I assume that a re set of currencies and financial markets are close at hand because the imbalances have gone too far mathematically. I also have come to the conclusion that the re set will be “imposed” on the U.S. by China because they know the math involved and do not approve of our business practices. The re set “concept” has gained much yardage over the last year as the imbalances have widened and the thought process has spread. Personally, I see it as mathematically inevitable. Some feel that any re set would be triggered by the U.S. others feel that Europe would do it, my personal opinion is that the Chinese have the greatest ability and stand to gain more from it than anyone else. Even without a “push” or a planned event, I believe that the markets would sooner or later be cued by Mother Nature and force this event, manipulators be damned.
That said, what would a “re set” mean to you? Well, it depends on “who” you are and how or where you have your assets positioned. First off, the value of your “dollars” will fall against everything. It will take more dollars to buy food, clothing, housing, transportation etc. Depending on how severe the devaluation is, the resultant inflation will be the mirror of this. If you are on a fixed income like a pension or Social Security or what have you, the amount of goods and services that you will be able to afford will be less. If you have bank balances, these will also have a lowered purchasing power (not to mention probably “bailed in” and lowered balances). Bonds however will receive a double whammy to financial purgatory. Their “face amount” will have a lesser buying power with a devalued currency but on top of that, I believe that interest rates will be much higher which will discount the market value. The above are pretty simple to figure out; it is the rest of the financial world which is a little more difficult to call.
In the difficult to call category are stocks, real estate and commodities. As I mentioned the other day, stocks generally sell off initially and then recover but not enough to regain the loss of buying power in the currency. Real estate in my opinion will be sold off; I say this because of the massive debt that is attached to it on a worldwide basis. Couple the debt with higher interest rates and the fact that theoretically the Fed will be precluded from flooding the liquidity gates… and I think you will see very weak real estate prices with the exits clogged by sellers seeking liquidity. Two other aspects to real estate that will hinder it are “taxes” and thus the ability of governments to tax them out from under the owners… and the lack of liquidity. Liquidity is “king” during monetary crack ups and real estate “just isn’t it.”
The last of this category are commodities. Here we do not have a “one size fits all” by any means and they will have to be viewed individually. If I had to guess, the most basic foodstuffs like rice and beans will be the best or hold their purchasing power the most. Compare these to non-essentials like cocoa or orange juice and I think the more basic (essential) the better. We then have to wonder about steel, concrete, iron, lead, copper etc., how will these hold up? I think the answer depends on the global economy and in particular China to have a handle on what sort of demand will remain. My first guess is that the global economy will be weak and thus demand weak but who knows? Oil and natural gas are also in this quandary, will the demand be there or not?
Last but certainly not least are gold and silver. These are money pure and simple. They are not commodities, they are not liabilities, and they “promise” nothing…they just simply “are”…money. Think of a re set as a set of parentheses, gold and silver as one and the dollar (and the other fiat currencies) as the other with all assets, liabilities, goods and services in between. The problem is that the parentheses have gotten too lopsided with fiat currencies way too large and the precious metals too small. Gold and silver will “accrue” value away from the bloated currency side while the “middle” revalues versus each other and the two “monies.”
The reality is that we do live in a bubble. This bubble was created by and centered around the U.S. dollar and Treasuries. It is easy to understand that if it the dollar loses value (and reserve status), it will be at the expense of gold and silver along with foreign currencies to a lesser extent. I was asked the question:
“Why would debt be adjusted if it is inside the US with US citizens?
The Dollar’s value inside the US will not change for domestic goods or debt, just foreign ones.”
This is an important question; I will try to answer it. First, the U.S. is no longer “self-sustaining.” There are so many goods and products that we no longer make. When was the last time a TV was actually “made in USA?” Many years ago. A re set, because we do not make all that we consume, this will make goods in general more expensive and some goods possibly unattainable. A re set will also lay bare the “2%” inflation lie. Another way to look at this question is that if a product that actually is made in the U.S. sells for more overseas, it will be shipped and sold overseas…creating either an internal shortage or higher prices (an arbitrage so to speak). Do not fool yourself into believing that “domestic prices for domestic goods” will be unaffected. An offshoot of this discussion (for another day) is whether or not we go to a “two tiered” internal and external currency …could be?
The other part of the question is “why would debt be adjusted if it is internal?” I could go into what is “just or fair” but that is a mental or moral debate. All I can tell you is that throughout history, “loans” get rewritten after devaluations (or outright currency changes). Without it, the banks would never recover and the entire banking system liquidated. Basically the “loans” get rewritten but the debt of the sovereign does not which allows the sovereign an escape hatch. I don’t make the rules, I’m just telling you what history has shown us. This is why having some debt going into a devaluation is OK because it does shrink prior to the devaluation but thinking that it will all go away in a currency re set/change is wishful thinking. I will say this, assuming that there is no “confiscation,” holding physical gold versus debt does make sense because your debt will shrink to some extent and the buying power of your metal should expand by more than any other asset.
To finish, a re set will kill the purchasing power of dollars. This will be seen or felt as “inflation.” This may (the odds are good) end up where foreigners will not even want to accept dollars which will create even more dollar weakness. If we go to an internal/external currency and this occurs with “bail ins,” we could actually see a shortage of “money on the street.” This would make the liquid nature of the precious metals …that much more valuable. With an internal/external dollar, we could experience inflation and deflation at the same time depending on how they maneuver the levers. The important thing to understand is that throughout all of history, whenever there have been financial panics, currency devaluations, sovereign defaults or what have you…it was always a good thing to have “money” which gold and silver certainly are. They are the “ultimate money” and when push comes to shove they will be known for their ultimate quality of liquidity. I assume that you have heard the phrase that “cash is king” during bad times? This phrase was coined back in the days when “cash” was counted in ounces, not electronic digits.