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Dollar Bubble Next to Burst?


Like the pound sterling before it, greenback on the verge of being replaced.

Minyanville Prof. James Kostohryz's article, Who's Afraid of the Big Bad BRICs?, discussed his interpretation of my views in the context of an article I linked to yesterday from the Financial Times.

To clarify, I did not post the piece to support a view Professor Kostohryz attributed to me: "that, by publicly panning the US dollar, the BRIC nations are demonstrating that they 'get it' regarding the dollar's imminent demise."

The point was that I thought the author of the FT article clearly articulated what I believe is a key theme going forward for investors: That the fiat dollar-based global monetary system (which is now clearly malfunctioning) puts these creditor nations (the BRICs) at a distinct disadvantage from both an economic and political standpoint, which in truth are one and the same. If they now understand that and are willing to do something about it, then it puts the dollar in great peril and has obvious huge investment implications.

Or to put it another way, the BRIC nations may now have realized they're the "suckers" at the poker table -- and they have the power to do something about it if they so choose. And in so doing, the dollar will be irreparably damaged.

As creditor nations, these BRIC nations are now the world's source of savings. They also happen to have enormous end demand markets of their own. They don't "need" the US market any more than the US needed foreign markets in the 1930s, 40s, 50s, etc., when it was a large creditor nation and the world's source of savings.

Today, the US is merely a source of consumption, debt, and endless supplies of fiat money. To assume that the world will continue to accept US paper simply because it always has in the past -- and that the US can print money willy-nilly without any consequences -- is in my opinion the height of folly.

Just yesterday, China and Russia agreed to bypass the dollar and expand the use of the ruble and yuan in bilateral trade.

This is a small step to be sure, but it is a step. And it's a warning to those who believe that the dollar will forever dominate global trade and finance simply because it has for the past 60 years. Just ask the British -- they made the same mistake with the pound sterling before the dollar took its place as the world's dominant currency. Those who do not learn from the past are doomed to repeat it, and I fear the dollar's fate has already been sealed.

That fear is why I have consistently advocated investing in gold for the past several years, not as a bet on the "end of the world" (as some incorrectly believe gold is), but instead as a bet on the disintegration of the fiat dollar-based monetary system that's dominated the planet since 1980 and been largely responsible for the growing global imbalances that are increasingly being recognized as unsustainable.

In my view, the fiat dollar-based monetary system itself is the last big financial "bubble," and its demise is just as inevitable as the demise of the housing and equity bubbles that it in fact helped to spawn. After all, without a dollar bubble the market never would have allowed the Fed to create the easy money conditions necessary for the excesses in both equities and residential real estate that have occurred over the past decade.

Understanding that simple concept is going to be the key to avoiding a lot of financial pain in the coming months and years, in my humble opinion.
No positions in stocks mentioned.

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