During the final two decades of the twentieth
century, the U.S. economy was the envy of the world. It created 30
million new jobs while Europe and Japan were creating virtually none. It
imposed its technological and ideological will on huge sections of the
global marketplace, and produced new millionaires the way a Ford plant
turns out pickup trucks. U.S. stock prices rose twentyfold during this
period, in the process convincing most investors that it would always be
so. Toward the end, even the federal government seemed well run,
accumulating surpluses big enough to shift the debate from how to
allocate scarce resources to how long it would take to eliminate the
federal debt.
As the coin of this brave new realm, the dollar became the world’s dominant
currency. Foreign central banks accumulated dollars as their main reserve
asset. Commodities like oil were denominated in dollars, and emerging
countries like Argentina and China linked their currencies to the dollar in
the hope of achieving U.S.-like stability. By 2000, there were said to be
more $100 bills circulating in Russia than in the U.S.
But as the century ended, so did this extraordinary run. Tech stocks
crashed, the Twin Towers fell, and Americans’ sense of omnipotence went the
way of their nest eggs. As this is written in early 2008, three million
fewer Americans are drawing paychecks. The federal government is borrowing
$500 billion each year to finance the war on terror as well as an array of
new or expanded social programs, and many parts of the financial system,
including sub-prime mortgages, credit insurance, and municipal bonds,
seem to be imploding.
The dollar, meanwhile, has become the world’s problem currency, falling in
value versus other major currencies and plunging versus gold. The whole
world is watching, scratching its collective head, and wondering what has
changed. The answer, as will become clear in the next few chapters, is that
everything has changed, and nothing has. The spectacular growth of the past
two decades, it now turns out, was a mirage generated by the smoke and
mirrors of rising debt and the willingness of the rest of the world to
accept a flood of new dollars. Just how much the U.S. owes will shock you.
But even more shocking is the fact that we’re still at it. Like a family
that has maintained its lifestyle by maxing out a series of credit cards,
America is at the point where new debt goes to pay off the old rather than
to create new wealth. Hence the past few years’ slow growth and steady loss
of jobs.
So why say that nothing has changed? Because today’s problems are new only
in terms of recent U.S. history. A quick scan of world history reveals them
to be depressingly familiar. All great societies pass this way eventually,
running up unsustainable debts and printing (or minting) currency in an
increasingly desperate attempt to maintain the illusion of prosperity. And
all, eventually, find themselves between the proverbial devil and deep blue
sea: Either they simply collapse under the weight of their accumulated debt,
as did the U.S. and Europe in the 1930s, or they keep running the printing
presses until their currencies become worthless and their economies fall
into chaos.
This time around, governments the world over have clearly chosen the second
option. They’re cutting interest rates, boosting spending, and encouraging
the use of modern financial engineering techniques to create a tidal wave of
credit. And history teaches that once in motion, this process leads to an
inevitable result: Fiat (i.e., government-controlled) currencies will become
ever less valuable, until most of us just give upon them altogether. These
are strong words, we know. But by the time you’ve finished the next two
chapters we think you’ll agree that they are, unfortunately, quite accurate.
Now, what does a collapse in the value of the dollar mean for your finances?
Many things, mostly bad but some potentially very good. First, it hurts
people on a fixed income, because the value of each dollar they receive
plunges. Ditto for those who are owed money, because they’ll be paid back in
less-valuable dollars (hence the disaster about to hit many banks). Bonds,
which are basically loans to businesses or governments that promise to make
fixed monthly payments and then return the principal, will be terrible
investments, since they’ll be repaid in always-depreciating dollars. For
stocks and real estate, the picture is mixed, with a weak dollar helping in
some ways and hurting in others. We’ll walk you through this labyrinth in
Chapter 17.
The only unambiguous winner is gold. For the first 3,000 or so years of
human history, gold was, for a variety of still-valid reasons, humanity’s
money of choice. As recently as 1970, it was the anchor of the global
financial system. And since the world’s economies severed their links to the
metal in 1971, it has acted as a kind of shadow currency, rising when the
dollar is weak and falling when the dollar is strong. Not surprisingly, gold
languished during the 1980s and ’90s, drifting lower as the dollar soared,
and being supplanted by the greenback as the standard against which all
things financial are measured. But now those roles are about to reverse once
again. In the coming decade, as the dollar suffers one of the great
meltdowns in monetary history, gold will reclaim its place at the center of
the global financial system, and its value, relative to most of today’s
national currencies, will soar. The result: Gold coins, Gold-mining stocks,
and gold-based digital currencies will be vastly better ways to preserve
and/or grow wealth than dollar-denominated bonds, stocks, or bank accounts.
That, in a nutshell, is the story. The rest of this book will put some meat
on this chapter’s rhetorical bones, but as historians once said of
Aristotle, all that follows is mere elaboration.
