Currency Collapse: The Obama Legacy

"To all; are you ready? Never in the history of financial markets have there been so many landmines in place, each one wired directly to a nuclear bomb that sits atop the entire global financial system. The 'masters of the financial universe' have postponed the coming day of reckoning for so long and in so many different ways that they have backed themselves into a corner where almost any movement at all will trip one of these numerous landmines." -- FOFOA

Zimbabwe, 2009:


38 years have passed since the U.S. decoupled its foreign debt obligations from gold. In 1971, the gold window closed -- meaning foreign debt could not be redeemed for gold -- and our currency began to 'float'.

Most money exists only in electronic form, as bits represented logically within computer storage. While the amount of tangible currency (bills, coins) has grown rapidly since 1971, counterparts such as M1, M2 and M3 have grown even faster.

Our current monetary system has changed several times over recent decades:

• From gold to gold IOUs
• From gold IOUs to debt IOUs
• From debt IOUs to electronic debt IOUs

As long as electronic debt IOUs can be traded for "hard commodities" like oil or gold at some realistic ratio, it can not be said that our currency is "unbacked".

It is worth noting that the oil crisis of 1979-1980 related to the simultaneous explosions in the price of both gold and oil as measured in U.S. dollars.

From 1933 to 1971, the payment system for oil was a stable one: gold cleared internationally at a fixed price of dollars in exchange for gold. In 1971, however, after foreign countries began draining the Treasury of thousands of metric tons of gold annually to pay for Johnson's "Great Society" and the Vietnam War, the U.S. unilaterally defaulted on its gold obligations.

This marked the death of Bretton Woods I, the international monetary exchange system created after World War II that employed a gold-backed dollar as the world's reserve currency.

Since 1971 -- or the implementation of "Bretton Woods II" -- the ability to trade oil for gold using only U.S. dollars has been in force. It is easy to surmise that the dollar's support is somewhat artificial, given its use as a reserve currency.

But, this year, after the Obama administration began printing money at a rate never seen before, Brazil, Russia and China -- among other countries -- began questioning the use of the dollar as the world's reserve currency.

In March, the dollar saw its largest weekly drop in value since 1985 after the Fed began buying long-term government debt.

Put simply, the ramifications of an alternative reserve currency would be devastating for the American economy.

While the possibility of a crash in the U.S. equity markets would be dire, the results would pale in comparison to a failure of the currency. Because the currency is implicitly and historically linked to trades of gold and oil, those markets will serve as "canaries in the coal mine".

In July, Russian President Medvedev introduced a new candidate for a reserve currency, aiming to eventually supplant the U.S. dollar. Bloomberg reported that Medvdev pulled a sample coin from his pocket, which bears the phrase 'Unity in Diversity'. Russia, along with China and India, have increasingly questioned the dollar's status as the global reserve currency.

Should an external attack on the currency occur, what might we see? Analyst PM at Zero Hedge posits the following scenarios:

1) A currency failure will happen rapidly (likely [ranging from] overnight to 8 - 12weeks). The dollar will devalue against gold and oil [by a] 50% decline or more.
2) Gold will go into backwardation (AKA Spot Price above Near-Futures Price). This is the single most important indicator.
3) The Gold price will vault upwards -- and ultimately trading will halt in USD.
4) Oil will likely vault upwards as well, but this analysis is difficult. The gold:oil ratio is a useful indicator.

The inverted triangle can be used as a tool to predict the flow of capital. Since 1971, capital moved upwards into more complicated and ambiguous expressions of value. Now, the movement of capital appears to have reversed.

Just how far remains to be seen.

The system was fragile prior to Barack Obama's presidency. But the Democrats' massive spending programs -- an $800 billion "Stimulus" package, nationalization of the auto companies, "emergency spending" bills -- have quadrupled the national deficit in only six months.

If Democrats are able to enact new energy taxes and nationalize the $3 trillion health care industry, we would likely see the destruction of the U.S. currency through its displacement as the international reserve currency.

As I wrote in March, "The only plausible explanation is that Obama's destruction of the economy is intentional... It is based on a failed ideology that has a track record of Mugabe-esque disaster."

Should the Democrats get their way and further undermine our currency -- the foundation of our entire economic system -- we very well could be looking at a reprise of Zimbabwe.


Linked by: The Other McCain. Thanks!
Related: ObamaCare's Crippling Deficits (WSJ).
Adapted from: Gold and Systemic Crisis.