Ominous Signs of the Coming U.S. Dollar Collapse Abound – Lombardi Letter

Stealth U.S. Dollar Collapse Possible as King Dollars Influence Wanes

The U.S. dollar collapse has been on many peoples radar for, well, forever. Its remarkable resilience is a testament to the strong relative fundamentals the American political and socio-economic system enjoys versus the rest of the world. Thats why King Dollar is still the worlds reserve currency today. But what if this narrative is changing? What if degrading fundamentalsincluding competition from upstart currenciesthreaten to tip the balancetowards persistent dollar selling?Will the U.S. dollar collapse? It can, if the snowball turns into an avalanche.

Most people are familiar with Americasnew-normal slow growth paradigm. What many dont knowand still cling tois that the great economic machine known as America isnt coming back. Not in the way we remember it, at least. Its essentially a numbers game now, and problems like huge debt levels and workplace automation are only going to increase. Without the return of economic growth, the dollar is destined for continued debasement through the printing press.The only other option is a U.S.dollar devaluation by way of default, or high inflation. Both will kill the dollar through different means.

Adding further pressure to the deficit, President Donald Trump has signaled a very dovish tone towards deficit spending. In Trumps Budget Blueprint released on March 15, 2017, he advocates $1.0 trillion in infrastructure spending and does not include reformsfor the real elephants in the room: Social Security, Medicare, and Medicaid. (Source: America First, The White House, March 15, 2017.)

Given that Trump has already pledged that Social Security wont be touched and favors increases in things like veterans care, federal government spending is only going up, not down. Theres no inclination that controlling entitlement spending is on anyones radar; certainly not from the administration still looking for their first win in Congress. Theres even an ambitious attempt to raise Defense spending by $54.0 billion per year, which is already 10-times higher than the annual budget of Americas next nearest rival. Under these conditions, the federal deficits will only balloon faster than the 150% debt-to-GDP ratio projected by the Congressional Budget Office by 2050.

This shouldnt come as a shock to anyone paying attention. After all, they didnt call Trump the Debt King for nothing. Over-indebtednessalmost sunk the Trump empire on a couple of occasions; and actually did in the case of individual assets like Trump Hotels and Casinos Resorts in 2004. Should his policies of much lower corporate tax rates (35% down to 15%) combined with increased federal outlay spending come to fruition, its practicallyimpossible for tax receipts to bridge the gap.

That is, unless you believe annual economic growth can sustainat four percentindefinitely, which it cannot. The averagebusiness expansion growth rate has been contracting since the mid 1970s. Not coincidentally, this occurred during Americas industrial manufacturing peak. GDP growth cycles that used to peak ateight percent, then six percent, then four percent,are now barely able to crack two percentgrowth in a good quarter. Americas workforce is aging and losing productivity, and now something even more ominous is lurking in the background.

Automation is about to enter stage right,and its threatening to engulf the workplace. Between 1990 and 2017, industrial robots unleashed in the workplace (around 670,000 in total) eliminated 6.2 jobs for every 1 job they created. But the real kicker: wages declined between 0.25% and0.50% for every 1000 robots that entered a company workforce.(Source: Six jobs are eliminated for every robot introduced into the workforce, a new study says, Recode, March 28, 2017.)

Now, imagine the wage deflation assured to take placewhen dozens of large multi-national companies start laying off workers. Some of these companies employ 250,000 people or more worldwide. If only 10% of these workers getreplaced by automation over the next few years, wages could fall 2.5%-5.0% or more for the remaining in-house workers. How is this not monumentally deflationary in nature? Deflation is kryptonite to high deficits.

Evenworse, there are indications that job losses will be much higher than 10%. A recent study predicted that 38% of jobs will be automated by the early 2030s. This includes high-paying financial service positions, which carry a 61% riskrate. All told, fourout of 10 U.S. jobscould be eliminated, which will add pressureto the 30-year lowlabor participation rate currently plaguing the economy. (Source: Watch out America, robots are coming for your jobs: Report finds 38% of US jobs will be automated by 2030,Mail Online, March 2, 2017.)

Again, why am I talking so much about automation in a U.S. dollar collapse article? Because without real organic economic growth, brought about by higher wages and tax receipts, deficit spending can only ramp higher. This will only lead to higher debt servicing costs asinterest rates gradually normalize and the debt servicing principal steadily increases.

Thus, from a supply-side perspective, the die has already been cast. Theupcoming dollar collapse is a mathematical certainty; all thats remaining is a demand-side catalyst.We believe one might have arrived.

The U.S.dollar collapse scenario hasnt happened yet, but more signs keep pointing inthat direction. The scenario will truly occur when all the collapse pieces are in place, which hasnt happened yet. One important piece will be shifting worldwide interest and necessity away from the dollar. Some rival currenciesmost notably of the digital varietyare starting to pose a serious challenge.

Bitcoins rise to preeminence has been astonishing. Its currently trading at all-time highs of $1,460 (as of this writing), having risen 1400-fold in just five years. Thats what real growth looks like.

Major industrialized nations like Japan and Russia are just starting to recognize Bitcoin as legal tender. Such a move would signal a huge step towards eventually recognizing them as legitimate Central Bank assets. Also, because cryptocurrencies are not centrally managed, Americas rivals would have a huge incentive to accumulate cryptocurrencies as reserves instead of recycling U.S. dollars. From a foreign perspective, breakingup the dollars reserve currency status would serve to knock out Americas ability to finance its war machine; something Russia and China both crave.

In fact, it seems Russia and China are not waiting around for blockchains rise to take matters into their own hands. The Russian CentralBank opened a Beijing-based bank in March 2017, signaling its intent to forge alliances with China, with the ultimate intent of establishing a gold-backed system of bilateral trade. This would bypass the need to use the U.S. dollar altogether, as an Eastern gold standard gradually forms. Once the G20 industrialized nations stop requiring U.S. in trade, one of the main drivers of demand dries up. (Source: Moscow and Beijing join forces to bypass US dollar in world money market, South China Morning Post, March 18, 2017.)

Various other nations are working bilaterally as well to circumvent the dollars dominance in foreign trade. Iran, Argentina, and Libya during theMuammar Gaddafi years (some believe his desire to bypass the dollar by trading with gold ultimately led to his demise). This trend is unstoppable as more nations attempt to break free from the dollar shackles. On the road to ruin, the U.S.dollar collapse timeline requires the underpinnings of support be severed. Critical mass will be achieve when enough countries choose to ditch the dollar and trade with another currency.

Aside from all of these negative events, perhaps the U.S. dollars time has simply come. Nothing lasts forever. The world changes, and the balance of power ebbs and flows through the decades. America is no longer the economic superpower it once was. Its a graying, uber-mature, hollowed-out economy with financial debt and social security obligation it can never pay back. The weakening dynamicsplaying out in America areno different than those of the Roman Empire, who gradually diluted the amount of minted silver in their coins to five percent of their original value. Why? Topay for such things as defense against the barbarians and pork projects for their over indulged monarchy. Surely, this sounds familiar.

As a testament to the nothing lasts forever meme,numerous different countries have both held and relinquished the world reserve currency mantle over the centuries. The average period of reserve currency dominance is around 90 years (since 1450), and the U.S. is right up against this timeline now. We simply may be approaching the time where the U.S. economy istoo mature and its indebtedness too great for the worlds currency power structure to shift somewhere else.

When will the dollar collapse?U.S. dollar collapse predictions are notoriously tough to pin down. My best guess is that it will be a gradual process, rather than an event. Its the fraying at the edges which will gradually eat away at dollar supremacy. The catalyst to really kick-start a crisis might be a credit downgrade or an unforeseen catastrophe. But if history is any guide, the dollars reserve currency status is lying on quicksand, and once it sinks,the dollars value will careen lower. Again, think gradual timelines, picking up pace as the crisis wears on.

Its the inevitable result when a mature economy gets complacent, coupled with huge liabilities it can no longer avoid. The die has been cast.

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Ominous Signs of the Coming U.S. Dollar Collapse Abound - Lombardi Letter