When Will the Currency Collapse Come?

As of the first quarter of this year, federal indebtedness was $21.1 trillion, while GDP was roughly $19.8 trillion, so the ratio of GDP to debt is 107%.   Nobody knows how the constellation of relationships in the current world economy will play out.  For instance, the dollar is the global reserve currency.  Other countries absorb and make use of the dollar.  However, as with all psychological delusions--whether faith in a tribal rain dance or faith in the integrity of the Federal Reserve Bank-- sooner or later reality intervenes.  The economy of Greece collapsed at a debt-GDP ratio of 170% or so.   The US has additional cushions, so there is not likely an impending crisis, but it is unlikely that indebtedness will do anything but grow.

There are three ticking debt clocks:  First the Social Security unfunded liability of $13.2 trillion over 75 years may require a benefit cut of 17%. Second, the unfunded liabilities of Medicare, which are unknown, may be as great. John D. Shatto and M Kent Clemens, actuaries for the Department of Health and Human Services, write that there is “substantial uncertainty regarding the adequacy of future Medicare payment rates under current law.” Third, student loan indebtedness is currently about $1.5 trillion.

If you add the hard indebtedness of $21.1 trillion to the unfunded liabilities and the student loan debt, the sum is in excess of twice GDP.

In part because the unfunded liabilities are not salient, international investors continue to accept the dollar as the global reserve curreny. As with any bubble, this will continue until it doesn't. The amount of US currency in circulation overseas is at least equal to the amount at home. 

There will be political pressure to devalue the dollar, both from Millennials who spent $100,000 each on college and never found a job and from senior citizens who do not want their Social Security benefits cut because the government claimed for 85 years that Social Security is an insurance plan rather than an at-Congressional-will welfare plan.  As well, depending on the course of technology and health care costs, Medicare can easily become the biggest problem of all.

There will thus be significant pressure to devalue the dollar in order to dupe Social Security recipients and to devalue the Millennial's unproductive student loans.  In response, there may be a global run on the dollar; alternatively, an internationalist authority like the IMF might step in and offer to substitute a global currency like special drawing rights as a substitute for the dollar.  As a result, bank dollar holdings and cash may be reduced in value.

Knowing this, I hypothesize that a portfolio allocation of 10 to 20 percent to gold and silver is wise. At the same time, gold could go back down to 2001 levels before it rebounds. As Keynes put it and my financial adviser reminds me,  "The market can stay irrational longer than you can stay solvent."  As well, trusting in the wisdom of the federal government and the American people is foolhardy.