Published January 08, 2014

The New Fed Sheriff in Town Means More Dollar Destruction

Helicopter Ben is passing the keys to the printing press (and the copter) to Janet Yellen in this New Year. We're told we can sleep well at night knowing the US dollar is in good hands. Don't believe me? Take it from an academic who teaches economics.

Back when her appointment was announced, University of Michigan economics professor Justin Wolfers said, "Yellen is quite simply more qualified for the job than any of her predecessors. She's an imaginative and technically adept economist possessed of a brilliant and precise mind." Wolfers continued, "Tonight, I feel reassured that my daughter's economic future is in good hands."

The US dollar, once backed by an unfeeling barbaric relic, is now under the stewardship of the best and brightest. Richard Nixon replaced the dollar's gold backing with the PhD standard back in 1971. The Tricky One, like Obama, also selected an immanently qualified Fed chair.

Why, none other than Milton Friedman gushed in a column for Newsweek at the time of Nixon's selection of Arthur Burns as chairman of the Federal Reserve. Burns, he wrote, "is the first person ever named Chairman of the Board who has the right qualifications for that post."

Those previous chairmen were, in Friedman's words, "able, public-spirited men with high standards of integrity and service." However, none saw the big picture, only having "experience in individual business or financial institutions," and none "had any training or special competence in the problems of the economy as a whole."

Real-world business or banking experience is not what Washington wants in a Fed chair-man or woman. That sort of background might dissuade a Fed head from trusting her models to know exactly what  interest rate should make for maximum employment and just how much "Q" to put in the central bank's monthly QE sauce.

Yellen, like Burns, has only worked in academia and government. She actually believes her employer can print jobs, and, to quote the New York Times, she has a "greater willingness to tolerate a little more inflation in order to reduce unemployment more quickly."

The new chair is said to be tougher than Bernanke, but like her predecessor was drawn to study economics by the Great Depression. Not surprisingly,  she too believes markets are imperfect and require lots of government supervision.

It's long forgotten that Arthur Burns tried to get his boss reelected by stimulating the economy with easy money. The result was unforgettable stagflation, which he blamed on everything but his monetary policy. Burns cited the business community's "exuberant mood" and "waves of speculation" as inflation causes.

I think you get the idea of what the Yellen Fed will do in the coming years, making now the perfect time to start considering hard assets. And who better to answer your hard questions about gold, silver, and precious metals stocks than one of the top resource speculators himself—Doug Casey.

A week from today, subscribers to BIG GOLD, Casey International Speculator, Casey Investment Alert, The Casey Report, as well as the Casey OnePass and the Casey Club membership services will have the opportunity to attend a Q&A discussion by a team of Casey experts—including Jeff Clark, Olivier Garret, Louis James, and of course Doug—answer the most pressing questions about the volatile gold market.

Please join moderator Andy Duncan and the Casey team at 2:00 PM Eastern next Wednesday, January 15 for "Answering the Hard Questions About Your Hard Assets."

If you have a question you would like answered, you can submit it via the link you've received in yesterday's email. Deadline is midnight, Friday, January 10. Watch your inbox for another email from us on Friday, for last-minute submission of your questions and to listen to the event on January 15.

Now that we have the housekeeping out of the way, in today's column EverBank's Chuck Butler considers Triffin's Dilemma and what it means for the dollar's future as the world's reserve currency. Most of us don't remember a time when the dollar wasn't the king of currencies. Butler puts the US currency in historical context and gives us an idea of what comes next. Don't miss it.


Doug French, Contributing Editor

Currency Watch: Triffin’s Dilemma

Chuck Butler, President, Everbank World Markets

In the 1960s, the Belgian-American economist Robert Triffin pointed out something that I would like to bring into the sunlight today, and which soon will be a popular topic around the water cooler, if I'm correct.

Triffin observed that when a national currency also serves as a world reserve currency, a dilemma arises: the issuing country must choose between "store of value" and "reserve status." A country whose currency has reserve status must be willing to supply the world with sufficient currency to meet world demand for foreign exchange reserves, and thus dilute the "store of value." Meeting this demand will also be reflected in fundamental imbalances in payments, specifically the current account.

I will focus on the dilution of the dollar's value since Nixon severed its gold backing in August 1971.

As I explained in my February 2012 World Money Analyst article, the dollar has completed four alternating weak/strong trends since 1971, shown in the chart above. The current weak trend in the dollar began 11 years ago; could this one be the trend to end all trends?

A History of Reserve Currencies

Prior to the current US dollar stint, the currencies of five countries each held world reserve status for an average of 95 years. This data goes back 563 years, folks, so we're not just looking at a single example. Here's the list and approximate time frames:

As you can see, the US dollar has held reserve currency status for 88 years… just seven years shy of the average of 95 years. Of course, the 95-year figure is just a historical average; the actual time till expiration of reserve status could be longer… or shorter!

I found the graphic below on the Casey Research site and thought that it played well with my point here.

Notice that the sand that represents the time the dollar has left is moving through the hourglass right before our eyes. To borrow and adapt a line from a soap opera, "Like sands through the hourglass, so are the days of the dollar's life."

I travel and talk to people throughout the US, Canada, Mexico, and Panama. Wherever I stop, I try to explain what deficit spending and debt has done to the US dollar's value, and how regardless of what country they live in, they should not have 100% of their investment portfolio allocated to their home currency.

For over 3 years, I have warned that the US dollar's term as the world's reserve currency will expire by the end of this decade. That message, it turns out, aligns well with the historical average that dates the end of the dollar's reign as 2020.

And now, the US must deal with another debt ceiling debacle. I truly believe that the US will eventually relinquish its reserve currency status in order to avoid an outright default.

So, if the dollar loses its reserve status, what will that mean to dollar holders? Gloom, despair, and agony come to mind. It took the UK over 50 years to recover from their loss of the reserve status.

Remember, the country with the reserve currency gets to receive loans at discounted borrowing costs.

Also, commodities are priced in the reserve currency, meaning central banks around the world must hold the currency in their reserves to facilitate trade. When these benefits are lost, a country's economy becomes stagnant at best, and the value of the currency is depreciated, mainly because the world's central banks no longer need to hold it.

What's Next?

I am frequently asked which currency will replace the dollar as the reserve currency. I respond that the real concern is not speculating about the next currency king, but about the consequences of the dollar's lost status!

When pressed, I speculate that it will be the Chinese renminbi. China was the first country to state as its goal the replacement of the dollar standard. Since making that claim, China has taken multiple steps toward making its currency, the renminbi or yuan (same currency), eligible to become the next global reserve currency. China still has a long way to go but has moved quickly.

I also believe that whenever China allows the renminbi/yuan exchange rate to float against world currencies, which is essential to gaining reserve status, it will issue the currency with partial gold backing. That would render its currency the most attractive in the world and spark global demand and wide distribution!

The euro was once considered the dollar's main challenger. That was before the markets woke up and realized that Greece, Spain, Italy, and Portugal can't pay their debts, and that their debt shouldn't be issued at the same yield as German debt. The euro may one day rebound to once again be a challenger, but not before China moves to the head of the class.

Another alternative could be that the reserve currency becomes a basket of currencies with each the "king of the hill" in their respective regions. But that wouldn't save the dollar from a loss of value that would follow its lost status.

I write a daily newsletter called A Pfennig for Your Thoughts in which I always remind readers to have at least 15% to 20% of their portfolio allocated outside of the dollar in select foreign currencies and precious metals. One day, when the dollar gives up its reserve status in order to stave off a debt default, non-dollar holders will be thankful they heeded that advice.

Chuck Butler is president of EverBank World Markets. EverBank is an FDIC-insured US-based bank specializing in WorldCurrency® Certificates of Deposit and deposit accounts denominated in select global currencies. Contact: