In my Gold Report ( a.k.a. “How to Purchase and Hide Gold Bullion Offshore”) earlier this year, I wrote that the USA, UK and other major countries are bankrupt. This may not be news to some readers, but the vast majority of the population carry on believing the mainstream media, in spite of all that has happened.
Recently, I received a call from a personal consulting client asking why I said the USA was bankrupt. I guess he had seen in the last few days gold surging ahead, breaking new records in terms of US dollar pricing, while the dollar was falling. Now of course that doesn’t necessarily mean gold is really gaining ground… it could just be taken as evidence of the dollar losing ground – since gold is real money. The Fed can’t print gold.
What was the evidence behind my claim of the USA being bankrupt? And how does one define a bankrupt country? And where do other countries, particularly the UK and Switzerland, fit into the equation?
I decided to answer these questions briefly here, for everybody’s benefit.
First of all, defining a bankrupt country is not easy. Iceland clearly went bankrupt in a more traditional sense. But Iceland was a relatively insignificant country of only a few hundred thousand people. My contention is that the USA is also bankrupt, but it is not so obvious because there are many other factors there supporting the currency – the greatest of which is China. While the USA is bankrupt, China is the richest country in the world.
Who says? And where is my evidence for that? No less authority than the Central Intelligence Agency, obviously a US government agency. Now don’t get me wrong, I know the CIA make mistakes, at least one of which led to a major war. But I think in this case the CIA’s figures are quite accurate… Click here to visit CIA site and see the Current Account Balance ranking
Take a look at that page, which shows the Current Account Balance. In plain language, that just shows what countries have ‘money in the bank’ and which are operating in a permanent overdraft mode!
China is at the top of the list, with a huge positive balance – not far off that of Germany, which occupies the number 2 position.
The United States is at the bottom, with a negative balance more than five times greater than the next largest debtor, Spain.
You’ll also see the UK, France, Spain and Italy down there with the USA.
Here’s another interesting page to look at: Gold and Foreign Currency Reserves
You’ll see China up at the top again, with huge foreign exchange and gold reserves. Most of China’s foreign exchange reserves are held in US dollars.
On this chart, the USA is at number 19, with foreign exchange and gold reserves just above Switzerland’s (but note the USA has smaller reserves than Malaysia, Libya, Mexico and Iran)
So compare the figures – the USA’s negative current account balance with the USA’s reserves – what is actually there backing the dollar – and you’ll see a huge discrepancy. The current account deficit is almost nine times the amount of the reserves.
Here’s how I interpret those figures: The fundamentals of the US dollar are a disaster. It is being supported only because the Chinese and US governments want to keep its value up, and to a lesser extent because other governments see the dollar as a reserve currency. This arrangement has suited many parties for years, but it doesn’t really suit China any more.
Many other governments see the writing on the wall (especially the BRIC countries – Brazil, Russia, India and China) and are diversifying out of dollars for their foreign exchange reserves as well as for other important activities like trading oil. Take a look at where those four countries appear on the list. Very interesting!
So my conclusion is that the dollar is doomed. It has to weaken a lot further. I’ve explained in other articles why I foresee the continuing stealth devaluation of the US dollar rather than an outright dollar collapse. (See related article links below) I just cannot see how anyone, not even the might of the US and Chinese governments working together, can support the US dollar long term. Of course they might succeed in the short and even medium term.
Another interesting factor affecting the US dollar is the commercial real estate timebomb in the USA. We just emailed Q Wealth members with some important information on that this morning. If you are not yet a member, that’s something else you missed out on!
The Euro is a more complicated matter because there are such widely divergent economies in the Euro zone (Germany and Spain for example). Many people believe the Euro will break up. It might, but somehow I think that is unlikely. I think the Euro could benefit, at least in the short term, from the run out of the dollar. If you are going to keep reserves in fiat currency, and you want to avoid the dollar, the Euro is the logical choice. That said, its fundamentals are terrible too.
What about Switzerland? Switzerland is actually looking good. If I wrote that it was in bad shape in the Gold Report, that was because of its huge exposure to Eastern European currencies – another timebomb that I won’t get in to here. The other thing is that Switzerland is inevitably very dependent on whatever happens to the Euro. But I would probably revise my opinion from earlier this year on Switzerland. I keep some of my own assets in Swiss Francs.
And the UK? A lost cause in my view. They are stuck somewhere between the dollar and the euro. Sterling might recover in the short term.
Finally, I should say that I am no currency expert. I hold fairly strong views but don’t seek to impose them on other people. My work is offshore structuring and managing offshore banking relationships. Managing money is a big responsibility that I prefer to leave to others. But my own portfolio is heavily invested in gold, and I believe the next decade will belong to emerging economies. Buying currency is something akin to buying shares in a country. And my currency bets are on emerging markets.
Note: Peter Macfarlane is joint editor of The Q Wealth Report, a unique privately-circulated newsletter dedicated to achieving personal freedom, wealth and privacy – and to securing wealth and nurturing it offshore. If you are new here and would like to see more views like this, be sure to check out our free five part course on the fundamentals of offshore investing and international asset protection. Sign up now without obligation for this free course and our weekly Q Bytes free newsletter.