Alasdair Macleod Predicts Dollar Collapse Before January 1, 2021
Alasdair Macleod publishes on the GoldMoney site. GoldMoney is a precious metals bullion storage firm.
Macleod has posted a forecast that is uncharacteristically precise in its dating and also uncharacteristically implausible. GoldMoney put this at the bottom of the article. "The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated." There was nothing expressly stated. So, GoldMoney is off the hook. This is wise.
Normally, taking apart an article as long as this one is, is not worth my time. My article would normally not be worth your time to read. But Macleod's article is so uniquely implausible, and so specific in its deadline, that it deserves consideration. It appears on a respected pro-gold website. So, if you happened to come across it, you might be tempted to believe it. I am trying to keep you from believing it.
The article will prove to be incomparably erroneous no later than December 31.
This article is not an example of someone who goes overboard in a moment of media-induced mania. This is leaping from the Golden Gate Bridge in full public view. "Look out below! Here I come!"
APOCALYPSE BY JANUARY 1
He has moved into the camp of the apocalyptics. With what is going on around the world these days, I can see why somebody would be tempted to do this. Central banks are inflating, especially the Federal Reserve. Government deficits are expanding dramatically. He is therefore tempted to believe that the long-predicted goldbug apocalyptic end of fiat money is finally upon us. Previously, he wisely resisted the lure of the great "I told you so," but now he has succumbed to it.
He predicts a complete collapse of the dollar by the end of the year. I mean complete. This means a dollar of no value. That means prices in the range of trillions of dollars for a loaf of bread. In other words, he thinks we're going back to something like hyperinflation in Germany in 1923. He writes:
Life will be very different, and those not prepared for it, principally by retaining a store of non-fiat, sound money, which can only be physical gold and silver until credible substitutes arise, will face impoverishment. Measured in real money, the value of non-financial physical assets will collapse due to the preponderance of desperate sellers to whom survival is most important, even though priced in worthless fiat their prices will have risen. The experience of inflationary collapses in Germany and Austria in the early 1920s showed the way, when country estates went for almost nothing in gold-back dollars and $100 would buy a mansion in Berlin.
He is not predicting this for some day, over the rainbow. He is predicting it by January 1.
At this stage of an evolving economic and financial crisis, such thoughts are necessarily speculative. But an imminent banking crisis is now a near certainty, with most global systemically important banks in a weaker position than at the time of the Lehman crisis. US markets appear oblivious to this risk, though the ratings of G-SIBs in other jurisdictions do reflect specific banking risks rather than a systemic one at this stage.A banking collapse will be a game-changer for financial markets, and we should then worry that the Fed has bound the dollar’s future to their fortunes.
The dollar could fail completely by the end of this year.
So, here are my counter-predictions for December 31:
1. CPI price inflation, year over year, will be under 2%.
2. No major U.S. bank will fail this year.
3. Interest rates on the 10-year Treasury bond will be under 2%.
ASSERTIONS VS. EVIDENCE
The article uses jargon. He does not define his terms. He terrifies people, but he refuses to explain what he is talking about: G-SIB. Here is his first reference. He uses it half a dozen times to make his case.
At this stage of an evolving economic and financial crisis, such thoughts are necessarily speculative. But an imminent banking crisis is now a near certainty, with most global systemically important banks in a weaker position than at the time of the Lehman crisis. US markets appear oblivious to this risk, though the ratings of G-SIBs in other jurisdictions do reflect specific banking risks rather than a systemic one at this stage.
The readers deserve to know what G-SIB means. Otherwise, they are forced to take his word for what he is saying. When readers are being told that the world that they now live in will be gone by the end of the year, they deserve to know on what basis, other than techie jargon, he is making this assessment.
Here is what it means, according to Wikipedia.
Certain large banks are tracked and labelled by several authorities as systemically important financial institutions, depending on the scale and the degree of influence they hold in global and domestic financial markets. Since 2011, the Financial Stability Board has published a list of global systemically important banks (G-SIBs), while individual countries also maintain their own lists of domestic systemically important banks (D-SIBs), also known in Europe as "national SIFIs". In addition, special lists of regional systemically important banks (R-SIBs) also exist.
Readers should not have to go to Wikipedia to interpret what a writer is saying. The writer should say it.
It means big banks. He then provides a list of the vulnerability of big banks around the world. I don't know where he got the data. He doesn't provide any live link. In other words, we are supposed to take his word for it. But I will go along with the game briefly.
Take a look at these two lists. The key statistic is leverage. The greater the leverage, the more likely that a bank will fail. The most leveraged banks are foreign. The least vulnerable are American. This calls into question his thesis that American banks are uniquely vulnerable. They are in fact the least vulnerable banks. They are the banks of choice for large depositors' money.
Here is the top of the list: high leverage.
Here is the bottom of the list: low leverage.
He never mentions this obvious discrepancy between his predictions about the American banking system (imminent collapse) versus his most important evidence: low leverage. The paragraph following this table is not even remotely connected to the data in the table.
It seems hardly possible that the US banking system will survive the current supply chain disruption without help. The added bad news is that the US G-SIBs are rated much more highly in stock markets than their Chinese, Japanese, Eurozone, Swiss and UK competitors, shown in Figure 1 above.[i] It indicates that a systemic failure in dollar-denominated financial markets is not widely expected, given the generally higher market ratings afforded to US G-SIBs than for those in other jurisdictions. This probably explains why this topic is not yet a significant issue for dollar investors, though individual bank failures are more obviously an issue in other jurisdictions, where some G-SIB price to book ratios are below 30% while those of US G-SIBs average 93%.
He then says that the failure may be outside the United States. Obviously, the failure would be outside the United States. Where else could it be? This failure, he says, is going to force the FED to "backstop" the bank, no matter where it is. He doesn't describe what this backstop is. He doesn't describe how the FED will provide it. He is completely silent on any of this.
The next significant event therefore will almost certainly be the failure of a G-SIB, if not in America, then elsewhere. Given the sheer scale of the problems in supply chains in all currencies and the accumulating bad debts attributable to lockdowns it could happen in a matter of weeks. Presumably, failing banks will be taken into public ownership with the Fed backstopping it with yet more inflationary finance.
How is the Federal Reserve going to take public ownership of a foreign bank? The foreign bank's assets are mostly in its nation's currency. The bank is controlled by a foreign central bank. So is its currency. He doesn't explain any of this. There is no coherence to his logic. Public ownership by the FED isn't going to happen.
Let's say that a foreign bank has some dollar-denominated assets. These assets are deposited in American banks. They are not held in a foreign bank and a foreign central bank's jurisdiction. The FED regulates these American-based accounts. What will happen to the value of these dollar-based assets in relation to the currency of the collapsing foreign bank? Think it through. The dollars will go up in value in relation to the foreign currency.
Here is why. The foreign bank's accounts in its own national currency unit are under the jurisdiction of the foreign central bank. If the foreign central bank wants to save the faltering domestic bank, it will have to create money. If it creates domestic money to save the bank, probably by turning this money over to a rival bank so that the rival bank can purchase the assets of the failed bank, this is going to depreciate the value of that foreign currency in relation to the dollar. Meanwhile, the dollar-denominated assets in that shaky bank will be rising.
In short, the scenario he describes -- a falling dollar -- will cause exactly the opposite effects that he concludes are inevitable. That is to say, he doesn't understand what he is talking about. He can't think through the simplest scenario regarding what has to happen if a large foreign bank fails.
The Federal Reserve will have nothing to say about that bank. It's not inside the Federal Reserve's jurisdiction. In any case, why would the Federal Reserve intervene? Only for this reason: to keep the dollar from rising in value in comparison to the foreign currency used by the bank that has failed.
Having gotten everything backwards, he then proceeds to his next shocking boldfaced headline: The dollar’s inevitable descent. Note: a descent is not a collapse. But he is not predicting descent in his article; he is predicting collapse.
He offers this reason for this inevitable descent: "With a rapidly escalating budget deficit the US Government has a growing funding requirement, the cost of which already absorbs $400bn in interest charges annually." I looked it up. The $400 billion figure was for 2018. That was the last time it was a $400 billion payout. In 2018, it rose to under 9% of the annual budget. The statistics are here.
The idea that the dollar is seriously threatened in the next six months by interest payments on the debt is ludicrous. We are in the midst of a massive increase in the deficit. It has gone up by over $3 trillion this year. Even $600 billion in interest payments is chump change. Nobody pays any attention to it, and nobody should. With what is happening to the rest of federal budget, this isn't worth talking about.
HE MISUNDERSTANDS POST-1934 BANKING
There is a classic sign of a man who absolutely does not understand modern banking. This is when he says that banks are threatened by withdrawals of currency.
American banks have not been threatened by withdrawals from currency in the United States ever since 1934: the government's creation of the FDIC. There has never been a modern bank run in the United States based on withdrawals of currency by depositors. That's because currency is barely used in the United States. At least half of the paper money in the United States is sent abroad. It functions as a secondary currency around the world, especially in Latin America. I have written about this repeatedly. Go here: https://www.garynorth.com/public/20881.cfm.
We don't use currency for most of our transactions. We use credit cards or debit cards. Nobody uses currency regularly in the United States except extremely poor people who don't have bank accounts. Their impact on the American economy is essentially zero. American finances, American markets, and the American economy are not dependent in any way on pieces of paper with politicians' pictures on them.
Here's what he writes:
As noted above, the next market shock is likely to be a systemic failure in the banking system. It matters not where that occurs, but when it does it makes bank depositors autarkic. Not only do they withdraw funds from banks they deem to be at risk thereby increasing their problems, but they also reduce cross-border currency exposure.
If you are a large depositor, which means a fund with more than $100,000 in a bank, you can't withdraw paper money. To protect your money, you must move it to another bank. It is impossible to take money out of bank A without simultaneously transferring it to your account in bank B. I mean this is literally impossible. But Macleod doesn't understand this. He doesn't understand the fundamental fact of modern banking: There cannot be a bank run in currency.
If a bank gets in trouble with large depositors, it is in trouble because depositors are not rolling over their deposits of digital money. This means the bank has to pay a depositor the money that the depositor is now transferring to a rival bank. There cannot be a systemic bank run in the United States. It is not possible. There can be a bank run on a particular bank. This is why banks do occasionally go out of business. But these banks go out of business only because rival banks are cleaning up at their expense. Rival banks are getting their accounts, i.e., their assets.
Which banks are the most solid banks internationally? The banks at the bottom of Macleod's list. These are large American banks. This means they are the least vulnerable. They are the banks most likely to have dollar-denominated assets transferred to them in the case of a foreign bank that is going under.
Consider this scenario. A foreign bank suffers withdrawals from institutions that have dollars deposited in the American branches of the foreign bank. These depositors will then transfer their digital dollars to other banks, probably American banks, but always banks regulated by the FED. So, if a highly leveraged foreign bank gets in trouble, the big winners are going to be American banks if that bank holds dollars in their depositors' accounts. Note: this only applies to dollar-denominated accounts. Accounts denominated in a foreign currency are under the jurisdiction of the foreign central bank. This has nothing to do with the Federal Reserve System.
Macleod's article does not discuss any of this. This is the simplest kind of analysis, yet it seems not to have occurred to him.
Having dug an enormous hole for himself, he keeps digging.
The dollar is most exposed of all currencies to the latter risk: on last known figures foreigners owned about $25 trillion in securities, short-term paper and bank deposits, while Americans held roughly half that invested mainly in illiquid production facilities abroad, limited portfolio exposure to listed securities and with very little liquid foreign currency exposure.
If you were a foreigner, and the largest bank in your country were going belly-up, you would try to get your money out of that bank. You would send your euros to a German bank if you were in the euro zone -- a solvent German bank. You might send them to an Austrian bank or a Dutch bank. But this has nothing to do with dollars. Why would you get rid of dollars? If a bank in your country is going bust, you might want to get into dollars. But the only way you can get into dollars would be to have your faltering bank deposit your dollars in an American bank or in an American branch of a German bank or a Dutch bank. You would try to do this before your bank went belly-up. If you wait too long, you might lose your money. But that has nothing to do with the dollar. That has nothing with the Federal Reserve System.
HE FAILS TO GRASP THE EXTENT OF A COLLAPSE
Then he asks his readers to use their imagination to foresee the utterly improbable scenario that he has presented. Remember, it's going to take place in their lives before December 31.
Just imagine the consequences of a systemic failure. The spell cast over financial assets will be broken. First, investors and speculators are likely to turn their attention to equities, being obviously the most overvalued financial assets at a time of intensifying crisis. Foreign investors will join, selling down their portfolio exposure, repatriating some, if not all of the proceeds by selling dollars as well. Next, with a falling dollar and a growing sensitivity to the political aspect of the crisis, market participants will reassess the US Government’s funding requirements and question the yield suppression policy of the Fed. Dollar selling seems bound to intensify.
I ask an obvious question: Why are investors going to sell American stocks but not all stocks? The national stock markets usually rise and fall together. The BBC publishes a page every day in which it tracks the rise and fall of the major stock markets. They rise and fall together. You can monitor this here.
Second, I ask another obvious question: If you sell stocks, what will you buy? You can buy government debt. You can buy the debt of your own country, or you can buy the Treasury debt of the United States. Maybe foreigners will sell their American stocks and buy their domestic currency. But Macleod has already shown that the most vulnerable banks are foreign banks. Why would somebody in the midst of a panic who owns dollar-denominated stocks not simply put his money into a solvent bank or into Treasury securities? He may think the dollar will go down marginally. But Macleod is not talking about marginal declines. He is talking about a collapse. He is talking about a worldwide collapse.
Why will there be a worldwide collapse? Everyone has to have his money in digits. People have ownership certificates, but these are all denominated in digital money. If the digits all disappeared overnight, 90% of the world would die. It's really simple. If all the banks fail, we literally die. We can't buy anything. We can't go to the store and get anything we need. Nobody will be delivering goods to the supermarkets. The whole world economy collapses, and the division of labor collapses. We die.
He does not mention this. That's what he's really talking about, but he never mentions this. He's only talking about digits. He's only talking about assets denominated in digits.
OVER THE RAILING
Then he leaps off the bridge.
The circumstantial evidence that the dollar will collapse before the year-end is mounting. Cassandra opened her casket, the evils escaped, and only hope remains trapped.
On the contrary, the circumstantial evidence doesn't point to anything like this. He is talking about something that has never happened before in post-1781 American history. Yes, it happened during the American Revolution to the continentals, but it has never happened since then.
The USA is the strongest economy in the world. The dollar is the reserve currency for the world. Everybody wants to sell to Americans, who pay in dollars.
He describes a collapse. But, before he begins, he admits that he could conceivably be wrong. Look, when you come to readers with a totally apocalyptic scenario, and you tell readers that the evidence is overwhelming, you don't go wishy-washy before you escalate your rhetoric to the point of utter implausibility. Yet that's what he does.
Or so it seems. We cannot divine the future. We can only sift the evidence, be aware of common fallacies and avoid the temptation to wrongly extrapolate from yesterday into the future. While our method may be better than the macroeconomic forecasting beloved of the establishment, a predicted outcome is never reality.
His method isn't better than Keynesian macroeconomic forecasting. It is vastly worse. His method is to present evidence in favor of one scenario, and then, without explanation, offer a completely rival scenario. There is no method here. There is an inability to follow one's own logic.
And it is possible the US Treasury might attempt a reset, perhaps using Treasury dollars, otherwise known as greenbacks, which were last issued in 1971. But without axing government welfare commitments to the American public, returning to balanced budgets and abandoning Fed dollar denominated debt this sort of legerdemain is unconvincing. Furthermore, the dollar’s reserve role for other currencies would have to be abandoned because of the monetary inflation involved in Triffin’s dilemma. And other currencies tied to the Fed’s dollar held in their reserves would still face their own collapse.
He mentions Triffin's dilemma. He doesn't define it. Triffin was a Keynesian economist who said that a nation could not run huge balance of payments deficits and still maintain its currency's status as the world's reserve currency. For over 60 years, we have waited for this prediction to come true. The dollar remains the world's reserve currency, despite Triffin and anybody else.
Central banks hold the dollar in order to keep the dollar's value high. This enables domestic exporting industries to sell more goods to Americans. Since most governments are mercantilistic at heart, they want to subsidize the export sectors of their economies. So, there is pressure put on central banks to buy dollar-denominated Treasury debt. This is why the dollar remains the world's reserve currency.
This could change, but if it does, it will change slowly over the next decade or so. It is not going to end by December 31.
EITHER A GREENBACK STANDARD OR A GOLD STANDARD
He offers two radically different scenarios. The FED will choose one or the other.
First, he offers a pure paper fiat money: greenbacks.
A reset abandoning the Fed’s dollar in favour of greenbacks is possible. But history has shown that the introduction of a replacement currency for one that has collapsed fails unless government financing by monetary expansion is demonstrably abandoned. Only time will tell whether in a presidential election year the US Government musters the clarity of purpose to implement a new lasting dollar regime.
He resurrects the memory of greenbacks! That was a fiat money experiment for two years in the Civil War when the Union government printed pieces of paper that were not backed by gold. They were green. That's why they were called greenbacks. That policy ended when Lincoln refused to sign any more laws for issuing more greenbacks after 1863.
Besides, what good would greenbacks do? We don't use paper money to buy goods and services. What good would fiat paper money do to huge investment funds that are trying to buy and sell billions of dollars worth of digitally priced assets? They wouldn't do any good at all. The scenario is completely hypothetical. It's not just hypothetical, it's utopian. It has nothing to do with the modern economy.
Greenbacks are just another means of inflation. Most people have never seen a greenback. They were Treasury notes. They have completely gone out of circulation over the last 50 years. Why he would mention the greenbacks is beyond my ability to comprehend. The greenbacks have nothing to do with anything, and they haven't had anything to do with anything since 1865.
For my critique of the nation's leading greenbacker, Ellen Brown, go here.
Second, he shifts to the opposite of the greenback: the gold standard. The gold standard's advocates and the greenbackers have been at war with each other intellectually ever since 1862. You can't logically hold both positions. They are completely antithetical positions. Macleod says the FED will probably adopt one or the other, despite the fact that no living FED official has ever publicly advocated a return to the gold standard, and no FED official has ever publicly recomended greenbacks, which are issued by the Treasury, not the FED.
The US Treasury says it still has over 8,000 tonnes of gold. If it is willing to drop its neo-Keynesian economics and its long-standing denial of gold’s monetary function, America could reintroduce gold convertibility for the greenbacks. This would probably be a last resort. It reneges on the Fed’s balance sheet note — which in these conditions would be its only significant asset, involves the abandonment of the welfare state and America’s longstanding geopolitical aims, and it allows China to gain potential advantage by displacing the dollar with a more convincing gold convertibility of its own.
This is utopian. He doesn't show how this transfer to a gold-backed digital system could be done. How would the world's capital markets re-price dollar-denominated assets in gold? Nobody ever talks about this. That's because it's utopian. There is no way for the Federal Reserve to move back to gold without collapsing the world's economy. It would destroy the world's stock of economic knowledge, as revealed in prices.
To do this, the FED would first have to have to face something comparable to the hyperinflation of Germany in 1923. That is what he says is going to happen. "The experience of inflationary collapses in Germany and Austria in the early 1920s showed the way, when country estates went for almost nothing in gold-back dollars and $100 would buy a mansion in Berlin." Yet this has not happened to any industrial country above the equator since 1923. That is to say, it is ancient history. It is irrelevant history.
The obligations of Medicare and Social Security extend out for 75 years. No country has experienced hyperinflation longer than about three years. So, all these government debts would remain. What he is talking about is a complete social revolution. He understands this. That's why he wrote the following: this "involves the abandonment of the welfare state."
We are supposed to believe that this is going to happen between now and December 31. Maybe it's going to happen before November. Is Trump going to abandon Medicare and Social Security? If he does, is Biden going to lose? Will Republicans never vote for another deficit again? This is bizarre. I have never seen anybody in the gold movement propose anything this out of touch with reality.
Here is what he predicts will occur before January 1:
A banking crisis in the coming weeks is an increasingly likely event, given the scale of disruption to supply chains. The escalation of bankruptcies and of non-performing loans worldwide will almost certainly take the banking system down. It will be a watershed, a wake-up call to all those who expect a return to normality after the coronavirus passes.
On the contrary, it will be banking as usual.
CONCLUSION
If Macleod has a reputation for accurate analysis, on December 31, this article will damage it. He will be in damage control mode for the foreseable future.
He tells people to buy gold and silver. Why? In order to survive a complete collapse of the dollar by December 31.
Life will be very different, and those not prepared for it, principally by retaining a store of non-fiat, sound money, which can only be physical gold and silver until credible substitutes arise, will face impoverishment. Measured in real money, the value of non-financial physical assets will collapse due to the preponderance of desperate sellers to whom survival is most important, even though priced in worthless fiat their prices will have risen. The experience of inflationary collapses in Germany and Austria in the early 1920s showed the way, when country estates went for almost nothing in gold-back dollars and $100 would buy a mansion in Berlin.
My prediction: life will be pretty much the same at the end of the year as it is today unless there is a return of the coronavirus, and the governors lock down the states again. But even that would be only marginally different, not radically different. It will have nothing to do with the collapse of the dollar. It will have nothing to do with the collapse of an American bank. The US dollar will be the reserve currency of the world at the end of this year, next year, and the year after that.
I have gone after Macleod because he is representative of long-term gold bugs who want to believe that the latest crisis is going to bring their long-term predictions to fruition. They think the world is finally going back to the gold standard (or maybe a greenback non-standard). The world is finally going to turn out the way they have predicted for decades. They are going to be proven right after all.
Finally, Macleod thinks, his theoretical ship is coming in. Either the gold ship is coming in or else the green ship is coming in. Either way, he will be vindicated!
No, he won't.
If you haven't bought any gold, buy some. But don't worry about your digital money in the bank. Prices are not going to skyrocket this year or next year. Even if they go up 4%, year over year, by the end of 2021, that would not be hyperinflation.
We're not going back to a gold standard. We're not going back to a greenback standard. Digital money will still buy goods and services in the marketplace even if some governors lock down the states again.
There is not going to be a collapse of the dollar in 2020 or 2021.
You can take this prediction to the bank.