The Collapse Of The Dollar

Another just-wandering-through-the-library book I picked up on a whim. I was waiting for other books I have put on hold through the inter-library loan program. This book has some interesting factoids but that is about it.


James Turk & John Rubino, “The Coming Collapse Of The Dollar And How To Profit From It (Make a fortune by investing in Gold and other Hard Assets)”, Doubleday, Dec. 2004, Pages 220
This book has four parts:
• Part One: Why the Dollar Will Collapse
• Part Two: Money Then and Now
• Part Three: Why Gold Will Soar
• Part Four: Profiting From the Dollar's Collapse

The authors concede that one of them, James Turk, could profit from a gold boom, since he is the publisher the Freemarket Gold and Money Report and the founder of GoldMoney.com, which operates the leading digital gold currency payment system. The other author, Rubino spent the 1980s as a Wall Street financial analyst and has been an author of books since the 1990s. E.G. How to Profit from the Coming Real Estate Bust, 2003. Wouldn’t a lot of people love to be able to claim they had authored a book of that title in 2003?

Anyway, on to the subject at hand: This book views the U.S. economy through a kind of gold-based prisim and forecasts that the dollar must collapse. The book was written in 2004 and many reputable people at the time (read W. Buffett) began betting against the dollar. Who could have forecasted the current dollar rebound, or is it only that the world is in such poor shape that the dollar momentarily just looks better than the other choices? Of course gold went from the $212 price it was at in 2004 to bounce off $1,000 about a month ago before retreating to $874 in April 2009. However, the authors correctly pointed out the housing bubble that was then going on as well as the moral hazard that securitization of mortgages presented. This is a dangerous book as it would have been very lucrative to anyone who followed its advice in 2004. However, I still believe that gold and hard assets should only account for 5-10% of anyone’s portfolio and only happenstance created this 2004 lucrative opportunity. Yet, if gold ever gets near $200-$300 I would certainly load up on some.

My Notes:

Pg. 18: From almost any perspective, the arc of government’s growth is shockingly steep. In 1800, Washington spent only $20 per U.S. citizen; in 2003, it spent $7,800. In the 1920s, the federal government took only 5 percent of national income; in 2004 it takes nearly 25 percent. Meanwhile, state and local government spending has risen twice as fast as GDP since WWII and now gobbles up about $5,000 per citizen each year. In 1946, there were 2.3 state and local government employees for every 100 citizens. In 2004 there are 6.5. More Americans now work in government than in manufacturing.

Pg. 22: In 2000 Americans discovered that thanks to innovations like home-equity crfedit lines and cash-out refinancing (where a homeowner refinances for more than their old mortgage and pockets the difference), they could use their homes as piggy banks, drawing down their home equity and spending it to maintain their lifestyles. From 1988 to 1997, mortgage borrowing averaged about $220 billion annually, but in 2002 and 2003 the average soared to more than $700 billion.

Pg. 41: Pick up any introductory economics text, and you’ll see money defined as something that performs three functions:
• A standard of value—that is, a generally agreed-upon measurement used to express the price of goods and services.
• A store of value, which holds its purchasing power over long periods of time, to allow people to save and thereby defer their spending until some future date.
• A medium of exchange, which is easily transferred from one person to another in return for goods and services.

Pg. 46: In the 1690s, the founders of the Bank of England had an epiphany: Instead of letting gold and silver coins circulate, why not lock them in a vault and issue paper notes to be used in the coins’ place? The bank began issuing paper “pounds” with the promise that they could be redeemed at any time for pound coins composed of gold or silver. The result was a conceptual breakthrough: the first widely circulated money substitute. Where money (defined as a standard and store of value) and currency (a medium of exchange) had previously been one and the same, a tangible asset, now they were separate things. Soon, much of England’s money, in the form of gold and silver, sat in the Bank of England’s vault, while its currency, now a liability (or IOU) of the Bank, circulated as bits of paper.

Pg. 50: In a 100 percent reserve system, the money supply grows at the rate of new gold and/or silver supplies, which is to say very slowly. So as technology progresses and workers become more productive, prices would be expected to fall rather than rise each year. This kind of deflation, viewed through a sound-money lens, is normal and healthy. Such an economy would be capable—barring war or plague—of growing steadily for long periods of time without excessive debt accumulation or monetary instability.

Pg. 55: By 1914 the gold standard was generally accepted as the only legitimate way for the global economy to run, and the few who advocated a switch to fiat currency (i.e., currency not convertible into or defined as a precise weight of gold) were seen as fringe radicals, not unlike today’s fans of a return to the gold standard.

Pg. 56: FDR proclamation: “All persons are hereby required to deliver on or before May 1, 1933, to a Federal Reserve bank all gold coin, gold bullion, and gold certificates now owned by them or coming to their ownership on or before April 28, 1933. “ Failure to comply “may be fined not more than $10,000, or imprisoned for not more than ten years or both.” They were given $20.67 per ounce for their gold. Once the confiscation was complete, in 1934, the Treasury devalued the dollar by 69 percent by raising gold’s exchange rate to $35 an ounce.

Pg. 59: Since the gold standard’s end in 1971, the dollar has lost an astounding 90 percent value versus gold, and 70 percent versus the cost of living.

Pg. 73: All the discovered gold in the world would only occupy a single cube 60 feet on a side.
Example of prices to expect for gold: When the spot price of gold was $412.90 it would cost between $420 to $424 to purchase a Krugerrand. To buy a SPDR look at GLD symbol. Some funds to look at: BGEIX, CEF, GOLDX, FGLDX, RYPMX, TGLDX, USERX, USAGX.

Pg. 161: The best way to profit from the early relative strength of the yen, euro, and other major foreign currencies is via a good global bond fund that holds a selection of bonds from around the world. Some No-Load global funds that fit this profile: BEGBX, LSGLX, MGGBX, PYGSX, PFODX, RPIBX.
Before venturing beyond simple puts and calls, take advantage of some of the options resources that are freely available. The Options Industry Council offers a free tutorial CD, available by calling 888-OPTIONS.

Pg. 197: Alan Greenspan 1996 essay title “Gold and Economic Freedom”:
“The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit…The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”