The Upcoming Evolution of Trade - Part 1: How We Got Here
stack of u.s. dollar notes

The Upcoming Evolution of Trade - Part 1: How We Got Here

By Final Sigma | Final Sigma Finance | 4 Jul 2020

Most people never think about their money. My dollars and cents buy my gasoline and groceries just fine. What else is there to know? Indeed, in a well-functioning economy, people shouldn't have to think about their currency.

Yet over the last several weeks, I have found many conversations with friends and family eventually steer toward our money. The United States federal government has borrowed immense sums this year in the name of stimulus. The Federal Reserve keeps printing up bailouts to keep their asset bubble alive. Many Americans are telling themselves, "Surely this can't go on forever, can it?"

They're right. It can't.

I have here put together a series of entries to address these questions. As with anything I post, this is not financial advice. I'm not a professional nor an expert. What exactly you do with your money is up to you. My aim is to help you creatively think about what's possible with your personal finances. In this case, we'll be looking at the negative side of possibilities: What could go wrong, why it's likely to go wrong, and what sort of things you could do to avoid suffering too much damage.

Before diving into the content, I want to share upfront the main strategy I'm personally employing:

  • Save up an initial emergency fund to cover short-term surprise expenses (~$2,000).
  • Pay off high-interest and/or variable debt - usually everything except the mortgage.
  • Save up a larger emergency fund to cover 6 months' expenses (in whatever currency you use to pay those expenses).
  • Begin strategically purchasing assets that will retain their purchasing power through to the other side of a currency crisis.

Allow me to provide an example of what I mean by that last point: silver coins. Today, I could sell a 1 oz. silver coin on Ebay for about $20. That $20 would buy about 2/3 of a tank of gas. In a currency crisis with hyperinflation, prices would rise dramatically. In that crisis, I might be able to sell that same silver coin for $150. But that $150 might at that time still buy only 2/3 of a tank of gas. In this example, the silver didn't change. The gas didn't change. The value of the dollar changed.

Together, we are going to pursue this journey in three parts:

Part 1: How We Got Here

Part 2: Developing A Dollar-Defensive Mindset

Part 3: Practical Dollar-Defensive Strategies

I know some people will find this content both alarming and perhaps distasteful. I'm not writing for them. I'm writing for the average person whose instincts are telling him that something bad is going to happen, but they can't quite put their finger on what it is exactly. If you're ready, we'll unpackage that anxiety, lay it out on the operating table, and see what's happening on the inside.

How We Got Here

Establishing Our System

What exactly is it about the U.S. dollar that could fail? I can still buy gasoline and groceries with it. My bank still takes it. What on earth do I have to be concerned about? To answer that question, we'll begin with some historical context.

Prior to World War II, banks throughout the world held vast reserves of British Pound Sterling in their vaults. The British Empire had such a global presence, that governments and industries needed a healthy supply of the currency available which they used to conduct international trade. Within a country's own borders, citizens would transact business in the local currency (to ensure they can pay that country's sales & income taxes, for example). A cross-border transaction would use Britain's currency. They were by default the world's reserve currency.

World War II devastated the British economy. The British government spent incredible amounts of money to fight the war. When they ran out of money, they borrowed. British citizens actually endured food rations into the 1950s as their government paid back these debts. The British Pound Sterling post-war was not nearly reliable as it had been a few years earlier. The world needed a new system and a new reserve currency.

In 1944, delegates from nations around the world met in New Hampshire to find an answer. When deliberations concluded, they emerged with the Bretton Woods System. The U.S. dollar, backed by gold, would be the new world reserve currency. It would be held in vaults of the world's central banks, and it would be used for international trade.

Losing The Way

This new system included one important caveat: The world needed to trust the United States did not print more dollars than they had gold to back them.

As we headed into the 1970s, France was perhaps the most vocal about their doubt that the United States was holding up their end of the bargain. The Huffington Post has a nice summary:

France sent a warship to New York harbor in early August 1971 with instructions to bring back its gold from the New York Federal Reserve Bank. It was, after all, French President Charles de Gaulle who remained consistently skeptical about the US dollar, saying at a press conference on February 4, 1965, that it was impossible for the dollar to be “an impartial and international trade medium . . . It is in fact a credit instrument reserved for one state only.” (Cited in Benn Steil’sThe Battle of Bretton Woods. Princeton University Press, 2013.)

On August 15, 1971, President Nixon Famously told the world:

I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.

This event officially ended the Bretton Woods System. No longer could countries consider the U.S. dollar as good as gold. With such a stark break from the gold standard, you might expect countries to rush in and establish a new one, right? They didn't.

Instead, there is now a competition of reserve currencies and a floating system of foreign exchange rates. Governments and banks have a whole host of options available to them, except to peg their currency to gold.

Our Unfair Advantage

So after World War II, the United States came to the world's monetary rescue. In 1971, we were caught with our hand in the cookie jar. Today, I believe we are still abusing that position of privilege, and I will explain below. For some mental preparation for the following paragraphs, I recommend this primer:

Though countries have the freedom to choose whatever combination of reserves they like, the dollar still tops the list. It isn't fundamentally different from other currencies anymore. None of them are backed by gold or hard assets. I like how Max Keiser describes the situation, "The dollar is like the leper with the most fingers left." So central banks continue to put dollars and U.S. treasury bonds in their vaults. As banks and businesses need those dollars, there is only one place to get them: the United States. Our debt and our currency are in much higher demand than those of other countries. This gives the United States an unfair advantage on the global economic playing field.

Economic sanctions are a complicated business. I won't pretend to be an expert. At a high level, you can think of sanctions as the rules by which a government tells organizations in their jurisdiction which international players they may and may not do business with. The United States is home to some of the world's largest international businesses and financial institutions. Through sanctions, the United States picks which countries' economies have access to these institutions and which do not. The United States plays a key role in deciding whose economies flourish and whose economies struggle along. Again, this gives us an incredibly unfair advantage in the international marketplace.

What if a nation or region wants to remove itself from this dollar domination and influence? What happens? Well, if you're going to have the largest military force in the world, you might as well use it. With various email leaks, especially Hilary Clinton's emails about Libyan intervention in 2011, we learn that foreign nations have tried to get out of the system. When they do, politicians and news media tell the Western public who the new bad guy is, and we champion our troops storming in to deliver some freedom. Again, if you're America, this is a great system. If you're anyone else, it's no bueno.

Have We Finally Gone Too Far?

When does it end? How long will countries, especially those who don't benefit from America's dominance, allow us to play such a central role in global economics?

It seems the world's COVID-19 lockdowns exposed the fragility of this game we're playing. As every economy in the world was put on hold, the United States revealed another unfair, advantageous trick we could perform: While other countries begged the International Monetary Fund for millions (or billions) of dollars in bailout funds, we in the United States provided ourselves trillions of new dollars.

In March, the federal government passed an emergency $2.2 trillion stimulus package. Corporations, citizens, and banks all received a healthy influx of cash.

At the same time, the Federal Reserve unleashed an additional bailout plan. In the name of providing liquidity, Neel Kashkari, the president of the Minneapolis Federal Reserve, shared, "there is an infinite amount of cash in the Federal Reserve. We will do whatever we need to do to make sure there’s enough cash in the banking system." Jerome Powell on 60 Minutes confirmed that they can "just print it."

On June 3, 2020, the Managing Director of the IMF Kristalina Georgieva gave a speech titled "The Great Reset." Here's one excerpt:

We know that—if left to its own devices—this pandemic is going to deepen inequality. That has happened in prior pandemics.

We can avoid this if we concentrate on investing in people—in the social fabric of our societies, in access to opportunities, in education for all, and in the expansion of social programs so we take care of the most vulnerable people. Then we can have a world that is better for everyone. . .

This is the moment to decide that history will look back on this as the Great Reset, not the Great Reversal. 

The World Economic Forum is leading the charge on this project. They've put together a website to summarize their ambitions.

What exactly this new system looks like is anybody's guess. I'm betting that China is preparing a gold-backed digital currency which they will introduce to the world when they host the 2022 Winter Olympics. They will deliver for the world currency as good as gold which maintains the same surveillance and control as we currently enjoy through the U.S. dollar system.

So What Happens Next In America's Economy?

So, that's a lot of bad news I've just outlined above. The world loses confidence in the United States dollar. A huge portion of American wealth and exceptionalism is kicked out from underneath us. You would expect a Great Depression style crash, right?

1929-1932 Stock Chart

No, I don't think so.

I believe we will see something like what Zimbabwe is experiencing right now. As their currency is collapsing their stock market is experiencing all-time highs.

zimbabe industrial index chart

What I am about to describe has been called the Dollar Milkshake Theory made famous by Brent Johnson. You can find his full presentation on YouTube.

In the scenario he describes, as the world economic system becomes increasingly unstable, wealth will flow to safe-haven assets. Historically gold has been the most reliable safe-haven asset. However, in our current environment, where the U.S. dollar is still the most reliable of all the world's fiat currencies, many will move their wealth out of their own economy and into the United States to try to gain exposure to the dollar.

Imagine a cascade of currency failures around the world. Economies collapse one at a time. India and Thailand. Then Japan and South Korea. Maybe next it's Russia and Italy. Meanwhile, investors seeing the incoming damage sell their assets in India (stocks, real estate) and quickly use their money to buy something, anything in the United States. Same for investors in Thailand, Japan, South Korea, Russia, Italy, etc., until everyone in the world is trying to move their money to America.

What's the easiest thing to buy? Stocks - probably. In an interview with Mike Maloney, Johnson shared that he expects many people to buy up American blue-chip tech stocks. Americans already see them as a no-brainer, reliable investment. Why wouldn't investors around the world? Amazon is already at all-time highs, trading north of $2,600. As foreign investors look for a reliable company operating inside the infallible economy of the United States, they might buy Amazon, too, driving the share price higher and higher. This will happen across the entire United States' stock market. The S&P 500, NASDAQ, DJIA, and every other index will skyrocket.

On paper, it will seem as though our economy is doing great! Relative to other countries, our wealth is growing and growing, right? Wrong. These prices are not driven by the fundamental performance of the market, they're driven by an inflationary bubble. Investors from all around the world are simply trying to buy the same few things all at the same time, and so prices are driven higher and higher.

Eventually, Johnson argues, the game will end. The U.S. dollar will once and for all show itself just as weak, fragile, and fraudulent as all the other printable fiat currencies. The dollar is not a long-term store of wealth - it loses purchasing power every time the Federal Reserve prints a new one. It's then that investors will (try to) sell their dollar-denominated assets and buy gold, real estate, artwork, or other hard assets that retain their value regardless of what particular currency or system we end up using. The dollar will crash, and a new world currency system will be erected.

You can bet the Federal Reserve will certainly try their best to print themselves out of this problem, too. But it won't work. For a full breakdown of why even our all-powerful central banking system cannot stop this kind of collapse, I recommend two videos by George Gammon on the subject ("Dollar Reserve Status: End Game part 1, part 2).

Groceries and Gasoline

At this point in our future story, we finally see hyperinflation in the United States. The stock market prices are going up, but so is the price of gasoline. Remember my scenario above about the silver coin? This is when that coin sells for $150. A few weeks later it sells for $300. A few more weeks, and it's worth $1,000. Eventually you might sell that same silver coin for $10,000 simply because the government is trying to print themselves out of the problem they created.

This is alarming stuff. Yet this is what has happened throughout history in every nation that has tried a fiat currency, where the government or central bank can simply print more money into existence as they please.

If you feel anxious right now, that's okay. Actually, I believe anxiety is good when it's set in its proper context. Anxiety is the tool we use to detect danger. When there's a threat, we feel bad. We might even feel physically ill! Our entire being is trying to tell us to do something. As we take steps to eliminate the threat or mitigate the danger, we will also alleviate the anxiety. It will feel good to transform your financial plan to account for this potential future we're all facing.

My next couple of posts will be more hopeful. As I'm writing this in June 2020, there's no reason why you, your family, and anyone you know can't take steps to minimize the damage. One thing I think about all the time:

It's really hard to share food with your neighbor when you're the one standing in the bread line.

Thumbnail Photo by Ryan Quintal on Unsplash

Final Sigma Finance
Final Sigma Finance

How does someone like me, an average citizen with an average salary, start building long-term, multi-generational wealth for my family? Here we will think creatively about what's possible for your personal finances.

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