In our recent article, How Long Can This House Of Cards Last? What Can We Do?, Urs Vrijhof-Drose remarked:

“Asia and Russia have a problem with the USD being the global reserve currency. …. We believe that this ongoing depreciation of the USD will continue….”

Charles F., a subscriber to both Chuck Butler’s Daily Pfennig and our letter, sent us a challenge:

“I am 78 & ok in retirement with status quo. What’s the odds that remains? Your interview spurred an idea for a future blog.

Good luck Mr. Phelps, should you decide to attempt this mission, your position in the blogger's hall of fame will escalate dramatically.”

It’s a doggone good question. Many of us are holding our own today, not sure what tomorrow brings; particularly if the USD loses world reserve currency status and inflation takes off.

Chuck’s initial reaction:
“Remember the movie Back to the Future II? It was a storyline about Biff, the town bully in his youth…. Old Biff (1985) stole the time-traveling DeLorean and made one trip back to 1955. He gave the 1985 Sports Almanac to his younger self, in the hopes of improving his life.

Sure enough, young Biff made lots of money betting on sports games because he already knew the outcome.

How would you like to have an investment almanac dated five years from now; knowing where to invest for a sure-fire profit?

Charles F. wants us to get in touch with our older self and describe what life will be like when the USD loses its reserve currency status and learn what separated winners and losers.

If we knew that for sure, we would be in the investor’s hall of fame next to other trillionaires. We can look at history, blend in common sense and experience and give readers our best shot.

How far do you want to go down that deep rabbit hole?”

We are about to find out!

We will break the interview into two parts.

Part 1, what will things look like; winners and losers.

Part 2, focus on how we are preparing to stay afloat and come away, winners…

DENNIS: My head is spinning, much to think about.

What are the perks of the country with the world reserve currency?

How does a country benefit from world reserve currency status?

What happens when they lose their esteemed status?

What should we expect?

CHUCK: Well, let’s start with the perks…

The reserve currency is held in significant quantities by central banks/ monetary authorities as part of their foreign exchange reserves. Worldwide demand for dollars has allowed the United States government to borrow at lower costs.

The reserve currency is used in international transactions, investments, and all aspects of the global economy.

The U.S. has an advantage when it comes to commodity prices since all are priced in dollars.

Also, so far at least, the reserve status allows the U.S. to print as much debt as the world can swallow, at very cheap levels.

When a country loses reserve currency status, those perks go away as the world no longer needs, or demands their currency to facilitate international trade.

DENNIS: When the world is awash with an unwanted currency, the value depreciates, and they experience high inflation. I was in Brazil in the mid-’80s when they experienced ridiculous inflation. 1000 bills were commonplace.

Leftover currency explains:

“Brazil went through waves of economic turmoil in the second half of the 20th century, during which the South American country switched its national currency many times. Two currencies with the name ‘Cruzado’ were in use in Brazil between 1986 and 1990:

The Brazilian Cruzado (BRC) was in use between 1986 and 1989. It replaced the Second Cruzeiro ‘Novo’ at a rate of 1 cruzado for 1000 cruzeiros novos. The Cruzado was replaced by the Cruzado Novo (BVN) at a rate of 1 cruzado novo for 1000 cruzados. In 1990 the Cruzado Novo was replaced by the Third Cruzeiro at par.

…. The value of Brazilian Cruzado banknotes was wiped out entirely by inflation. Cruzados are no longer exchangeable at the Banco Central do Brasil.”

If this were dollars, $1000 as we know it, would be worth less than a penny. The Brazilians went to work and struggled to feed their families while their currency was worthless in the rest of the world. Yet, some of the businesspeople I worked with did just fine.

How do you see that playing out?

CHUCK: Hold on tight, here we go down the rabbit hole…

So, losing the advantages I outlined would bring about quite a few changes in our economy, our value of the dollar, which affects your buying power, and life as we know it…

Any future weak dollar trend could easily trigger the loss of the reserve currency status, affecting everyone:

• A sudden dollar collapse would create global economic turmoil.

• Investors would rush to other currencies.

• Investors would rush to other assets, such as gold and commodities.

• Demand for Treasuries would plummet.

• Interest rates would rise, and possibly very high.

• U.S. import prices would skyrocket, causing inflation.

• The cost of commodities like Oil would increase.

As an example, I used to compare gas prices. In the U.K., gas costs $8 a gallon as compared to the U.S. being $3. We would all pay what everyone else in the world pays for gas.

Remember when the Beatles appeared on Ed Sullivan in 1963? They showed pictures of their hometown, Liverpool, England. Those pictures are as depressing now, as they were then.

The U.K. lost the reserve currency status after World War II; 20 years later they still hadn’t recovered, economically, and psychologically.

The U.S. would probably have to default on some debts; causing a major shift around the world out of dollars, and stocks. I’d expect damage to your investments, psyche, and your buying power.

All those reserves that foreign Central Banks hold in dollars, would be sold back to the U.S. or given back in trade, and no new reserves purchased.

U.S. Treasuries will be ignored at the auction window by foreign countries…

To borrow money the government would have to allow Treasury yields to rise to the point where there is enough risk premium to entice foreigners to buy them. That will have a negative effect on business and the market. Why would that be a problem? Today our government spends trillions more than they take in with taxes; financing the shortfall through borrowing. To borrow a line from Blanche DuBois; when the kindness of strangers disappears, how will the debt be financed?

Countries that experienced hyperinflation all experienced some level of civil disorder, riots, and calls for more money from a bankrupt government.

After paying the higher interest rates on our massive debt, we won’t have enough money to spend on anything else – you know, like Social Security, Medicare, WIC, food stamps, etc.

And, to finish this off – political promises cannot be kept to creditors and/or citizens.

DENNIS: During the Great Depression, our country was still primarily an agricultural society. Many people could live off the land, and we saw pictures of people waiting in line for food and for the possibility of a job. Things have changed, bread lines have been replaced by food stamps and debit cards.

I’m sure the government will do all they can to prevent social unrest. Wolf Street published an interesting chart showing personal income hit astronomical levels.

A large portion of the income was from stimulus, Unemployment Insurance, and Welfare – not earned income. Sending out worthless dollars to the citizens won’t solve anything.

While I’m sure they will announce some grandiose plan to save the day and stabilize things, there will be big problems that must be addressed. How did Great Britain work through the process?

CHUCK: That’s a good question… I went to Wikipedia just to lay the groundwork:

“The United Kingdom’s pound sterling was the primary reserve currency of much of the world in the 19th century and first half of the 20th century, until the UK almost bankrupted itself fighting the two World Wars, resulting in the Pound losing its status as the world’s most important reserve currency.”

After WWII, the nearly bankrupt U.K. went into a belt-tightening scenario. Austerity became a word they hated to hear; it was the only way the U.K. could get back on its feet. They didn’t print sterling and give away free money; they cut deficit spending. While it took more than 25 years for them to recover, they did.

Do you see the U.S. implementing austerity measures? I don’t… I’ll just say that, and let that sink in…

Let’s stop for a breath. Some investors, the winners, will stay ahead of the game; invested in hard assets. After the huge inflation losses, those assets would be sold for good money, and their true wealth protected. All Americans are likely to be affected, some will win, lose or stay even.

Dennis here. Like Charles F., we want to hold our own and enjoy life, regardless of what is happening around us. Next week, we look at how the winners did it.

>> Read Part 2: Back To The Future