The Next Best Thing

by Jeff Thomas

There can be little doubt that the euro and the dollar are presently on life support and are not responding well. They may soon be dead currencies.

Those who are looking to the future are asking, “Where do I put my wealth in order to keep from losing it? I’m not talking about making money; I’m talking about not losing what I now have.”

Well, for many years, we have been recommending that investors retain their wealth by buying precious metals and real estate, neither of which should be in an afflicted country (the EU, the US, and some other First World countries.)

Those who do take this essential step then often ask, “But what about my cash? I have to have cash to pay for my expenses. I can’t pay for my groceries in Krugerrands.”

Quite so. In order to continue to function normally, it is essential to deal in fiat currency of one form or another. Whilst it makes sense to protect the great majority of your money by exiting those currencies that are riding for a fall, we still need to maintain a minimum amount (three months’ expenses is recommended) in a currency that will allow us to buy the groceries every week.

Those of us who advise on the topic often shy away from this discussion, because, truth be told, there is no ideal answer. But we have now left the eye of the economic hurricane and are entering the ferocious other side. It is high time that we open up the discussion.

Increasingly, we’re being asked, “I’m really getting worried and am planning to dump my dollars if I can, but what currency is safe?”

To be sure, the traditional safe havens, such as the Swiss franc, are looking less likely to continue to perform their traditional role. Some advisors have recommended the Australian and Canadian dollars as being amongst the more stable currencies, but their futures are highly dependent upon the dollar and may, in a crisis, head south also.

In each case, they are backed by nothing, and the capital ratios (the level of central bank assets to the volume of currency units printed) are dangerously low. The US dollar is the hub of the fiat currency wheel, and all the spokes on that wheel may well be on their way out.

Currency Option

Today, no currency is truly “safe.” The closest choice is likely to be the Norwegian krone. First, it is not pegged to the US dollar. Second, Norway has virtually no debt. Third, Norway’s central bank has one of the world’s highest capital ratios.

For these reasons, the krone may be the currency closest to providing an answer for the storage of wealth (whether your wealth is ten thousand or ten million).

Unfortunately, the krone is almost certainly not acceptable to your grocer. Therefore, it cannot be used for regular expenses in the anticipation of a currency collapse, nor is it likely to be usable thereafter. It is therefore primarily useful as a store of wealth during the emergency transition period.

Both before and after the collapse, other currencies must be utilized for daily use. But which ones?

In many countries today, the US dollar acts as a second currency, and should their home currencies collapse, the population can simply switch over to the dollar in order to continue paying their regular expenses each week.

Historically, there has always been an alternate currency that could be turned to when a country debased its currency. In recent times, the US dollar has been the safety net when currencies (the Zimbabwean dollar, the Argentine peso, etc.) headed south.

No Viable Currency Option

Today, there is no alternative that’s internationally tradable if we are to see the demise of the US-based currency.

When a currency crashes, people turn to whatever is the next best thing, and they do it quickly, because they need to buy groceries and gasoline and pay the electric bill. They will do so, even if it is illegal, as it often is, as a result of governments seeking to maintain control.

The next best thing then becomes a black market currency that, even if it is initially banned, eventually ceases to be banned, as even the political leaders need it to pay for their groceries. Again, this has been the historical pattern.

But we have an historical precedent in the making. For the first time, there is no currency that is poised to take over in a crisis. Surely, the krone is not already in use as a significant international currency. (Most likely, your grocer is not even aware of its existence.) Additionally, it does not exist in sufficient quantity that it could do the job worldwide.

And yet, there can be no question that a currency (or currencies) will arise and will do so quickly, following a collapse. Historically, this is always true, as the need for currency will continue to be immediate.

Currency War

So, what are the realistic possibilities? My own projection would be that it would most likely come down to two currencies:

1. An all-new dollar, very possibly in electronic form, issued by the US through the Federal Reserve, most likely not backed by anything other than a promise of its worth.

2. The yuan, which is likely to possess fractional backing in gold.

Both the Americans and the Chinese would then be competing for the coveted position of holding the world’s next default currency.

The US would apply all its power to muscle out the yuan, as China would take over as the economic leader of the world if the US was to lose its present default currency status. (We have already seen the approach the US has taken when some Middle Eastern countries have announced that they planned to cease using the dollar as the currency that they use to trade in oil. Punishment has been swift and devastating.) The US would be ruthless in demanding that only the new dollar be used.

This would suggest that, in the US, the yuan would be forbidden for use. This ban would also extend as far internationally as the US could control.

But the Chinese have been doing their homework. They have already forged agreements amongst the BRICS and the ASEAN nations to use the yuan as the currency of trade. More recently, they have begun to nibble at the tail of the American eagle, with countries such as Australia, New Zealand, and the UK agreeing to trade in the yuan in future.

It may well be that China intends to sew up the world with yuan agreements, with the US as the last man standing, then pull the plug. This they might well be able to do simply by refusing outright to accept any further US debt of any kind. At that point, the US would be isolated and, in order to trade, would be forced to cave to the yuan as the currency of world trade.

If this were to take place, the remaining question would be whether the dollar would remain as the US currency. If so, the US would be in a similar position to countries, such as Argentina, where, today, the government does all it can to force the use of the deteriorating peso, whilst the population would prefer to use the stronger foreign currency.

In effect, the roles would reverse. But, in practical terms, for those who are American, and indeed, for those of us whose national currencies are tied to the dollar in some way, there would be an emergency period following a currency crash during which the immediate currency would be uncertain. Would we find ourselves like the German who, in 1923, took a wheelbarrow full of marks to buy bread and was robbed? (The thief dumped the marks and stole the wheelbarrow.)

Or, would the new US currency be accepted quickly, if only for the sake of practicality, even though it had no more worth than the dollar it had replaced?

Or would we see a rapid acceptance of a previously unacceptable currency (or currencies)?

If the latter, it would not matter that the new currency was unfamiliar. Its feature would be that, if it enjoyed fractional gold backing, it would be more trusted than the alternative.

Whatever the eventual outcome, the fiat currency end-game is now in view. As any stock investor will say, if you are holding a stock that you know is about to tumble, get out of that stock, ASAP. That time, for fiat currencies, is now on the horizon.