US Dollar Worst Case Scenario

[Billy]

This video about a possible collapse of the US dollar is very well done. What I am interested in with your reactions would be a systematic documented analysis of why this could not happen. Facts, please, no opinions!

http://www.youtube.com/watch?v=2N8gJSMoOJc

Billy

[Neil Stoloff]

Hi Billy,

Sometimes a question contains its own answer. Regarding future events that depend on human behavior, there can be no "systematic documented analysis" demonstrating why anything could not happen, much less a scenario -- like the one presented in the video -- that simply projects current trends to a logical conclusion.

Maybe a more meaningful question would be: "What could prevent such a scenario from playing out?"

On this topic, I know of two books that qualify as "documented analysis."

Endgame: The End of the Debt Supercycle and How It Changes Everything (http://www.amazon.com/Endgame-Debt-Supercycle-Changes-Everything/dp/1118004574/ref=sr_1_1?ie=UTF8&qid=1307137713&sr=8-1), by John Mauldin; and

This Time Is Different: Eight Centuries of Financial Folly (http://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691142165/ref=sr_1_1?s=books&ie=UTF8&qid=1307138509&sr=1-1), by Reinhart and Rogoff.

The short answer is that voluntary bubble deflation -- causing short-term pain -- would let society avoid much worse (involuntary) pain down the road. Unfortunately (alert: an element of opinion here), the first priority of those in power is to remain in power, making them incapable of taking action that's likely to result in their removal. It's not their fault: In a democracy, "we get the government we deserve." [Alexis de Tocqueville] We the People (present company excepted) would be the ones threatening to vote them out if they take the necessary steps.

For the VIT group, an even more meaningful question might be, "How would EV and/or the Robots fare in such a scenario?"

Not long ago, Billy, you suggested that we shouldn't worry about macro issues. Whatever comes, EV would keep us on the right side of the trade. Indeed, the chart on the EV home page shows that we can achieve outstanding returns even in otherwise dire circumstances. How confident are you that EV would hold up in the extreme scenario depicted in the video?

Cheers,

Neil Stoloff

[ericoleman]

Billy,

Like Neil, I agree that it would be difficult to surmise a way to document why a future situation could not happen . . . I did watch the video and recognize the message, and although the presentation is plausible, it is also alarmist.

I attempt to remove myself from dwelling in these types of doomsday scenarios. Currency crises have come and gone (Mexico, Southeast Asia, Russia, Britain, Argentina . . .) Not to diminish what could be an ugly scenario; but from a larger perspective, life goes on. Some of these places have even emerged much stronger, particularly countries in Asia and Latin America. In the event of such an intensely chaotic period in the US, I like to remind myself that "from dirt grow the flowers."

Also, the video seems to have a gold/pm bias. While I recognize these assets as store of wealth, I find it difficult to believe that our electronic and internet connected world would find gold/silver acceptable as a viable method of exchange. I live in a state where gold is now legal tender, yet if I actually went to pay with a gold coin, I believe I would have a hard time doing so. Never have I seen someone attempt to pay with gold.

Ultimately, the imbalances are going to have to be addressed. Will it be the hard way or the easy way or possibly some middle ground? I don't think we can know until we know. If political will and market pressure emerges, perhaps some solutions can be found. Some viable suggestions I hear discussed include dramatically reducing defense spending, raising the social security age, increasing taxes, reforming medicare, and legalizing marijuana.

Best,

Eric

[nickola.pazderic]

Marc Chandler, who is a higher regarded contributor to Seeking Alpha wrote Making Sense of the Dollar (http://www.amazon.com/Making-Sense-Dollar-Dangerous-Bloomberg/dp/1576603210)

For a take on the actual advantages of the American economy and it global position see George Friedman's The Next Hundred Years (http://www.amazon.com/Next-100-Years-Forecast-Century/dp/0767923057/ref=sr_1_1?s=books&ie=UTF8&qid=1307149267&sr=1-1)

Cullen Roche (http://pragcap.com/resources/understanding-modern-monetary-system)should be read by a lot of people. But to sum up his argument in the most simple language: it is absurd to compare the debt of a state like the USA with a family and its debt/credit.

[ilonaross]

Gretchen Morgenson's "Reckless Endangerment."

Maybe if some of the behaviors she describes were curtailed we'd have a better chance of making things right.