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Gold & the Dollar are Less Correlated than Everyone Thinks

Understanding the impact of Triffin's Paradox
Tuesday, November 13, 2012, 11:03 AM

Whenever I make the case for a stronger U.S. dollar (USD), the feedback can be sorted into three basic reasons why the dollar will continue declining in value:

  1. The USD may gain relative to other currencies, but since all fiat currencies are declining against gold, it doesn’t mean that the USD is actually gaining value; in fact, all paper money is losing value.
  2. When the global financial system finally crashes, won’t that include the dollar?
  3. The Federal Reserve is “printing” (creating) money, and that will continue eroding the purchasing power of the USD. Lowering interest rates to zero has dropped the yield paid on Treasury bonds, which also weakens the dollar.

The general notion here is that, given the root causes of our economic distemper – rampant financialization, over-leverage and over-indebtedness, a politically dominant parasitic banking sector, an aging population, overpromised entitlements, a financial business model based on fraud, Federal Reserve monetizing of debt, and a dysfunctional political system, to mention only the top of the list – how can the USD appreciate in real terms? » Read more

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In theory, there’s nothing problematic with living in a world full of exponential growth and depletion curves – as long as the world does not have any boundaries. However, exponential functions take on enormous importance when they approach a physical boundary, as seems to be the case for oil in the very near future. Both discoveries and production indicate that we could be at oil’s exponential boundary already.

We can make a very strong case that both population and our money system are utterly dependent on the continued expansion of oil energy. But what if our exponentially-based economic and monetary systems, rather than being the sophisticated culmination of human evolution, are really just an artifact of oil? What if all of our rich societal complexity and all of our trillions of dollars of wealth and debt simply are the human expression of surplus energy pumped from the ground?

What will happen to our exponential, debt-based money system? Is it even possible for it to function in a world without constant growth? These are important questions, and they deserve answers.

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Our nation has a historic, never-before-seen level of debt and a historic failure to save. Along with debt and savings, one also has to consider assets. After all, does it really matter if you have no savings and a million dollars of debt, if you have assets worth 10 million?

An asset is an item of ownership that is convertible into cash. Assets comprise the total resources of a person or business, including such things as cash, notes, accounts receivable, securities, inventories, goodwill, fixtures, machinery, and/or real estate.

Debts are fixed, while assets are variable. When you take on a debt, there it placidly sits, growing larger until you make payments on it. Assets, on the other hand, are variable, sometimes gaining and sometimes losing value.

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In order to understand the urgency I feel about the issues covered in the Crash Course, you need to understand the power of compounding. If something, such as a population, oil demand, a money supply, or anything else steadily increases in size in some proportion to its current size, and you graph it over time, the graph will look like a hockey stick.

Said more simply, if something is increasing over time on a percentage basis, it is growing exponentially. With exponential functions, the action really only heats up in the last few moments. There is simply not a lot of maneuvering room once you hop on the vertical portion of a compound graph.