There is a battle under way right now. In this battle there are three things to watch.
What is a dollar?
To different people and groups it is different things.
To the average American the dollar is a unit of measure for trade and the denomination of debt owed. To the Chinese the dollar is a mandatory middleman for international trade and a mandatory store of value for the excess wealth China receives from trading with the West. To bankers the dollar is the denominator of contracts holding others in debt to the bank.
There is a particular meme spreading right now that a very large mountain of contracts denominated in US dollars is somehow SUPPORT for the US dollar. As one example, I quote the latest Prudent Squirrel newsletter:
There is no clear alternative to the USD system at present. China, Russia, Brazil, India are taking steps to diversify their foreign exchange, but the amounts involved are a few tens of $billions, and nothing compared to the USD footprint world wide which I previously estimated at $2200 trillion for all USD stocks, bonds, contracts world wide, not to mention that all important commodities are still priced in USD – sort of like the US having its own private world wide ‘comex’ in everything from money markets to commodity markets to you name it.
That's $2.2 Quadrillion in contracts denominated in US dollars! That is not wealth. That is one entity holding a contract that INDENTURES another entity or individual.
The question I want to ask is does this mountain of contracts lend de facto SUPPORT to a continued dollar regime? Or is it the fatal FLAW of the regime?
Chris Laird seems to think that the usage demand of the dollar as a middleman for international trade must somehow be weighed against contracts of debt held by the banks. And if the debt weighs more than the net usage demand, then the dollar must continue on as the reserve currency.
But as I said, the dollar is different things to different people.
And my thesis is that the dollar's Achilles' heel is that it must perform TOO MANY functions. The dollar's fatal flaw is that if any one function fails, they all fail.
Think about the mountain of contracts held by the banks. Compare this mountain to a bag of groceries. If the price of a bag of groceries goes from $20 to $100, the entire mountain of contracts (derivatives) collapses and the banks go bust.
Now think about global usage demand. This is a funny thing. Intuitively you would think that if the price of oil rises it will hurt the dollar. But in fact the opposite happens. As the price of oil climbs, all the world must buy more dollars to get the same amount of oil!
This creates demand for dollars which keeps the dollar strong. But here's the Catch 22. The rising price of oil also raises the price of a bag of groceries. This puts downward pressure on the value of the dollar. All those banks holding contracts denominated in dollars lose value when the price of a bag of groceries goes up.
So the dollar's interconnectedness in the global marketplace combined with its reliance on performing too many functions creates a very unstable environment for survival (of the dollar).
If all of a sudden dollars were not needed to pay for the rising price of oil, there would not be the usage demand to counterbalance the rising price of everything else. And this is why a few tens of billions in usage by the BRIC countries is a DEADLY threat to the $2.2 Quadrillion in derivative contracts.
What is gold? What functions does it perform?
To different people and groups it is different things.
But not for long. Soon it will perform its one and only function, wealth reserve par excellence!
But for now, to those bankers who sit precariously on a mountain of contracts denominated in dollars, gold is a tool used to lie to the people about wealth. There are a couple problems though. Most of the people being lied to have no wealth to preserve. And those that do are starting to see through the lie.
One more thing. In order to lie through gold, they must have a fractional reserve of gold from which to pay physical gold to those that see through the lie. For the last 10 years that gold has been provided by Gordon Brown and the central bankers. But now things have changed. Now the central bankers are net BUYERS of gold.
The lie is coming to an end.
During the last century many things have come and gone. Wars, nations, leaders, parties, ideas, ideals, blood was shed, promises broken, much chaos. But one thing has been steady. The evolution of gold!
First we had a regime of fixed gold prices ($20, $35, $42) and all the while the dollar printing exploded! Then we had the regime of semi-fixed gold prices from 1971 to 2001, and dollar printing exploded even more! Finally we had a decade of "controlled demolition" or controlled gold price inflation, as gold tripled in value at the same time as oil rose SIX times in price and the US dollar printing EXPLODED like never before!
So what is next in the steady evolution of gold? It is free gold pricing and the recognition of its one and only function, wealth reserve par excellence! This is next!
What to watch for? Watch for when gold starts to outrun oil to the upside. So far over the last 10 years gold is up 3 times and oil is up 6 times. When gold outperforms oil it will mean that the process has shifted into high gear.
What about oil?
Do we have an energy crisis on our hands? Did we have an energy crisis in 1973?
How can we possibly know?
Certainly a monetary crisis and an energy crisis are not mutually exclusive. They can happen at the same time. But what we know for sure is that monetary manipulation distorts free market pricing mechanisms, causes massive malinvestment, and masks the reality of whether or not we are facing a true resource crisis.
In just one year we have seen the WILD fluctuation of the price of oil from $147 to $30. At $147 per barrel the producers and anyone holding oil should have been jumping out of their seats to sell, yet we were told there was a shortage. At $30, we were told that demand was low. Buyers should have been jumping out of their seats to buy! So why all the confusion?
Can we really know the true availability of resources while prices are so distorted by currency fluctuations in our fiat system? No, we can only speculate.
No disrespect to my favorite active Peakist! As I have said before, I am agnostic when it comes to this subject. And yes, Hugo, I did read your post.
So how will we know when the end is near? When Helicopter Ben comes under attack for being too tight with the printing press, the end is near. When helicopter drops are not enough to satisfy the beast, the end is near. When the US borrows more in one week than it did in an entire year seven years prior, the end is near. When scorched earth self-preservation tactics, in-your-face theft of public funds, and outright corruption is done in broad daylight without fear of reprisal, the end is near. This is what to watch for. Please let me know in the comment section if and when you happen to see any of these signs. We all need to be on the lookout!