Looking back at Richard Heinberg's 2004 prediction of a dollar collapse

[JurisDoctorOfDoom]

In light of the events of the last week, this is probably worth a relook. Written in August 2004:

For decades the US dollar has served as the world's default currency. The phrase "sound as a dollar" has expressed the faith and confidence of generations, not only of Americans, but people worldwide.

That situation is coming to end, and the consequences will be far-reaching.

The conclusion, emphasis mine. Note that the current account deficit is three times what it was when Richard wrote this five years ago. Government and consumer debt have also exploded since then, which is really hard to wrap one's head around when you think just how heavy they were at the time, only a few years ago:

To understand why the dollar is America's Achilles heel, a metaphor is useful. Imagine being able to write checks and then convince the people you give them to not to cash them. Perhaps they find the checks themselves comforting to hold onto; or maybe you have a friend who agrees to sell groceries or gasoline for your checks only, and then happily stockpiles and re-circulates them. In either case, you may be tempted to write checks for much more than you have in your bank account. As long as the checks themselves are regarded as valuable and not cashed, you get a free ride. But if people stop finding your checks comforting to hold onto, or if your friend starts selling groceries for other people's checks or for gold or silver, then the game is up. It will be revealed that your account is overdrawn and you will be in trouble.

The metaphor is not perfect. In fact, every nation in the world is attempting to write checks beyond its means. But the US has managed to do by far a better job of it than any other nation. The checks we are not talking about are not just hoarded paper dollars (though there are billions of these stuffed in mattresses around the world) but dollar-denominated investments and securities, including T-bills, stocks, and mortgages. Currently the US is running a $700 billion per year trade deficit, this on top of trillions in government debt and trillions more in consumer debt. No other nation in the world comes remotely close to this level of bad-check writing, on either a total or a per-capita basis.

If a run on the US dollar were to occur, then the only financial solution would be to create even more dollars (presumably through government borrowing), which of course wouldn't actually solve the problem and would in the long run make matters worse. The currency would become almost worthless, and in the process real wealth (land, factories, and natural resources) would be confiscated and turned over to creditors.

What could cause this to happen? A decision by OPEC to openly sell oil for euros could be a trigger. Some oil is already quietly being sold for euros, and several countries including Iran and Saudi Arabia have floated the possibility of valuing oil against a basket of currencies (meaning, effectively, dollars and euros). The Arab OPEC states have also toyed with an idea that must be equally worrisome to Brussels and Washington: to sell oil for gold (the gold dinar). If and when this happens, the full wrath of America will descend upon the Arab Middle East - and that's why it hasn't happened yet.

The other likely trigger would be a collapse of the US economy from within resulting from a bursting of the mortgage bubble. The recent US economic "recovery" arose almost entirely from low mortgage rates (set ultimately by the Fed), which allowed families to refinance their homes, cash out some of their equity, and use the money for immediate consumption. With oil prices soaring, the Fed will eventually have to raise interest rates steeply in order to contain inflation. But this may cause millions of homeowners to default on their currently low-interest adjustable-rate mortgages. In that event, property values would plummet, and with them would go the stock market and the economy as a whole.

Full article: http://archive.richardheinberg.com/museletter/149

[DarthBruder]

Written in August 2004

Holy.......

[cygnus]

Written in August 2004

Holy.......

Yeah, exactly.  He's been right on some pretty important points, hasn't he? 

[ptyol]

This makes me want to look at more of his predictions!

[picasso moon]

In January '08, he stated that it's very possible we could experience inflation and deflation simultaneously. The last few days, several web commentators have broken out of the inflation-deflation debate parameters to also argue for such a position, including Chris Martenson (whose guest post on Zerohedge has a thread here) and Charles Huge Smith.

[mtlouie]

In January '08, he stated that it's very possible we could experience inflation and deflation simultaneously. The last few days, several web commentators have broken out of the inflation-deflation debate parameters to also argue for such a position, including Chris Martenson (whose guest post on Zerohedge has a thread here) and Charles Huge Smith.

That's the thing I could never understand about the arguments the inflationists/deflationists were having.  It seemed pretty simple to me:

Milk is $10+ a gallon (inflation) and nobody has any money (deflation.)

Thanks for posting this, Matt.  It's always interesting to go back to articles like this.   More doom for the day. 

[ArmaGoof]

In January '08, he stated that it's very possible we could experience inflation and deflation simultaneously. The last few days, several web commentators have broken out of the inflation-deflation debate parameters to also argue for such a position, including Chris Martenson (whose guest post on Zerohedge has a thread here) and Charles Huge Smith.

This macro point of view is also represented at a more local level:

There is a huge amount of "Plastic Pumpkin" inventory gathering dust on shelves and in warehouses.  Eventually, it will HAVE to be liquidated, somehow, some way.  That means exceptional bargains on the one hand and higher costs for "necessities" on the other hand to make up for the loss.  Currently, retailers are being somewhat sneaky in packaging the higher cost (i.e. less product for same price).   The definition of necessities will continue to narrow throwing more and more inventory into the "Plastic Pumpkin" category.  The net effect for consumers, at least, will be stagflation until these worthless inventories begin to run out.  Even then, those products will provide recyclable inventory through yard sales, Goodwill, estate sales, repo sales, etc.

In the meantime, gov will impose more taxes and fees in a futile attempt to make up the shortfall in revenue, forcing more consumers to find what they need from each other as they'll have money for neither necessities, nor taxes.  Merchants won't dare raise prices too high, out of fear for completely empty shops.  But it will be a catch-22, as THEIR creditors will be screaming for what is owed them.  This will eventually force even bare necessities into the "Plastic Pumpkin" category by virtue of price alone.  Almost all corporate commerce will cease.  Once the banks have confiscated everything, they'll find themselves boxed in - having ruined the credit of everyone.  The trillions in their vaults will be useless and thus valueless.

[HungryRaven]

This problem was figured out many millenia ago and the solution was found.  50 year jubilee.  Now that has been halted multiple economies and a even some civilizations have crashed over this problem.   I think the 50 year evening out of disparity was eliminated on purpose.  Not just for the benefit of the rich and powerful who had possession of the land taken from tax delinquents or were getting the interest from family crushing debt.  But because Earth is on a program which the programmers desire chaos and failure regularly.  It's the best way to keep the people under their thumb.  But they can't always just point a finger and we attack each other so destroying stability is another way to insure bloodshed and disruption and to set back any progress.   

[ninakat]

Thanks for that, Matt. Great article, amazingly prescient. But I've always had a strong gut feeling about Heinberg that he's the real deal (smart, no bullshitter, and free of the mental disease called Denial). And he questions the gov't story about 9/11. What more could I ask for?!

[Emeline]

Very accurate - thanks.

[berkeley]

Thanks for that, Matt. Great article, amazingly prescient. But I've always had a strong gut feeling about Heinberg that he's the real deal (smart, no bullshitter, and free of the mental disease called Denial). And he questions the gov't story about 9/11. What more could I ask for?!

1. someone who's renounced participation in terminal cities (e.g. Oakland) . . . because they mean almost certain death in a fast crash / serious supply disruption

2. has joined, or started, some sort of sustainable subsistence operation (e.g. farm), which allows his example/precedent instruct more than a periodic narrative on ideas-of-collapse

3. has stopped wasting time trying to convince psychopathic collectives (e.g. branches in a corporatocracy) that a "powerdown" is needed, realizing that for them resource limitations are a function of population numbers - numbers subject to strategic "adjustment". 

4. someone who's a really good musician, or has an endless repertoire of fantastic jokes? 

. . .

[slow_dazzle]

Heinberg is one of the 'serious' types, which is partly why he is not a megastar outside of the PO field. Our dumbed down society is infantile in its thought processes and tends to place emphasis on appearance, rather than substance. For example, Alex Jones' web site is a classic example of the triumph of glitzy messages over serious discourse.

I instinctively liked Heinberg from the outset because there was absolutely no hype or self-promotion in his message. The guy is a deep thinker. Anyone who has analysed the role of agriculture, in the development of a society such as ours, is  intelligent and worth heeding.

As an aside, I can hear a buzzard calling somewhere above my house. Ordinarily I'd welcome this as a sign that birds of prey are on the increase. In light of the coming collapse I think I'll check that the windows are all closed.