Wednesday, March 18, 2009

Dollar Crisis in the Making


Anyone who thinks they must "just ride out the storm", should think again. A perfect storm is brewing with major political and social disruptions and when it happens you know: you read it before at Troy Ounce. Gold will keep you safe in these times provided you have NOTHING standing between you and the physical gold. With this I mean you should own physical gold, not paper promises. It seems the financial world is dealing in app. 800 x the volume of gold in paper than there is physical gold available. Brokers are selling paper gold to gullible investors. Good for them and their commissions but when the stampede begins, the investor will ask for delivery. Imagine the stampede when investors are going to look for the highest tree in town when the broker informs the stunned investor that their gold is based on derivatives and actually "baked air". That's why one should stay away from GLD's, ETF's, shares, unit trusts and other paper promises. They are just what they say they are: paper.

BEFORE THE STAMPEDE

Asia Times; By W Joseph Stroupe; 14 March 2009

Increasingly ominous clouds are gathering in what could soon be the perfect storm against the United States dollar and against the present dollar-centric global financial order.

This is not shaping up to be a storm that anyone is trying to initiate, not even those who are actively driving for a new global financial order that is no longer centered on the dollar. Instead, it will result from a correlation of forces arising out of the deepening global financial and economic crises, coupled with recurring and conspicuous miscalculation on the part of some of the world's political, financial and economic leaders.

The storm has the potential to cause upheaval on a grand scale, opening the door to swift, and largely uncontrolled, fundamental transformation.

As is widely recognized, the present financial order that is
dinately reliant on the US dollar must some day give way to a new order that is more balanced, stable, resilient and reliable, one that is based on multiple currencies and that therefore won't be plagued by the extremely dangerous structural drawback of an increasingly worrisome elemental single point of failure (the dollar).

But if the current dollar-centric financial order should become more seriously shaken than it already has been, perhaps even suffering a collapse, as a casualty of the present deepening global crisis, then the transition to any new global financial order is most likely to be disorderly, disruptive and unmanageable rather than gradual and orderly.

We can hope - but cannot be at all confident - that world leaders and global investors will act coherently, cohesively and intelligently enough in this crisis so as to ensure that the policies and actions being undertaken will not put at further serious risk the fundamental structure of the current dollar-centric financial order, and that they will instead be effective in bolstering deteriorating global confidence in the present order and in the safety of the dollar, at least until we get through this crisis.

Unfortunately, we cannot be confident that world leaders know what they are doing in seeking to resolve the crisis. Are their measures attacking the heart of the problem, or only its periphery? Are they exacerbating the crisis, either by enacting certain misdirected measures, or by failing to enact certain required measures? Are they setting up conditions that make a dollar crisis and radically increased financial upheaval virtually inevitable, by blindly pushing ahead with a simplistic agenda of trying to spend their way out of the present crisis?

If the dollar is being put at significant short- and medium-term risk by such measures, then we're seriously risking plunging the global financial order into a depth and breadth of transition that we cannot adequately control.

Investment, finance and economics are a complex mix of at times downright illogical human psychology with the pure logic of mathematical science, introducing possibilities for potent wild-card factors that must be taken into consideration in any calculation.

History provides many unfortunate examples of how the psychological components of uncertainty, fear and panic can, at crucial times, trump the components of logic, reason, knowledge and discipline to give impetus to shortsighted and risky policies and actions that create a full-blown crisis. Humans simply don't always act in a rational and logical way that is in their best strategic interests. And institutions, regulatory agencies and governments, being composed of humans, don't always act rationally either.

All are subject to the potent influence of human psychology, which can at times be quite defensive, knee-jerk, irrational and somewhat unpredictable. In a crisis situation such as we presently find ourselves, the darker side of psychology's influence is often and unfortunately magnified.

Added to this is the fact that global investment, financial and economic systems have become increasingly complex and interrelated much faster than the ability of experts and leaders to adequately comprehend them. This makes it much easier to make mistakes of real consequence. This complexity also at times prevents governments and other institutions from taking requisite bold, comprehensive actions in the midst of crisis for fear that these may backfire by producing some unforeseen and intolerable effects and repercussions.

Further complicating matters, investment, finance and economics are nearly always deeply intertwined with politics, adding to potential uncertainty - especially so in a time of deepening global crisis, when individual governments invariably lean toward self-interest, nationalism, protectionism and self-preservation.

To illustrate the disturbing truthfulness of the foregoing, remember when experts and leaders confidently concluded that the free markets could mostly regulate themselves with success; when they concluded that no housing bubble existed in the US, but only some "regional froth"; when they insisted that complex new mortgage-backed securities, including high-risk mortgage paper, dispersed throughout the financial and investment system, would decrease default risk.

Link

UPDATE 1: part 2: The not-so-safe-haven
UPDATE 2: part 3: China inoculates itself against Dollar collapse