALL oil sales would be conducted in US Dollars, thus creating a demand for that currency for commodity trade settlement.  Such an agreement meant that all foreign governments (and any private businesses involved in oil or petroleum transactions) needed to keep a reserve of US Dollars to purchase oil.  This of course created a demand for US Dollars that very much so gave support and value for the USD use in global commerce (remember basic supply and demand economics, and currencies can be considered a commodity as well subject to supply and demand functions).  In essence the free floating currency (and variable exchange rate) system we have today was born out this, but it has left the door wide open to abuse by politicians and financial participants (Central Banks) that decided to print money with reckless abandon when they so desired to do so.

Conservative columnist David J. Frum summed up the inherent problems with a free floating (and untethered to gold or silver) currency unit this way:  The modern currency float has its problems. There is no magical monetary cure, monetary policy is a policy area almost uniquely crowded with trade-offs and lesser evils.  If you want a classical gold standard, you get chronic deflation punctuated by depressions, as the U.S. did between 1873 and 1934.  If you want a regime of managed currencies tethered to gold, you get regulations and controls, as the U.S. got from 1934 through 1971.  If you let the currency float, you get chronic inflation punctuated by bubbles, the American lot since 1971.  System 1 is incompatible with democracy, because voters won’t accept the pain inherent in a gold standard.  System 2 is incompatible with the free market economics I favor.