Risk Of A US Dollar Crisis: Benign or The Austrian Endgame?

``The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”-Ludwig von Mises, Human Action, The Monetary or Circulation Credit Theory of the Trade Cycle

As a final thought, many people ignore the risks of a US dollar crisis.

Crisis happens because they are an unexpected. It is a black swan or statistical fat tail. The US housing crisis was a much anticipated outcome yet many got caught owing to the belief that they would be able to get out on time. They never expected a buyer’s boycott.

Another, the repercussions from the US housing bust was largely unforeseen. Nobody saw that the investment grade AAA papers would lose sizably in value. Nobody predicted the extent of the contagion from the mortgage bust which would lead to a seizure of global credit markets.

Today, the US dollar continues to fall. The conventional expectation is that the declining trend of the dollar will be orderly. The culmination of the US dollar crisis is presumed to be a benign “overshoot” of the currency’s valuation which would fall low enough to attract enough foreign buyers and reverse the decline. We hope this is the right scenario.

However, the Austrian school’s endgame outcome is different. The risk from a US dollar crisis probably suggests of the collapse of the global currency standard and the end of the US dollar as the world’s de facto foreign exchange reserve. It also suggests that the world may experience a bout of hyperinflation, as the entire chain structure of paper money collapses. To quote Anthony Mueller, The End of Dollar Supremacy, ``Losing trust does not mean that there must be a ready substitute. On the contrary: when distrust will emerge towards the US dollar this would affect the attitude towards all paper currencies. In the final stages of the currency crisis, the dollar will most likely devalue not so much against the euro and the yen, but all of these currencies and most of the rest will devalue drastically against gold.”

Yet the common denominator of countries that experienced hyperinflation had war related expenditures, protectionist walls and uncompromising leadership which pursued onerous welfare policies that eventually resulted to a lose of faith in the country’s currency. These ingredients have been not absent from today’s landscape. The difference is at least we remain globalized.

I came across a sober article from a blogger Steve Waldman who suggests that today’s commodity boom could be seen as “a run on central banks”.

To quote Mr. Waldman (highlight mine) ``Capital devoted to precautionary storage would be better employed building new enterprises, laying a foundation for tomorrow's prosperity. But claims on future money are only promises, easily broken or devalued. A run on central banks, a flight from financial assets to stored goods, sacrifices the hope of future abundance for certain present scarcity. Governments can shut futures exchanges, confiscate gold, ban "hoarding, profiteering, and price-gouging". People will hoard anyway if they don't believe in the paper. People are losing faith in financial assets for good reason. Rather than organizing productive economies, the machinery of finance has recently functioned as an anesthetic, masking the pain while resources were mismanaged and stolen. We need a solid financial system, but confidence cannot be imposed or legislated. It will have to be earned. There has to be a plan. Earnest promises to do better soon won't suffice. Nor will yet another drink from the punch bowl.

Since the pillar of the world’s Paper money standard depends solely on faith on the credibility of the issuer of money, all it needs to topple the entire system is to lose such binding faith. I hope we don’t lose it.