We’ve all heard reports about how U.S. deficits are out of control and the U.S. debt-to-GDP ratio is heading toward a complete loss of confidence in the U.S. dollar. These facts are true enough, but they beg the question of when the crackup will arrive.
Both Japan and Italy have higher debt-to-GDP ratios than the U.S. and they are still issuing new debt, despite recessions and other negative indicators. Estimating the timing of a debt default or loss of confidence in the dollar requires continual observation of events related to a default and the assessment of the conditional probability of those events occurring if a default were or were not close at hand.
This article is one of the most dramatic indications yet that a default of some kind may be closer than most expect. It describes what the author calls a “soft default.” This involves resetting the dollar to equal a basket of commodities, including oil, gold, natural gas and other key commodities.
This idea has been around for decades and is not unlike what John Maynard Keynes proposed at Bretton Woods in 1944 in connection with the creation of world money that he called the “bancor.” What’s different is that the new peg would be at prices greatly in excess of current market prices. For example, gold would be valued at $10,000 per ounce (a figure I have predicted for years as part of an endgame dollar reset).
This gives the economy a massive one-time dose of inflation, which wipes out the real value of the national debt. After the debt devaluation, the dollar would remain stable based on the commodity basket at the new prices. This is a variation of what FDR did in 1933 when he devalued the dollar by raising the price of gold from $20.67 per ounce to $35.00 per ounce.
Whether this peg and devaluation play out is less important than the fact that it is receiving high-profile consideration. That alone tells you the dollar’s days are numbered as a store of value. The best remedy for investors is to beat the government at its own game by acquiring gold today at comparatively low prices.
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