The Reasons the Dollar Hasn't Lost It's Value - and the One Reason It Might This Time
Just so we're clear about where Jim Rickard's stands regarding the next recession, here's what he writes in Aftermath:
"The evidence of the past ten years proves that the most devastating financial crisis since the Great Depression is right around the corner. The global elites are ready to protect their wealth. Are you?"
With that provocative lead-in, Rickards finishes every chapter of his book with suggestions on how to deploy your money and assets in order to come out of the next recession intact, if not ahead of the game.
We've already made suggestions in previous posts. Most of these would serve you well not only in surviving a recession, but also natural disasters, a failure of the electronic grid, an attack on the internet, etc. Our suggestions were by no means exhaustive, but ideally they can help you pursue those measures you deem best, especially if you've so far done little to prepare, or have done no planning at all.
Last time, we gave a quick and dirty summary of potential problems the US dollar could face, even as we suggested having some of these stashed away for a rainy day. You may have wondered why we'd want to store away extra cash if there's a chance the dollar could lose value in the coming recession. It's simple: While it's a pretty good bet the dollar will lose lots of value - if not all its value - degree and timing remain an unknown. Maybe the dollar gives you needed purchasing power during the next recession. Maybe it loses value as the recession wears on. Maybe its value holds. Even Rickards won't pinpoint a prediction on the dollar's demise - although he suspects it's inevitable.
So that's why, for the reasons we outlined last time, we want some cash stowed away.
But if the dollar doesn't hold its value or - and this one caught my attention - its status as the world's reserve currency is lessened or even eliminated, we face the danger of having not only our dollars lose value, but perhaps even everything you owned that's denominated in dollars. And if you're wondering what you have denominated in dollars, the answer is simple: all of your financial assets.
Financial assets include brokerage accounts, IRAs, 401ks, SEP plans, 403bs, 459 plans, even most pension plans - all of which hold mutual funds, ETFs, stocks, bonds, CDs, money markets. Any securities or bank products stand to lose some or all of their value.
But didn't something similar happen during the last recession, the so-called Great Recession? Yes and no. Yes in that stocks, stock funds, many bonds and bond funds, gold, silver, precious metals mining shares, oil and other commodities - just about everything lost value at least for some period of time. If you had a typical "balanced" portfolio of 60%/40% bonds you likely watched your portfolio lose up to 30% from November 2007 to February 2009 - a mere 14 months. And such portfolios were touted to be relatively "conservative" with the expectation that bonds would hold or increase in value if stocks tanked. It didn't happen, much to everyone's surprise and dismay.
However, all of these assets regained their footing after a while. And if you held on to your securities without selling, you saw your portfolio bounce back (or maybe crawl back would be a better description).
And remember that money markets - which virtually everyone considered among the safest, most conservative investments - almost failed. One huge money market did. But the Fed intervened and "guaranteed" all money markets, just as they guaranteed all bank savings and CD accounts - a guarantee that remained in effect for years after the recession ended.
Who knows what would have ensued had the Fed not taken this and other extraordinary measures?
This time though, could be different. Even if the Fed intervenes with extraordinary measures that include guarantees (and it likely would if push comes to shove), it won't matter if the US dollar - which determines the value of all those financial assets - declines rapidly.
It's hard to imagine the dollar declining rapidly, given the alternatives that presently exist: the Euro, the British Pound, the Chinese Yuan, the Japanese Yen. Except that it's already happened in the past, albeit not to the degree Rickards envisions in the future.
Remember that in the 1970s, the US endured years of extraordinary inflation. If you're too young to remember this, do some research. It won't take long to discover how long this inflation lasted, and how much value the dollar lost. Inflation, which, by the way, has shown its ugly face in these United States at other times in the past, dating all the way back to the War for Independence, was for all intents and purposes rapidly getting out of control. It wasn't the "hyperinflation" that causes a nation's currency to ultimately lose all its value, but it was unnervingly close to that.
To use a modest example, in order to purchase the same $1,000 of goods and services you could purchase in 1970, you would need to have instead $1,871 in 1980. Your dollars steadily lost 7.21% of their purchasing power per year throughout the decade. How would you fare if we saw a repeat of that scenario?
But Rickards believes the dollar could be in even bigger trouble this time around. We'll look at this next time. And we'll consider the solutions Rickards proposes to defend ourselves from such a possiblity. Much of what worked in the 1970s would likely work this time around. However, there's no guarantee the dollar will spring back to life as it did then.
More next time...
"The evidence of the past ten years proves that the most devastating financial crisis since the Great Depression is right around the corner. The global elites are ready to protect their wealth. Are you?"
With that provocative lead-in, Rickards finishes every chapter of his book with suggestions on how to deploy your money and assets in order to come out of the next recession intact, if not ahead of the game.
We've already made suggestions in previous posts. Most of these would serve you well not only in surviving a recession, but also natural disasters, a failure of the electronic grid, an attack on the internet, etc. Our suggestions were by no means exhaustive, but ideally they can help you pursue those measures you deem best, especially if you've so far done little to prepare, or have done no planning at all.
Last time, we gave a quick and dirty summary of potential problems the US dollar could face, even as we suggested having some of these stashed away for a rainy day. You may have wondered why we'd want to store away extra cash if there's a chance the dollar could lose value in the coming recession. It's simple: While it's a pretty good bet the dollar will lose lots of value - if not all its value - degree and timing remain an unknown. Maybe the dollar gives you needed purchasing power during the next recession. Maybe it loses value as the recession wears on. Maybe its value holds. Even Rickards won't pinpoint a prediction on the dollar's demise - although he suspects it's inevitable.
So that's why, for the reasons we outlined last time, we want some cash stowed away.
But if the dollar doesn't hold its value or - and this one caught my attention - its status as the world's reserve currency is lessened or even eliminated, we face the danger of having not only our dollars lose value, but perhaps even everything you owned that's denominated in dollars. And if you're wondering what you have denominated in dollars, the answer is simple: all of your financial assets.
Financial assets include brokerage accounts, IRAs, 401ks, SEP plans, 403bs, 459 plans, even most pension plans - all of which hold mutual funds, ETFs, stocks, bonds, CDs, money markets. Any securities or bank products stand to lose some or all of their value.
But didn't something similar happen during the last recession, the so-called Great Recession? Yes and no. Yes in that stocks, stock funds, many bonds and bond funds, gold, silver, precious metals mining shares, oil and other commodities - just about everything lost value at least for some period of time. If you had a typical "balanced" portfolio of 60%/40% bonds you likely watched your portfolio lose up to 30% from November 2007 to February 2009 - a mere 14 months. And such portfolios were touted to be relatively "conservative" with the expectation that bonds would hold or increase in value if stocks tanked. It didn't happen, much to everyone's surprise and dismay.
However, all of these assets regained their footing after a while. And if you held on to your securities without selling, you saw your portfolio bounce back (or maybe crawl back would be a better description).
And remember that money markets - which virtually everyone considered among the safest, most conservative investments - almost failed. One huge money market did. But the Fed intervened and "guaranteed" all money markets, just as they guaranteed all bank savings and CD accounts - a guarantee that remained in effect for years after the recession ended.
Who knows what would have ensued had the Fed not taken this and other extraordinary measures?
This time though, could be different. Even if the Fed intervenes with extraordinary measures that include guarantees (and it likely would if push comes to shove), it won't matter if the US dollar - which determines the value of all those financial assets - declines rapidly.
It's hard to imagine the dollar declining rapidly, given the alternatives that presently exist: the Euro, the British Pound, the Chinese Yuan, the Japanese Yen. Except that it's already happened in the past, albeit not to the degree Rickards envisions in the future.
Remember that in the 1970s, the US endured years of extraordinary inflation. If you're too young to remember this, do some research. It won't take long to discover how long this inflation lasted, and how much value the dollar lost. Inflation, which, by the way, has shown its ugly face in these United States at other times in the past, dating all the way back to the War for Independence, was for all intents and purposes rapidly getting out of control. It wasn't the "hyperinflation" that causes a nation's currency to ultimately lose all its value, but it was unnervingly close to that.
To use a modest example, in order to purchase the same $1,000 of goods and services you could purchase in 1970, you would need to have instead $1,871 in 1980. Your dollars steadily lost 7.21% of their purchasing power per year throughout the decade. How would you fare if we saw a repeat of that scenario?
But Rickards believes the dollar could be in even bigger trouble this time around. We'll look at this next time. And we'll consider the solutions Rickards proposes to defend ourselves from such a possiblity. Much of what worked in the 1970s would likely work this time around. However, there's no guarantee the dollar will spring back to life as it did then.
More next time...
Comments