Peter Schiff: When The Dollar Collapses China Won’t Be There To Catch It – Shadow of Truth #55

Paper money eventually returns to its intrinsic value – zero. – Voltaire

TND Podcast Spotlight:  Shadow of Truth

The value of fiat currencies is based on faith – faith in the entity that is issuing the currency. In the case of the dollar, it’s issued by the Treasury and backed by the “full and faith and credit of the U.S. Government.”

In reality the dollar is simply a debt instrument which the Government issues to the public. There is no real objective measure of the dollar’s value.   But let’s examine the “credit” of the U.S. Government.  The Government has issued $18 trillion in Treasury debt.  When the debt ceiling limit eventually is raised, that number will likely quickly jump north of $19 trillion.  It also guarantees about $7 trillion Fannie Mae and Freddie Mac debt.  It also backstops about $1.3 trillion in student debt.

These are just the “funded” liabilities issued to the parties who loaned this money to the Government.  There’s also an estimated $200 trillion of “unfunded” liabilities in the form of promises to make payments associated with Government pensions, entitlement programs, Social Security, etc.

Ultimately headed for a dollar crisis – next time when the dollar falls it will fall vs. the yuan. The next currency crisis will be much worse because when the dollar falls, China won’t be there to catch it.  – Peter Schiff on Shadow of Truth

The average lifespan of a fiat currency over history is 27 years.  The British pound sterling has lasted 300 years but it was originally backed by 12 ounces of silver per unit.  The pound is now worth .5% of its original value.  The U.S. dollar as a fiat currency has lasted, so far, 44 years since Nixon removed entirely the gold-backing.  Since the Fed was founded in 1913, the dollar has lost over 97% of its value.  (Note: the value of fiat currencies are measured vs. gold).

The Shadow of Truth hosed Peter Schiff today.  One of the primary topics was China’s move to begin devaluing currency and to “de-peg” it from the dollar.   Historically, when the dollar plummeted – see 2002 – 2009, for instance – China had to buy dollars and sell yuan in order to maintain the $/yuan peg.  Over the years this cost China a lot of money but it enabled China to continue building its export economy.

The purpose of de-pegging is part of a process that has been initiated by China to prepare the world for a post-U.S. global economy, as we discussed in our China Braces For Impact SoT Market Update.  The next time the dollar starts to head lower, China will let the dollar fall…

…This will also mean that the biggest foreign buyer of Treasury bonds will likely be sitting on its hands when deteriorating U.S. finances force the Treasury to begin issuing trillions of new bonds annually. So when the U.S. needs China’s help the most, it will be unwilling to provide it.

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About Dave Kranzler:

 I spent many years working in various analytic jobs and trading on Wall Street. For nine of those years, I traded junk bonds for Bankers Trust. I have an MBA from the University of Chicago, with a concentration in accounting and finance. My goal is to help people understand and analyze what is really going on in our financial system and economy. You can follow my work and contact me via my website Investment Research Dynamics.  Occasionally, I publish on Seeking Alpha too. As a co-founder and principal of Golden Returns Capital, LLC Mr. Kranzler co-manages the Precious Metals Opportunity Fund, a metals and mining stock investment fund. 

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