Demise of the Dollar
Description
In the newly revised third edition of Demise of the Dollar: From the Bailouts to the Pandemic and Beyond, New York Times and international bestselling author Addison Wiggin delivers yet another timely and insightful account of the devaluation of the American dollar. Fully updated to consider the events of the last ten years--including the COVID-19 pandemic--the book contains nuanced discussions of historic inflation, interest rates and the Federal Reserve, the impact the Euro has had since its introduction, the rise of China prior to the pandemic, cryptocurrencies and the United States' consumer debt addiction. It also demonstrates how all these factors, and more, are affected by the American dollar's role as the world's "reserve currency".
You'll learn what a weakened American dollar means for your portfolio and how you can best arrange your finances to protect against global macroeconomic risks. You'll find:
* Strategies for making your portfolio more resilient against economic shocks, downturns, and crises
* Explorations of what increasing levels of US consumer debt mean for your investments, and for the world's largest economics
* Examinations of how foreign countries have come to control the economic fate of the United States via the issuance of debt
A fascinating account of one of the most important trends in American economics in the last hundred years, Demise of the Dollar offers incisive observations about the factors driving the world's contemporary economies and specific and strategic guidance on how to structure your portfolio to survive, and even thrive, in a new financial environment.
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Content
Acknowledgments xv
Introduction: Fistful of Dollars 1
Chapter 1: The Greenback Boogie 7
Chapter 2: "We Are All Keynesians Now" 19
Chapter 3: Attention to Deficits Disorder 31
Chapter 4: Here Comes the Boom 59
Chapter 5: Oops, Here's the Bust 83
Chapter 6: A Modern Enigma 99
Chapter 7: Short, Unhappy Episodes In Monetary History 111
Chapter 8: Alas, the Demise of the Dollar 135
Notes 179
Index 189
CHAPTER 1
THE GREENBACK BOOGIE
See the money, wanna stay for your meal.
Get another piece of pie, for your wife
-Ima Robot (Suits theme)
Our way in is through "inflation." Most people think inflation is when things get more expensive. But what if we thought something different? What if we changed our definition of inflation and thought of rising prices as the result, not the definition?
It is simple economics, actually. The more that you have of something, the less value it has. Think: if I had the one and only baseball card of Carl Yastrzemski, it would be worth a lot on the sports memorabilia market. If everyone had a Carl Yastrzemski card, mine wouldn't matter at all. The analogy fits for me because I grew up in New England. Carl Yastrzesmski was a famous first baseman for the Boston Red Sox when I was a kid. Baseball cards were a thing too. A Yastrzemski card when you opened the bubble gum pack and got one, euphoria. It was, like, "Whoa, what, seriously? A Yastrzemski card?!"
One card means a lot. But if there were thousands of them. Billions or trillions of them. You get the point. The same thing goes for the American dollar bill. Substitute the Yastrzemski card with "the American greenback" and the more dollars you have in the system, the less each dollar is worth. And today, those "dollars" are created by digits.
What this means to the consumer-you and me-is that the dollar doesn't go as far. The items we want to buy feel more expensive. This is because you need more dollars to buy the things you want. But are things really more expensive? Or is the dollar just worth less because there are more of them in the system? It can be confusing! And around and around we go. That's why we call it the "greenback boogie." We're going to explain what that means.
The essential value of the American dollar itself is and has been in question. It's a feature of the economic system in which we live. The dollar is what's in your wallets, so it could present you with a big problem. What if we all start worrying about food on the table, our mortgages, taxes, retirement, tuition, gas for our commutes to work, and the cost of weddings and marriages and vacations, all at the same time? In the end, without what we call "sound money"-money whose value we can rely on-it is really hard to figure out if you have the right amount of money and whether the financial decisions you are making actually work. It doesn't really matter what currency you spend your money in. It's whether you can trust what you earn your money in and whether that money is going to be worth anything when you want to buy something.
In earlier editions of the book, we were forecasting inflation. During the pandemic and now, as the economy begins opening up, inflation-rising prices-is in our face. In 2022, we began to really think about the phenomenon that we call "inflation" and what we can do to manage our money through it.
THAT WHICH IS SEEN
Economists often look to the French philosopher Frédéric Bastiat's "Parable of the Broken Window" for guidance on how to conduct an economic study. He says with all things there is always "that which is seen, and that which is not seen." The idea is very helpful when trying to understand the economy and the stock market at large and, further, the problem of inflation and the effect it has on the money in your wallet. Bastiat writes:
In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause-it is seen. The others unfold in succession-they are not seen: it is well for us if they are foreseen. Between a good and a bad economist this constitutes the whole difference-the one takes account of the visible effect; the other takes account both of the effects which are seen and also of those which it is necessary to foresee.
What is seen is the chairman of the Federal Reserve-currently Jerome Powell-announcing on television to the American people that he and his Federal Open Markets Committee (FOMC)-the policy-deciding wing of the Fed-are raising interest rates yet again to tackle a so-called "transitory inflation." Pulses quicken. Mortgage rates go up. Credit cards are harder to pay off.
In 2021-22, we saw a sea change in interest rate hikes. In a very short amount of time, the rate you needed to pay for a mortgage, home equity loan, or tuition payments increased by the quickest pace ever induced by the Federal Reserve. (See Figure 1.1)
Most people don't know that interest rates determine the rate you have to pay on your credit cards and mortgages. You want to buy a house, you will have to take out a mortgage loan (unless you can pay up front). The interest rate at which you borrow for your mortgage loan is usually around "a point" above the rate decided by the FOMC.
Whether you like it or not, Jerome Powell and his posse are making decisions that directly affect you as an investor and consumer. As the head of the central bank of the United States-colloquially dubbed "the Fed"-Powell announces the collective decision of America's seven central bank governors. All together, the committee sets the interest rate for the American banking system. Which, as we all know, is priced in American dollars.
FIGURE 1.1 Federal Funds Effective Rate, 1955-2020
(Source: Board of Governors of the Federal Reserve System (US))
They call it the "overnight Fed funds rate." And the financial media, yours truly included, have taken to "Fed-watching," as we call it, in the last two years. We hang onto every word issued by Powell and the FOMC because it determines the very value of our dollars. Your money.
"What have they decided?" journalists want to know.
"What does it mean?' we ask.
"Can we still buy homes without going bankrupt?" everyone and their mother worries. Then the keyboards get to clacking.
To reiterate: we see the headlines and the analysis of the Fed's every interest rate manipulation. What we don't see: Jerome Powell's actions are actually the culmination of more than three decades of Federal Reserve trials in economic theory.
You might still be thinking: "Why the hell should I care about what the Federal Reserve does to interest rates? I've got better things to do." To which I will respond: In trying to manage the American banking system, the Federal Reserve and the FOMC are directly influencing the value of the money in your wallet. When they tug at strings from up top, you feel it in your wallet.
The Federal Reserve governors think they can manipulate the value of the dollar by lowering and raising rates based on signals from the 12 banks in the American Reserve bank system. This is what we call "the greenback boogie." It's a jazz beat. And it's confusing as it sounds. All the world's a stage to the Fed's two-step. But why? It hasn't always been this way. We haven't always been doing the greenback boogie. In fact, the Federal Reserve didn't always determine the value of the dollar, nor did it always manipulate the dollar in an attempt to regulate its ups and downs.
For 23 years-between 1944 and 1971-the dollar was "pegged to gold." That simply means that the gold price on the world market determined what the dollar could be redeemed for by other countries holding assets priced in dollars. The nation's central bank, the Federal Reserve, did not try to control the value of the dollar through interest rate adjustment as they do today. In 1971, what's called the "gold standard" for the US dollar was disbanded. Then the story changed, and the boogie began.
In the story of how we got here, there's a cast of characters. The protagonists are involved in complex discussions about how to organize the global economy and its currency system at the end of World War II, a war that destroyed most of Europe, Western Russia, and the Southeast Pacific. Let's begin.
WELCOME TO BRETTON WOODS
Our story begins in a little town in New Hampshire on July 1, 1944. For the first time in modern history, an international agreement was reached to govern monetary policy among the world's nations. It was a chance to create a stable international currency once and for all. In total, 730 delegates from 44 nations met for three weeks at a resort in Bretton Woods.
The conference was held at the Mount Washington Hotel in the shadows of the largest mountain in the Granite State, Mount Washington. Mount Washington is known for some of the most severe weather in the lower 48 contiguous states. Seems all too fitting a location for a conference discussing what to do with the world's money as the closing battles of World War II raged on in Europe and the South Pacific.
The hotel itself was, and still is, as ostentatious and grand as the aims of the 44 countries who sent their delegates.
The economist John Maynard Keynes led the British delegation-he was something of an economic superstar because of...
