How the Collapse of the Dollar Could Occur

US Dollar Collapse? Here Are 9 Ways It Could Happen, by Chris Ferreira on Economic Reason.com, which defines nine ways the dollar collapse could occur. He is spot on concerning the slow, gradual decline until a major event triggers the collapse. Until then most people will be fooling themselves, thinking market correction, chances to buy cheap and sell high, until it becomes apparent that there are other things more important than their financial holdings,....and those things of course are the ability to feed yourself and your family,.....and the ability to protect the same.

We all know that the US dollar is losing value through inflation every year; in fact, the dollar has lost over 97% of its purchasing power over the last century. When “real money” (i.e. backed up with intrinsic value) was used, a cup of coffee in the 1920s costed about a few cents. In a fiat world, where money’s value is ambiguous, a cup of coffee can cost upward to a 100 trillion dollars, as was the case in Zimbabwe in recent times. Just how much more can the remaining 3% be debased from the US dollar, and how fast can it happen?

A slow, gradual decline can occur without any one person ever even noticing the effects– until, that is, a “black swan”event comes along and triggers the psychology of investors to quickly reverse their thinking, and here a collapse can literally happen overnight. A “black swan,” a term coined by Nassim Nicholas Taleb in his bestselling book The Black Swan, is “an event, positive or negative, that is deemed improbable yet causes massive consequences.” In his book he describes the psychology biases that makes people individually and collectively blind to a rare event. He also notes that the more complex a system is, the more prone it is to failure as there is more room for glitches and errors. This analogy can be used to describe the complexity of the US global empire, complete with its massive debt and 900 military bases around the world. This article is taking a “black swan” approach to the US dollar.

Here are nine events that could trigger a black swan event that would result in a US dollar collapse. The reasons below are not in order of importance, and all them can prove to be negative for the US dollar.

1. The Fed Chooses to engage in currency wars by being the spender of last resort and printing money to oblivion. When people think of a collapse, they often think of a deflationary setting. But a collapse can also occur when the face value of the currency goes up–or skyrockets upwards, as did the currency in Zimbabwe, when everyone was suddenly eligible to be a “trillionaire.” (Webster needs to update their dictionary with this word). When the face value of a currency skyrockets, the purchasing power decreases, and these are usually the ingredients for hyperinflation and collapse.

It took the US 200 years to issue $3 trillion dollar in M3 money supply. Greenspan increased this to $10 trillion dollars in his eighteenth year as Fed chairman. How much has it increased under Ben Bernanke, in his seven years as chairman of the Fed? Your guess is as good as mine, actually, because the exact number is unknown: the Fed no longer reports this statistic as of 2006, exactly when Bernanke entered office. What a coincidence!

With QE 3 and QE 4, the Fed now prints a total of $85 billion a month, most of which is reportedly being held in reserves. Even with these rock bottom low interest rates, credit demand is weak. There is plainly too much uncertainty.

If the stock market were to crash again as it did in 2008, and the Fed were to consequently launch QE5, then QE6 and so on… This would hardly be, in reality, a “black swan” event since it is probable, but nevertheless, it could eventually lead to hyper-inflation and a total collapse of the dollar, where people would lose purchasing power of the dollar as in the case of Zimbabwe. This is more likely to occur if the US dollar also loses its reserve currency status.

2. The Fed’s printing press “jams” and ceases to stops printing money. As I’ve stated before, the Fed will most likely not stop printing money. During the December 2012. FOMC meeting, this belief was supported. The most important reason why the Fed needs to continue printing money is so that it can hold interest rates artificially low to stimulate the economy. Normally, higher interest rates would increase the value of the dollar, as this would cause people to deleverage from investments and increase the demand for dollars. However, the structural imbalances the economy has undertaken from a decade of artificial low interest rates would implode the economy from high interest rates now. Undoubtedly, if the Fed stops printing money, this will mostly cause higher interest rates. This will lead to increased bankruptcies, higher unemployment, more foreclosures, lower tax revenue for the US government, and increased interest on the national debt. In this situation it could lead to the bankruptcy of the US as they could default on their own debt.

Interest rates in the 80′s were increased signficantly to kill inflation, however the US debt was nowhere near what it is today (even in terms of % of GDP). At the present moment, the US is paying over $1 billion a day just in interest payments to service its debt. A slight increase in interest rates would significantly increase these payments and leave the US with even more debt than it already has, increasing their trillion dollar per year deficits. This is a scenario whereby the US could default just as Argentina did in the early 2000′s.

If they were to stop printing money, the Fed could trigger a dollar collapse, especially if foreigners decide to no longer lend the US any more money, and start dumping US debt from their foreign reserves.

3. Rise of “Gotham City” and the Vigilantes. We know that the US is currently the largest debtor nation in the history of the world, operating on yearly trillion dollar deficits. What if the US citizens were to “wake up” and collectively stop paying their taxes? What if they were to collectively choose to no longer support political decisions that serve to perpetually increase the debt? An increase in debt ruins the prospects for future generations, after all. Taxes are essentially the life-line of any government. A cut on this life-line is like cutting the main artery to the heart. Without a tax base, government can no longer pay its bills.

A significant internal revolution by citizens would entail a collective refusal against the paying of taxes and the continual raising of the debt ceiling. Perhaps these citizens might even become bond vigilantes and sell US bonds, especially if other countries became US bond vigilantes and sell their US bonds, as well. This would likely collapse the dollar, and send the US dollar into hyper-inflation.

4. China, the largest financier of the US debt, drops the debt bomb. The Chinese can drop the debt bomb on the US just by selling a fraction of their US treasury holdings. As of June 2012, the Chinese owned $1.16 trillion in US debt (US government treasury bonds). Japan owns $1.11 trillion and the OPEC nations, $261 billion. In the last few years, China has been lowering their purchases of US debt and replacing it with other assets. To circumvent this problem, the Fed of late has been stepping in to purchase treasury bonds to make up for the lost demand of the foreigners.

China’s power is the direct result of the symbiotic trade relationship with the US. The US buys goods from China in US dollars, and China ships them the products and uses the US dollar surpluses to buy US debt, among other assets.

It may not be in the interest of China to drop the debt bomb, but it definitely has the power to do it. If this is the case, there would be so much US debt on the market that other US debt holding countries could also throw their debt on the market as well as a result of panic and fear. Triggering an international run on US debt. The US Dollar will surely collapse in this scenario.

5. China, Japan, Russia, Iran, Germany, Brazil, Australia, Chile, UAE, India, and South Africa are bypassing the dollar and creating bi-lateral trade warfare.

What if now the Chinese, instead of dropping the debt bomb, create enough bi-lateral trade agreements to avoid the US dollar altogether with foreigners? In fact China, among other countries, has already done this by trading with the Chinese Yuan instead of the US dollar. If China, Japan, Russian, Iran, Germany, Brazil, Australia, Chile, USE, India, and South Africa would continue to do so, other larger countries may follow suit and before you know it, the majority of trade would be transacted in non-US dollars. At this point, the US dollar would no longer be needed, and its world reserve currency status would collapse along with its purchasing power.

What could also trigger a large decline in the US dollar would be if a relatively large oil-producing country (like Saudi Arabia) refuses to use the US dollar to sell its oil, choosing instead something more tangible (like gold). William R. Clark’s excellent book, Petrodollar Warfare, treats this issue precisely, going in depth into the Petrodollar collapse and how the US maintains its dollar supremacy with its current imperialistic foreign policy. If a major OPEC nation refuses to sell its oil in US dollars, this could result in a total loss of confidence in the US dollar, precipitating its collapse.

6. “Good-bye Dollar, Hello SDR!” The U.N. and IMF implement a New World Reserve Currency George Soros states in a recent video interview (see here) that the US needs a “New Financial World Order,” on the pretext that the current system is “broke” and creating huge trade imbalances. The Guardian stated the following:

“The International Monetary Fund warned that the colossal United States trade deficit was a noose around the neck of the economy, emphasizing that the once mighty dollar could collapse at any moment.”

Soros, a member of the Bretton Woods Committee–the same institution that created the IMF–is now promoting the Special Drawings Right (SDR) as a potential new world currency.

The progress for the SDR has been very slow and has not received much acceptance among other nations. However, note that the US currently controls the IMF by its voting powers (17% nominal interest, and a required of 85% majority for decisions). As more and more people lose confidence in the US dollar in general due to reckless monetary and fiscal policies, the IMF can instead back the SDR with gold to promote stability and confidence. That is certainly one realistic possibility considering that they reportedly own over 2,800 tons of gold. A shift in reserve currency from the US dollar to the SDR or other another currency would undoubtedly collapse the US dollar. It’s trade imbalance is sustained by it’s reserve status.

7. A “too-big-to-fail” corporation fails: A derivative shock-wave. The Financial Stability Board (FSB) released a list of 29 “too big to fail” corporations operating around the world. According to the FSB, these banks are considered to be “systemically important financial institutions” and a failure of any one of these corporations could result in “financial systemic failure.” Of the 29 corporations on the list, 17 are based in Europe, eight in the U.S., and four in Asia.

Bank of America

Bank of China

Bank of New York Mellon

Banque Populaire CdE

Barclays

BNP Paribas

Citigroup

Commerzbank

Credit Suisse

Deutsche Bank

Goldman Sachs

Group Crédit Agricole

HSBC

ING Bank

JPMorgan Chase

Lloyds Banking Group

Mitsubishi UFJ FG

Mizuho FG

Morgan Stanley

Nordea

Royal Bank of Scotland

Santander

Société Générale

State Street

Sumitomo Mitsui FG

UBS

Unicredit Group

Wells Fargo

A failure of any one of these banks, but especially one in the US, could create a bank run, further destroying the ability to provide credit and increasing the likelihood of a dollar collapse.

What is most likely to create a bank failure is a derivative failure. Actually, a current derivatives scandal is threatening to take down the world’s oldest bank:

“Banca Monte dei Paschi di Siena, the world’s oldest bank, was making loans when Michelangelo and Leonardo da Vinci were young men and before Columbus sailed to the New World. The bank survived the Italian War, which saw Siena’s surrender to Spain in 1555, the Napoleonic campaign, the Second World War and assorted bouts of plague and poverty.

But MPS may not survive the twin threats of a gruesomely expensive takeover gone bad and a derivatives scandal that may result in legal action against the bank’s former executives. After five centuries of independence, MPS may have to be nationalized as its losses soar and its value sinks.”

The precise, total amount of global derivatives in the market is not exactly known, but estimates range from 650 trillion to 1.5 quadrillion dollars. This amount dwarfs the world’s GDP at approximately $70 trillion. (Refer to this article to see what $16 trillion looks like.) It is no wonder why Warren Buffet calls derivatives the “financial weapons of mass destruction.”

According to the Controller of Currency and National Banks, here are the stats for the following banks as of September 2012:

JPMorgan Chase
Total Assets: $1.85 trillion dollars
Total Exposure To Derivatives: $71.07 trillion dollars

Citibank
Total Assets: $1.365 trillion dollars
Total Exposure To Derivatives: $55.51 trillion dollars

Bank Of America
Total Assets: $1.448 trillion dollars
Total Exposure To Derivatives: $43.79 trillion dollars

Goldman Sachs
Total Assets: $120.43 billion (not trillion)
Total Exposure To Derivatives: $41,23 trillion
Note that JP Morgan alone has more derivative exposure than the world’s GDP. A derivative collapse is definitely an event that could take down the whole financial system and collapse the US dollar. 8. A run on the gold and silver bullion exchanges. Andrew McGuire, a former Goldman Sachs trader, disclosed that the London bullion Market Association (LBMA) trades on a net basis each year of $5.4 trillion dollars, a little less than half the size of the US economy. The LBMA is the biggest gold commodity market in the world.

But how can the LBMA do this be when the gold market is such a tiny market? The world production of gold is about 2,500 metric tons of gold (88,184,905 oz) which at today’s price of $1,667 is approximately $147 billion in yearly production value.

The LBMA is the equivalent of a fractional reserve system in that it is leveraged 100 to 1. For every ounce of real gold that is sold, 100 ounces of paper gold is sold, meaning there are 100 claims on each and every ounce of gold. These numbers were verified by Jeffrey Christian, a gold expert and founder of CMP Group (a commodities research, consulting, investment banking, and asset management company). The leverage is absurd.

The LBMA can be compared with other exchanges. The world’s gold market is backed up by approximately 2.3% of real gold. If a mere 2.5% of people would start demanding their gold, the physical gold market would explode, subsequently crushing the dollar, as the value of the dollar is inversely proportional to the price of gold.

Hedge fund manager Kyle Bass pointed out that the New York Comex has only approximately 3% of the bullion on hand to cover future contracts positions. and this game will continue if people do not demand delivery of their gold. The emperor has no clothes!

9. A central bank gold rush and foreign gold repatriation from the Fed – Gold Audit Venezuela has actually just recently received their last shipment of gold bars from the US.

“This was the largest type of operation to transport this type of metal in the last fifteen years,” said Merentes. “The repatriation of our gold was an act of financial prudence and sovereignty.” (Bloomberg)

The Germans and the Dutch have also recently requested their gold to be repatriated from the US. However, unlike Venezuela, Germany was told to wait seven years to get their gold back. That sounds odd, right?

Now the Swiss, under their recently launched Swiss Initiative to Secure the Swiss National Bank’s Gold Reserves, are hinting that they might want to get their gold back on Swiss soil. The Swiss government has a long standing tradition of backing their currency with gold.

This gold repatriation is turning out to be much bigger than a political statement. It is a total non-compliant/non-confidence vote for the US and the US dollar.

Which country is next? Mexico? They have 96% of their gold stored in the US and London.

A central bank gold rush to repatriate a country’s gold from the US can cause a huge upward demand for gold, pushing the price of gold upward and crushing the US dollar. (Especially if the Fed doesn’t have their gold and has been leased out into the market).

We have just gone through nine black swan events–events, remember, that are highly improbable but yet, when they do happen, have massive consequences.

Chris Ferrerra promises a Part 2 of this article, which he will go through five other “black swan” events that could cause the US dollar to collapse.

Government Preparing for the Collapse with Large Ammunition Purchases?

E-mail received recently:  "I am concerned about the humongous ammunition purchase by the Government (non-military). I saw reports about how much ammunition they use a year and the figures did not add up. If they use 15 million rounds in one year, it would take over 100 years to use the 1.6 billion rounds they are buying. What are you thoughts as to the Government preparing for a crackdown? I have also read reports of tractor-trailer trucks transporting loads of signs that read 'Martial Law in Effect". All this is stunning and scary news. Interested in what you have to say."

UrbanMan's comments: First of all, I have seen nothing of Martial Law signage. Sounds like an internet legend to me unless there are some verifiable sources. Second of all, the Government does have some plans for internal civil operations to quell disturbances and react to terrorist attacks, just like they have contingency plans to invade about every country of the face of the earth. This is what they do,...create "what if" plans. And it is concerning that it seems like the government has taken the stand that it is okay to kill American citizens outside and inside of this country using drones or other means. But I don't think the large ammuniton purchase is in preparation for civil war or whatever.

Here is an the report from Fox News about the large ammunition purchase by the Department of Homeland Security (DHS):

The Homeland Security Department wants to buy more than 1.6 billion rounds of ammunition in the next four or five years. It says it needs them -- roughly the equivalent of five bullets for every person in the United States -- for law enforcement agents in training and on duty.

Published federal notices about the ammo buy have agitated conspiracy theorists since the fall. That's when conservative radio host Alex Jones spoke of an "arms race against the American people" and said the government was "gearing up for total collapse, they're gearing up for huge wars."

The government's explanation is much less sinister.

Federal solicitations to buy the bullets are known as "strategic sourcing contracts," which help the government get a low price for a big purchase, says Peggy Dixon, spokeswoman for the Federal Law Enforcement Training Center in Glynco, Ga . The training center and others like it run by the Homeland Security Department use as many as 15 million rounds every year, mostly on shooting ranges and in training exercises.

Dixon said one of the contracts would allow Homeland Security to buy up to 750 million rounds of ammunition over the next five years for its training facilities. The rounds are used for basic and advanced law enforcement training for federal law enforcement agencies under the department's umbrella. The facilities also offer firearms training to tens of thousands of federal law enforcement officers. More than 90 federal agencies and 70,000 agents and officers used the department's training center last year.

The rest of the 1.6 billion rounds of ammunition would be purchased by Immigration and Customs Enforcement, the federal government's second largest criminal investigative agency.

ICE's ammunition requests in the last year included:

- 450 million rounds of .40-caliber duty ammunition

- 40 million rounds of rifle ammunition a year for as many as five years, for a total bullet-buy of 200 million rounds

- 176,000 rifle rounds on a separate contract

- 25,000 blank rounds

The Homeland Security ammo buy is not the first time the government's bullets purchases have sparked concerns on the Internet. The same thing happened last year when the Social Security Administration posted a notice that it was buying 174,000 hollow point bullets.

Jonathan L. Lasher, the agency's assistant inspector general for external relations, said those bullets were for the Social Security inspector general's office, which has about 295 agents who investigate Social Security fraud and other crimes.

UrbanMan again: A friend of mine in one of the largest federal law enforcement agencys told me that if everyone agent/officer shot every firearms qualification (very unlikely), and received their maximum ammunition allocation, that they would expend 12 million rounds a year. This is not counting the academy training, nor the high levels of ammuntion expended by their tactical units. This is only one agency so the 15 million rounds a year is extremely low counting all the federal law enforcment agencies.

While I don't think the government is planning on a need for this ammunition in the streets of America, a secondary effect of such a large ammunition buy may just result in much less ammunition so the preppers can get any.  The shrill cry for draconian gun control also had an effect in ammunition stocks in gun stores,  sporting goods stores and on-line sources becoming scare.   

Potential Devastating Solar Super Storm

A solar 'superstorm' is coming and we'll only get 30-minute warning,...they cause devastation, occur every 150 years, and the last one was in 1859. This is an article by Steve Connor on the Independent.co.uk news and science site.

A solar "superstorm" could knock out Earth's communications satellites, cause dangerous power surges in the national grid and disrupt crucial navigation aids and aircraft avionics, a major report has found. It is inevitable that an extreme solar storm – caused by the Sun ejecting billions of tonnes of highly-energetic matter travelling at a million miles an hour – will hit the Earth at some time in the near future, but it is impossible to predict more than about 30 minutes before it actually happens, a team of engineers has warned.

Solar superstorms are estimated to occur once every 100 or 200 years, with the last one hitting the Earth in 1859. Although none has occurred in the space age, we are far more vulnerable now than a century ago because of the ubiquity of modern electronics, they said. "The general consensus is that a solar superstorm is inevitable, a matter not of 'if' but 'when?'," says a report into extreme space weather by a group of experts at the Royal Academy of Engineering in London.

In the past half century, there have been a number of "near misses" when an explosive "coronal mass ejection" of energetic matter from the Sun has been flung into space, narrowly bypassing the Earth. In 1989 a relatively minor solar storm knocked out several key electrical transformers in the Canadian national grid, causing major power blackouts.

Similar solar storms significantly increased atmospheric radiation levels in 1956, 1972, 1989 and 2003, the experts found. Professor Paul Cannon, who chaired the academy's working group on solar storms, said that the Government should set up a space weather board to oversee measures aimed at minimising the impact of solar storms. "A solar superstorm will be a challenge but not cataclysmic. The two challenges for government are the wide spectrum of technologies affected today and the emergence of unexpected vulnerabilities as technology evolves," he said. "Our message is, 'Don't panic, but do prepare'. A solar superstorm will happen one day and we need to be ready for it. "Many steps have already been taken to minimise the impact of solar storms on current technology… We anticipate that the UK can further minimise the impact," he added.

Minor solar storms hit the Earth on a regular basis, but these are far less powerful than the 1859 event named after the British astronomer Richard Carrington, which was the last true solar superstorm. A similar event today would put severe strain the electricity grid, where transformers are particular vulnerable to power surges, as well as degrading the performance of satellites, GPS navigation, aviation and possibly the mobile phone network, particularly the new 4G network, which relies on GPS satellites for timing information. "Satellites are certainly in the front line of a superstorm. They are part of our infrastructure and we have concerns about their survival in a solar superstorm," said Keith Ryden, a space engineer at Surrey University.

The Economic Impact of a War Between Japan & China

This article came from a very good article titled the same, The Economic Impact of a War Between Japan and China, from On Line MBA and in a very clear manner explains the issues and impact of a possible conflict between China and Japan. Saying that any shooting war between these two Pacific powers would adversely affect the economic status and well being of U.S. is an understatement.

Global economists are keeping their eyes glued to the Asia-Pacific region, where a bitter feud is brewing between two of the world’s most powerful nations over a small collectivity of islands in the East China Sea. The Chinese government argues that a treaty signed during the first Sino-Japanese War (1894-95) conferred ownership of the islands to China. Japan has long disputed these claims, and today argues that the islands are integral to its national identity.

The argument came to a head last September, when a boycott of Japanese products led Chinese demonstrators to target fellow citizens who owned Japanese cars. Three months later, the situation escalated when when Japanese jets confronted a Chinese plane flying over the islands; no shots were fired, but the act of antagonism has set a troubling precedent between the military forces of both nations.

The conflict between China and Japan has put the United States in a precarious position: if a full-scale war were to erupt, the U.S. would be forced to choose between a long-time ally (Japan) and its largest economic lender (China). Last year, China’s holdings in U.S. securities reached $1.73 trillion and goods exported from the U.S. to China exceeded $100 billion. The two countries also share strong economic ties due to the large number of American companies that outsource jobs to China.

However, the U.S. government may be legally obligated to defend Japan. In November, the U.S. Senate added an amendment to the National Defense Authorization Act that officially recognizes Japan’s claims to the disputed islands; the U.S. and Japan are also committed to a mutual defense treaty that requires either country to step in and defend the other when international disputes occur. Not honoring this treaty could very easily tarnish America’s diplomatic image.

The countries of the Asia-Pacific region are collectively responsible for 55 percent of the global GDP and 44 percent of the world’s trade. A major conflict between the region’s two largest economies would not only impose a harsh dilemma on U.S. diplomats, but also have a significant impact on the entire global economy. It is in every nation’s best interest that the Chinese and Japanese settle their territorial dispute peacefully.

You can also go to the On Line MBA article and read or download the transcript from the video below.