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?