SHOW STOPPER: THE DEMISE OF THE DOLLAR

Last month we examined the current meltdown in our financial system and began the search for an answer to the question that no one wants to ask: How much credit – how much trust – can actually be placed in the U.S. dollar? Said another way, at what point will our dollar no longer have value if we can never repay any of the enormous debt we owe?

Craig R. Smith, CEO of Swiss America Trading Corporation (Phoenix, AZ) and co-author (with columnist Jerome R. Corsi) of the book Black Gold Stranglehold: The Myth of Scarcity and the Politics of Oil, does not believe we can continue employing the broken business model that our current financial system represents. “For the first time in the post-World War II era, our dollar is susceptible to competition from another currency that is based in an identifiable and universally-accepted value that cannot be created out of thin air,” he says. Is such a currency available?

“Not yet,” answers Smith. “But you know the old saying, ?Necessity is the mother of invention.’ Right now the world has three very strong and prosperous countries competing on the world stage with huge amounts of capital, natural resources and gold that could easily, if they chose to do it, create a currency much like Europe did with the euro. However, this time it could be backed with oil and gold.”

Think about that.

Russia, China and the Arab nations – nations which are not exactly our allies – sit on an enormous amount of oil, gold and U.S. dollars. What if those countries forged agreements, similar to NATO or the WTO, and offered an “ARC” dollar that was fully backed by gold or oil? The holder of that new currency could actually exchange the currency for a specified amount of gold or oil. Exchange paper for a tangible, useful, valuable resource.

Smith cuts to the chase here. “A note is a promise to pay. For years in America, a Federal Reserve Note (currency) was a promise to pay gold and silver at the Treasury. Today it is a note to pay debt. Debt that is exploding and can apparently be wiped away by the Fed overnight or, worse yet, transferred to the backs of American workers in the form of tax on future labor.” This is a precise description of the $750 billion federal bailout that occurred last month.

So what is the end game here? What will happen if a group of nations offers another currency that has no recurring liability attached to it, like our dollar once had? A currency that possesses actual value in the form of a resource, such as gold (like the dollar once did), or the ultimate natural resource, oil?

“In the past I would have viewed such a prospect as preposterous,” remarks Smith. “But today it may well become a reality. Talks are already under way with the Gulf Monetary Authority for just such a system.” In fact, this past August the Arab Times in Kuwait reported that economists at the Dubai International Financial Centre (DIFC) wanted Gulf Arab states to drop their pegs to the weak U.S. dollar to have more tools to control inflation and achieve single currency criteria. “Targeting inflation should be the top priority of the Gulf central bank being set up by Saudi Arabia, the United Arab Emirates and three other states as they roll out a single currency,” stated the DIFC.

“Pegging to the U.S. dollar is not the best policy to control inflation,” says Nasser al-Saidi, the chief economist of the DIFC. “The central policy issue is to gear monetary policy toward controlling inflation. The Gulf monetary authority should put its priority to targeting inflation.” At that time, dollar pegs had already forced Gulf central banks to track seven U.S. interest rate cuts in the past year, driving their real interest rates into negative territory and stoking record inflation.

To make a very long story short, the Gulf states are now well on their way toward converging to a single currency by 2010, including an inflation target of no more than 2 percent above the regional average (which ran 6.9 percent last year due to the weak dollar). The Abu Dhabi Department of Planning and Economy called on the Gulf states to consider a currency basket this past summer. They are aggressively working to announce a common currency by 2010, issue the banknotes later and depeg from the U.S. dollar.

The end game: Hostile nations flock to a currency backed by oil or gold, then eagerly watch the socialization, deterioration and eventual collapse of our financial position on the world stage. They would not flinch at our total demise.

Not very pretty. So what do we do?

Since no one can predict the future, at least three immediate strategies come to mind. One is the Blue Sky plan: Simply ignore everything that is happening and do nothing. Cross your fingers, hope for the best and continue business as usual until everything thaws out. Smith disagrees with this approach: “You can either ignore the obvious or act upon it. This will be a time when many will prefer to deny what they see around them and hope against hope that the system will fix itself. It will not.”

Another option is the Cash Is King plan: Assume that all of these economic insights will miss their mark and the Arabs will change course over the next year. In this approach, manufacturers might weather the credit turbulence by hoarding cash and reducing their debt levels as all sorts of government bailouts save the day. You would lower your debt-to-equity ratio, increase your cash-to-asset ratio, and spend more on paying back your debt.

Or, instead of investing in production capabilities, you could build up your cash reserves until Big Brother announces that “all is well” again in your part of the business world. Of course, the problem is that with enough bailouts, Big Brother will eventually own your part of the business world.

Last, but not least, is the Real World approach: “Now is the time to acknowledge and accept that each of us is solely responsible for our own future, not the government,” says Smith. “Devise a plan and put it into action. With the levels that gold and silver are currently trading at, it is time to put 10 to 20 percent of total assets into tangibles. Understand that the only answer to avoiding a total collapse is either a new currency or runaway inflation. Gold helps you out either way.” Tangibles will make the shift to another currency a lot less painful.

Will the dollar really be replaced by another currency with actual value? It’s the question that no one wants to ask. But common sense – and some hard facts – cannot be ignored much longer.

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Mike Riley is the editor of Fabricating & Metalworking magazine and the author of Backfield in Motion (Derek Press, 2007). Share your views with him on how you are preparing for the recovery at 205-681-3393 or [email protected].