The World Is Dropping the Dollar
I’ve had a hell of a time writing the Rude this week.
The idiots in DC, NYC and elsewhere in the Lower 48 have lobbed grapefruits down Broadway to yours truly.
Whether it’s the Democrats inadvertently re-electing Donald Trump, Alvin Bragg proving that graduating last in law school still makes you a lawyer or Chicago electing an even worse choice than Madame Fishface, America has not disappointed this week.
Elsewhere in the world, while America is distracted turning itself into a dystopian amusement park, the Chinese government is stepping up to be the next Nobel Peace Prize winner.
But before I tell you about peace-loving Pooh Bear, let’s get a bit of history in.
“It’s Not Worth a Continental!”
Unfortunately, my beloved library is still in Cebu, Philippines, where I had to leave it due to the insane transportation costs that followed the government-induced private sector shutdown of 2020-2021.
My in-laws are dutifully minding my library, shelves and reading chair until later this year, when Pam flies back to her native country to retrieve them for us.
That’s why I can’t pinpoint the exact page where the phrase “not worth a Continental” jumped out at me.
Growing up in Joisey and believing that America was always the richest country in the world, Ihad no idea what that phrase could possibly mean.
From Clifford F. Thies, of AIER:
In 1775, practically at the outset of hostilities, the Continental Congress authorized an issue of $2 million in paper money. By the end of 1776, $25 million was in circulation, already at a 30 percent discount relative to silver. By the end of 1777, $38 million was in circulation, at a 70 percent discount relative to silver. By the end of 1779, $192 million was in circulation, and $1 in paper money was worth only 1 or 2¢ in silver. The states were issuing their own paper money, contributing to the inflation.
With so much paper money, prices were skyrocketing, and specie was being hoarded. At one point, George Washington, commander of the Continental Army, remarked that a wagon load of money would not buy a wagon load of provisions. Innkeepers, merchants, and farmers were refusing to do business in terms of money. In October 1779, the Continental Congress requested not money from the states, but actual supplies – such as corn, wheat, hay, and oats – in order to support the armies in the field.
What was that paper money that depreciated off a cliff?
They were called the Continental Dollars.
And since a wagonload of them were worthless, anything that was deemed worthless was “not worth a continental.”
- The Mississippi Bubble
- Weimar Germany
- Gideon Gono’s 100 trillion Zimbabwe Dollar Note
Mark Twain was right: history doesn’t repeat, but it rhymes…. Especially financial history!
But how much does it rhyme?
Will the latest version of the United States Dollar follow its Continental Dollar ancestor into worthless oblivion?
The World Is Dropping the Dollar Like a Bad Habit
All week, you’ve probably heard news like this:
Theoretically, there’s no reason for any of these countries to use the dollar.
Except, their own currencies trade like they’re jumping on trampolines. So it’s difficult to maintain a solid rate.
The USD was attractive because the US, in better days, had the strongest economy, military and institutions.
But so mismanaged has been the dollar, whether by the Fed ratcheting up rates too quickly or the USG weaponizing the dollar by first sanctioning and then confiscating Russia’s assets, that the world is sacrificing stability for a leap in the dark.
Because that’s what it is.
To be fair, I have no idea what this new system would look like… and neither does anyone else. That’s why I think most of these moves have been made bilaterally.
A bunch of things will be tried, and whatever works out the best will be codified into the BRICS “legal code.”
But why is this such a disaster for Americans?
Follow The Money
This week, Saudi Arabia and Iran are meeting in Beijing to solidify a new relationship. I don’t know if Emperor Pooh Bear can pull off the miracle of making 1,500 years of hatred disappear. But he’s going to try his damnedest.
Saudi Arabia has already agreed to trade its oil for China’s yuan.
Let’s write that again, for those who just blinked really quickly…
Saudi Arabia has indeed agreed to trade oil for yuan.
All sorts of questions pop up from just that one bit of news.
Aren’t Saudis supposed to sell their oil for USD? Isn’t that what “petrodollar” means?
If they’re not selling it for USD, is Sleepy Joe even aware of it?
And perhaps most importantly…
If the Saudis are taking in Chinese yuan, then where are they going to invest those yuan?
That answer is obvious, isn’t it?
They’ll invest those yuan back into China, just like they were doing with the USD and USA for nearly 50 years.
That’s why these headlines make so much sense:
But this is just part of the problem. The second order effects are even worse.
The Real Problem
Let’s set the terms. Taxation is robbery. Inflation is theft.
We’re dealing with the latter.
The USG subsidizes the economy via inflation. The government literally steals from you by printing money.
Here’s how: the Fed prints money and delivers that via the commercial banks to the USD users. That’s you… and all the foreigners who want USD.
There are more dollars outside the United States than inside the United States. And normally, this doesn’t matter.
Because you don’t benefit from “reserve currency” status.
The government and the banks do, because they print $100 bills for $100 worth of goods from foreigners.
The thing is, it only costs them 15 cents to print that $100 bill.
That’s what we call seigniorage.
And it’s the single greatest scam ever invented
You’re just the middleman through which the dollars flow. You get none of the $99.85 profit.
And again, you don’t care. You don’t feel it. You go to the outlet stores, buy an SUV-load of “stuff” you think is marked down and off you go.
But here’s where the problem comes in: when the foreigners decide they’ve had enough of the scam and then send all those dollars back.
Those dollars build like a 100-foot wave and come crashing back into the domestic economy.
Domestic prices skyrocket because there’s a tidal wave’s worth of dollars chasing far too few goods.
Not only that, but do you really think your taxes pay for your military? Of course not. There’s simply not enough revenue to pay for all of it.
That’s why the Fed needs to print, print, print. Those printed – one might say “counterfeit” – dollars spread the cost of the military around to everyone.
Think of inflation as a tax that the central bank levies instead of a legislature. It’s a disaster for the lower classes because they get “taxed” out of existence.
That’s why the Fed’s reaction to all this matters so much. They’ve got to make sure inflation doesn’t get out of control… but they still need some to pay for the “goodies” the government can’t tax you on.
If you’re not prepared, your loaf of bread will require a wheelbarrow worth of paper to pay for it.
But we’ll get you prepared in a second, because I think it may get even worse…
The Peace Deal
According to the Global Times, Emperor Pooh Bear invited the Saudi Arabian and Iranian delegations to Beijing today to discuss detailed arrangements to resume ties.
Liu Zhongmin, a professor at the Middle East Studies Institute of Shanghai International Studies University, practically snorted:
It is obviously difficult for the West to understand the fundamental reason why China can successfully promote the reconciliation between Saudi Arabia and Iran, because China follows a diplomatic concept and policy that is completely different from the West’s Middle East strategy and policy, and is different from the West’s behaviors that divide the region, incite camp confrontation, and promote so-called democratic transformation as well as harmful practices such as proxy warfare.
Here’s my question, and I’m just thinking aloud here. Feel free to call me crazy.
Do the Chinese want to build an oil pipeline from Saudi through Iran to China?
One already runs from Saudi through Kuwait to Iraq. The Chinese would just need to extend it.
This would lower costs and avoid hostile navies like the US and UK.
Saudi would get the yuan, Iran would get an enormous transit and insurance fee and China would get its oil.
This would also bring China’s Belt and Road Initiative closer to fruition.
That would obviate Alfred Thayer Mahan’s sea-based world and usher us into the age of Halford Mackinder’s land-based World Island.
I’m not sure, but forgive me for thinking there’s an ulterior motive.
My erstwhile colleague Jim Rickards has been talking about gold forever. And now it’s time to act.
Silver also looks like a great bet right now. We can see the upside all the way to $50 or higher.
And, if you’ve got room left, a bit of Bitcoin can also help you avoid inflation.
For Bitcoin, you’re not swinging for the fences. Just a bit of protection.
And remember, it’s Bitcoin. No shitcoins!
You’ve got time, but the sooner you act the better.
This is a lot to take in, but I want to make it clear: something big is brewing here and it doesn’t look good for the everyday American. So let me know how you feel about all this (or any other topics you want covered) by emailing me here.
And have a wonderful Easter weekend!
My story starts in Hasbrouck Heights, New Jersey, where I grew up. My childhood was idyllic. I never thought I'd leave the Heights. Well, maybe just for college. When I was searching for colleges, I only looked within a hundred miles or so. I wound up going to Villanova. I stayed there for four years and earned — their word, not mine — a finance degree with a minor in political science. After that, I went to work on Wall Street. I had a menial job at Paine Webber to start, but then I got my first real Wall Street job at Lehman Bros. (before its collapse, of course). I worked there in Global Corporate Equity Derivatives as an accountant, believe it or not. Honestly, I hated the job back then. I didn't know how spreadsheets worked — yes, even with a finance degree. (Now I'm a Microsoft Excel nut. I think it’s one of the most extraordinary things ever invented.) After that, I moved to Credit Suisse, who sent me to London — the center of global operations for banking. I was young. Not only did I love the city for being a Candyland for alcoholics, but I also needed the international experience to cancel out my mediocre grade point average to get into a top 25 U.S. business school. Somehow, though, I stayed for a decade, until I discovered London Business School. There I earned a master’s (HA!) degree in finance. My next job was as a futures broker, which I utterly loathed. When I had enough, I took a year off — pub crawling around London and pissing away my bonus money. Then I figured out that I needed a new job. So I went to work for a company called 7city Learning, where all of the best finance trainers were working. I had no idea about any of that, but imagine walking into the 1927 Yankees locker room and being taught how to hit. I spent my time teaching all the traders exams, the graduate programs of the various big banks and then the CFA Level 1 review courses. Yes, that's the only level I've passed. I hate that exam. I never really wanted to run money anyway. In 2009, my boss asked me to move to Singapore to help build the business in Asia. Then I went to work for another financial training company where all of my friends had migrated. Around the time I was getting bored of Singapore, my old bank asked me to work at talent development for them in Hong Kong. Nearly three years later, I moved to the Philippines, where I started an EdTech startup called Finlingo. Along the way, I’ve racked up a ton of qualifications — I am a CAIA, FRM and CMT, amongst a few other things — but they don't mean anything. All that matters are my experience, my connections and my takes on things. So every day I'm going to do my snarky best to inform and entertain you.