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After the last crisis it was easy for many to look back and say all the signs were there to indicate an impending crisis. Super-low interest rates from the FED, no down-payment loans, interest-only loans, under qualified borrowers, flipping of properties, securitization of mortgages, over-leveraged banks, etc.

So what is the next crisis and what are the current events that we will look back on and say "all the signs were there"?

The US dollar (USD) crisis.

  • Russian central bank diversifies into Canadian dollar. Quote from the article: "Analysts said the move could be a sign of increased diversification of emerging market central bank assets away from the dollar and into investments denominated in other commodity-linked currencies..."
  • India's central bank buys 200 tonnes of gold from IMF at $1,045 an ounce. Quote from senior finance ministry official in the article: "It makes sense to buy gold as it will appreciate more than the U.S. dollar."
  • China announces trade deals with many countries to use the yuan and local currencies for settling trade and thus bypass the USD. Argentina, Indonesia, Belarus, South Korea, Malaysia, Hong Kong, and Brazil so far. If Australia or Canada get added to that list - look out.
  • China encourages its citizens to own gold. It was illegal to own gold in China up to 2002. Recently the Chinese government ran TV ads urging citizens to consider purchasing gold. Gold can be purchased at almost any bank in China.
  • The FED prints over $1.4 Trillion in new money to rescue banks. Printing money has consequences. Very serious consequences.
  • In 2009, the US government financed over 40% of its expenditures with debt. Most of the money was borrowed from abroad or purchased with newly printed money from the FED. The US government will need to borrow at least that much for its planned expenditures in 2010.
  • Iran stops accepting US dollars for oil. What country was the last country to stop accepting USDs for oil? Iraq in November 2000. Iraq now accept USDs for oil.
  • Nations now openly hostile to FED money printing. After the FED announced the printing of another $600 billion to purchase government debt, many nations openly criticized the move. Many nations are considering implementing capital controls so all those new dollars don't wreak havoc in their nation. These same nations may consider dumping their dollars as they see others implementing the same type of controls. If other nations don't accept the dollars where are all the dollars going to land? Back in the US.
  • The FED is now printing money to fund the Federal government. The FED is now printing money to fund the Federal government. An additional $600 billion of newly printed money will be used to buy ALL the government debt issued by the Federal government over the next 8 months (from 11/8/10). From the article: "For the next eight months, the nation’s central bank will be monetizing the federal debt."
  • The US has crossed the "Bernholz line" The US has crossed the "Bernholz line". Peter Bernholz analyzed hyperinflationary episodes that took place in the 20th century. Two indicators where common in almost all the episodes. First, over 40% of government expenditures are financed by debt. Second, that debt is financed by money printing. The US meets both criteria.
  • As of 12/2/2010, China has imported 5 times more gold (at around $1100/oz) than they did for all of 2009. China is also the world's largest producer of gold, of which none is allowed to leave the country.
  • India is considering using gold to purchase oil from Iran.
  • Montana, Missouri, Colorado, Idaho, Indiana, New Hampshire, South Carolina, Utah, Washington and Virginia have all introduced legislation proposing state currencies of gold to hedge against a precipitous fall in the value of Federal Reserve Notes (i.e. the US dollar).

What are ways to hedge against the dollar collapse?

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Can you take the answer of out the question? :-) –  C. Ross Aug 19 '10 at 13:09
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I cannot really answer professionally, but I once read the following: in bad times, buy Government Bonds; in very bad times, buy precious metals; in "oh s**t" times, buy canned food, cigarettes, fuel and ammo. –  Stefano Borini Aug 19 '10 at 13:17
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I'm no expert but are the Canadian and American economies sufficiently independent that investing in Canada would protect from American collapse? –  theycallmemorty Aug 19 '10 at 14:24
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Can I say that continually spelling government as "gubmint" doesn't do anything to increase the credibility of this question. –  DJClayworth Jan 11 '11 at 16:09
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I edited the post and replaced "gubmint" with "government", it's distracting. –  Sverre Rabbelier Sep 21 '11 at 17:09

10 Answers 10

up vote 20 down vote accepted

There are two basic ways you can separate your investments from the dollar (or any other currency).

  • Invest in other currencies.
    • Keep money in foreign saving accounts or CDs (Austrailia has awesome interest rates right now).
    • Invest in foreign companies/stock exchanges that are traded in foreign currencies. This is tricky because a collapse of the dollar would likely have a negative effect on many of the world's large companies.
  • Invest in hard commodities.
    • Gold or other precious metals, but be careful because the price has already inflated.
    • Land and real estate. It's already lower than it's high, but some believe it may go lower, but land always retains value.
    • Other real assets that don't devalue.
      1. Hard commodities such as mines, oil fields, etc.
      2. Luxuries that appreciate such as liquors, wines, and art.
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@C. Ross - Opening a Canadian bank account requires a US citizen to travel to Canada. I've done some initial research and it looks like other countries are similar. Is there another way? –  Muro Aug 19 '10 at 17:50
    
@Muro I believe their are companies that facilitate that through the web, I'll try to find an example. –  C. Ross Aug 20 '10 at 17:32
    
@C. Ross - It looks like EverBank gives customers the ability to open CDs in foreign currencies. everbank.com/001CurrencyCDSingle.aspx –  Muro Aug 22 '10 at 2:31
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@Muro - I think you do it by travelling to Canada: apparently it's anti-terrorist / anti-money-laundering legislation. –  ChrisW Apr 24 '11 at 1:09

Depends what kind of expenses you intend to use this money for. If you plan to buy housing in the future (eg you're saving a deposit), then you need to ensure that the value doesn't deteriorate relative to the value of the housing you are likely to buy - so you could buy a Residential REIT, or buy some investment property. If you expect to use this money for food, then you should buy suitable assets (eg Wheat futures, etc). Link the current asset to the future expense, and you will be fine. If you buy Gold, then you are making a bet that Gold will retain its value compared to the thing you want to purchase in future. It doesn't matter what the price of Gold does in $US.

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I like the idea of using my current dollars to purchase things I think will be of value or at least hold their value in the future. Grain futures are appealing. I'm actually considering DBA which is an agriculture ETF. –  Muro Aug 19 '10 at 17:38

I am not preparing for a sudden, major, catastrophic collapse in the US dollar.

I am, however, preparing for a significant but gradual erosion of its value through inflation over the space of several years to a decade. To that end, I've invested most of my assets in the stock market (roughly 80%) through major world index funds, and limited my bond exposure (maintaining a small stake in commodity ETFs: gold, silver, platinum and palladium) due to both inflation risk and the inevitability of rising interest rates. I don't think most companies mind overmuch if the dollar falls gradually, as the bulk of their value is in their continuing income stream, not in a dollar-denominated bank account.

I also try to keep what I can in tax-deferred accounts: If, after several years, your stocks were up 100% but inflation reduced the dollar's value by 50%, you're still stuck paying taxes on the entire gain, even though it was meaningless. I'm also anticipating tax hikes at some point (though not as a result of the dollar falling).

It helps that I'm young and can stand a lot of investment risk.

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The biggest collapses happen where people least expect them.

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Are you saying that a dollar collapse is not going to happen because more people are expecting it? –  Muro Aug 21 '10 at 12:54
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When large groups of people fear a scenario, it tends to lead to heavy hedging against it. As a result, some other type of asset inflates. Everyone huddles to one side of the boat. It's sort of a reverse self-fulfilling prophecy that is not sustainable. Also, the USD may have its problems, but the rest of the world can easily screw up worse. It's relative. –  James Roth Aug 21 '10 at 17:17
    
That's what I thought you meant. Agreed. –  Muro Aug 21 '10 at 17:39
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So I should hedge against hedging, but not tell anyone. –  Jay Bazuzi Jan 26 '11 at 19:57
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You can tell them. They won't listen. –  James Roth Jan 26 '11 at 20:47

I've thought of the following ways to hedge against a collapsing dollar:

  1. Open a Canadian bank account. The Canadian real estate market did not experience the bust the US market experienced. As a result, Canadian defaults and foreclosures have not increased much in the last couple of years. Their banks did not need to be bailed out. This would also allow me to have some money outside the US. When the dollar collapses the government will lock down bank accounts in an effort to stop the run on the dollar. People will not be able to withdraw their money from the bank. Having money in a Canadian bank account will give me access to some funds outside the US.
  2. Alcohol. Alcohol is always desired by people. It also has the nice features of being non-perishable and easy to store. Having $5-10K worth of some popular bourbons, scothes, and whiskeys seems like a low risk hedge. Besides, if I'm wrong, I have my lifetime supply of alcohol.
  3. Gold and silver. Not the ETFs. I'm talking about having gold and silver bullion in your possession.
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+1 for bourbon and scotch –  warren Jan 27 '11 at 2:24

I recently finished reading a book that you may be interested in based on your question, The Ultimate Suburban Survivalist Guide.

The author begins with a discussion of why he thinks the US economy and currency could collapse. It gets a little scary. Then he goes into great detail on commodities, specifically gold. The rest of the book is about what you can be doing to prepare yourself and your family to be more self sufficient.

To answer your question, I do anticipate problems with US currency in the future and plan to put some money in gold if the price dips.

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I like owning some gold. It's easy to store and no maintenance. I use to wait for the price go down but it never did much so I finally jumped in. –  Muro Aug 19 '10 at 17:47
    
Another related book is How to Survive the End of the World as We Know it, though this focuses more on social and self-defense aspects and less on financials. One thing he stresses is the importance of how you store your gold (or alcohol, or ammo, or whatever) -- i.e. don't make it too easy to steal. –  bstpierre Aug 20 '10 at 2:55
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but one of the prime reasons Gold (measured against the USD) is so high is because the USD has dropped relative to other currencies around the world (and some of them have dropped too) –  warren Nov 9 '10 at 13:35
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@bstpierre If you are in an apocalyptic scenario where self-defense and stockpiled ammo are important then gold isn't going to help you. Or any kind of financial advice. –  DJClayworth Jan 11 '11 at 16:12

Invest in other currencies and assets that have "real" value.

And personally I don't count gold as something of real value. Of course its used in the industry but besides that its a pretty useless metal and only worth something because everybody else thinks that everybody thinks its worth something.

So I would buy land, houses, stocks, ...

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"real value"? There is no such thing. The only reason any object has value is because human beings desire it. If it is desired then it has value. This is why gold has had value for its entire existence - it has always been desired. –  Muro Aug 20 '10 at 17:44
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Of course there is something like real value. Land has real value because you can use it in a practical manner. You can grow food on it so you won't starve. Houses have real value. You and your family won't freeze to death . Stocks have real value. You own parts of companies which produce things and offer services. Gold is just a lump of metal which has no practical applications and no chance to produce revenue. So you can only hope, that tomorrow people still think its worth something. –  Plankalkül Aug 20 '10 at 18:10
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Yes, but different from gold: Land and homes have also value if they are not desired by people. They might not have a price but they still have value. For example: In 2000 Gold had a price of about 280$ per ounce. Now it has a price of about 1100$ per ounce. So sure it was worth something in 2000 but it was worth a lot lot less. To think that the gold price will go up and up for ever should remind most people of something unpleasant in the near past. If the price of your house is going down you still have a house thats as nice as before. –  Plankalkül Aug 20 '10 at 18:32
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I think there is a difference between value and price. Sure: Gold can go down in price, so can houses and land. But with houses and land you at least have something, even if you can't get much money for it. A wonderful villa has great value even when the price for it is just 10$ a ton of gold worth 10$ has only a value of 10$. But I guess thats just a kind of taste. I like to invest in things that are valuable not just because they have a high price. Because I think in the long run those are the things that will be most useful to me. –  Plankalkül Aug 20 '10 at 19:03
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@Plankalkül - stocks only have "real value" so long as the company is in business –  warren Nov 9 '10 at 13:34

Buying gold, silver, palladium, copper and platinum.

The first two I am thinking about new currencies. The last three for the perpetual need for the metals in industry.

I also have invested in Numismatic coins. They are small portable and easy to hide around the house. I only collect silver coins, so even if the world really blows up and numismatics goes out the window, I can depend on them forming a barter system through the content value of the silver.

The problem with collectable items is that they are easy to see. For example, a nice painting just shouts out "steal me!".

I don't buy large gold coins. As long as the coin is below 1/4 Oz gold I collect it.

If the dollar does finaly collapse, to be honest it will be so bad that I think weapons will be order of the day. Do I think it will collapse...nah never.

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The collapse of the US economic system is one of the many things I am preparing for.

To answer the how, me personally I am doing some investing in gold and silver. However I am investing more in the tools, goods and gear that will help me be independent of the system around me. In short nothing will change for me if the US dollar goes belly up. A book I recommend is Possum Living (http://www.possumliving.net/).

Other than that I am investing in trade goods such as liquor, cigarettes, medical supplies.

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I'd like to provide ideas other than gold, stocks, property, bonds on how to prepare for a severe crisis. My suggestions below may even make your life more happy now.

  • personal development and education: nobody can take that from you or tax it. It may even make you more happy now. Some of these skills will be very valuable in any crisis. For example, doctors are always needed. And even first aid may be valuable.
  • family, friends and relationships: they can support you in times of need and enrich your life here and now. The main investment here is usually time, not money, so you can still save enough money.
  • experience and enjoyment: it shapes you, and can make you a more interesting and open person. Nobody can ever take it from you. If you haven't done it you may not be able to do it in the future.
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Welcome to Money.SE. This particular question is not what I'd consider a shining example of the great Q&A on this site, bu your answer is excellent, and at least distracts from the panic nature of the question. –  JoeTaxpayer Jun 15 at 13:32

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