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Your Property, Other Investments & The Imminent Collapse of the US Dollar?

As an investor, I keep myself updated with current economic and global news as much as possible. I am not an economist and neither do I profess to be an expert on global economics. However, as investors in a very turbulent financial world, it is highly important for us to keep abreast of the world’s financial history and current dynamic financial forces that are shaping our financial world and how it will impact our investment decisions now and future.

For all financial crisis, economic successes, regional prosperity and stability, and the creation of many wealthy Singaporeans due to the surge in property prices for the last 2 decades in Singapore, we can attribute most of these phenomenon growth, not only for Singapore but in Asia as well, primarily to one giant economic power of the 20th and 21st century, the USA.

For now, I like to share my personal views on one very important aspect which may concern you as an investor. (I.e. Property Investor)  The US Dollar. The US Dollar and its monetary policies have wide ranging global effects on global financial markets. With the looming ‘fiscal cliff’ and constantly printing large amounts of money, with another possible round of QE 4 in 2013, there are rumours saying that there is a possibility of a collapse of the US dollar, while some say such possibilities are remote.

Let’s talk about the strength of the US currency which is currently the anchor currency of the world. Here’s a little history here about anchor currencies and where we think they might end up. This is not meant to be a boring history class but it’s vital for any investor to know and understand past events and how they will shape our financial future.

History of anchor currencies

In ancient times, India ran huge trade surpluses with the Roman Empire. Every year, India took 50 million sesterces from Rome. That huge trade imbalance implied a continual drain on fold and silver coin, causing shortages of these metals in Rome. In modern times, Romans faced a monetary squeeze.
Rome responded by reducing the gold/silver content which led to sustain inflation in the empire. Heavily indebted and reckless spending throughout the centuries are some of the reasons Rome fell from being a world dominant super power. However, Roman coinage continued to be accepted long after it must have been obvious that it’s gold or silver content had fallen.

In 16th century, Spain is superpower. Between 1501 & 1600, 17 million kg of pure gold flowed from the Americas to Spain, which spent the money on wars in the Netherlands and elsewhere. With the colonisation of the Americas after 1492, great amounts of silver began to flow from the New World to the old. Especially the silver mines in Bolivia and Mexico gave rise to large silver coins. Within decades after Columbus’ discovery, silver coins were minted in the Americas and shipped to Spain. This increase in liquidity caused both an economic boom and disastrous inflation consequences across Europe, leading to one of history’s worst global financial crisis, the Tulip Bulb Craze Mania in 1636.

Spain becomes indebted. Defaulted 3 times in the 17th century alone – 1607, 1627, & 1649. (Greece defaulted 5 times since 1826.) Yet Spanish coins remained the main currency used in world trade right up to the end of the American Revolution (1775-83).  Most countries shifted to the gold standard by the 1870s.
Pound sterling continued to be a world currency until well after World War 2. Even as late as 1950, more than half a century after US had replaced Britain as the world largest industrial power, 55% of foreign exchange reserves were held in sterling and many countries continue to peg against it.

A new economic order was established after World War 2, with the US as the anchor country. Most countries including Britain were hugely indebted (Owing Money) to the USA for funding their expensive war efforts. The Bretton Woods system linked the US dollar to gold at US$35 per ounce, with other currencies linked to the US dollar.
The flaw in the system was that it underpinned global economic expansion for only as long as the US was willing to provide US dollars by running up deficits- deficits that would undermine America ability to maintain the US$35 /ounce gold price.

The Bretton woods system collapse in 1971 because governments around the world, especially the USA, needs huge amounts of money to finance their political ambitions, wars and other needs of their own country. Having money pegged to gold has tremendous limitations for further monetary expansion.

I am led to believe from history, an anchor currency will outlived its world power even centuries after its financial collapse or crisis. That is to say, the US dollar will still be around even at the end of our generation or even our children’s. It will be hard though to predict the status quo a century from now.

The USA Inherent Strengths Versus Other OECD countries Which Are Facing High Debt Problems Currently:  (Below is a Quote and Excerpt from a renowned Economics Professor)

1. Home to World’s Top 20 Universities with the most Innovative Minds on Our Planet.

This is an important measure as it tells us how many bright minds will emerge to propel an economy forward.

2. Institution that may still get together in ways which Europe cannot.

USA has only the Republicans and the Democrats. Europe has 27 members in the EU alone, not even counting others like Britain or Swiss yet, and most of the time many of these members share many conflicting notes on how to run their economies. That’s why they are still in such a big mess today. If I were to place my bets, I would say the Euro would be the first to collapse rather than the US dollar.

3. A fertility rate that exceeds death, meaning America can ultimately outgrow its debt – Unlike Japan, Europe or even China.

  • By 2050: Japan will have half its population over 52 years of age, making it the world’s oldest society. Population of 127 million is predicted to fall to just 90 million by 2050. Child ratio: Elderly ratio: 1:1
  • By 2050: Europe will have 3 dependents for every 4 adults.
  • By 2050: Europe will age faster than USA by 2050.
  • By 2050: China will have a burden of retired people because of 1 child policy. China will also be older than USA as early as 2020 and older than Europe by 2030, thus causing an abrupt end to its cheap labour manufacturing. Dependency ratio will rise from 38 (dependents, children, retirees) to 68 per 100 working adults. 96.5million men in their 20s in 2025, but only 80.3million women. Demography and population may be the gravest problems for the Chinese government as it had often been in the rise and collapse of its many dynasties in its 5000-year history.

Africa, Middle East and India may be the world’s fastest growing economies with a young growing population within a decade or so.

And Singapore…

By 2020, 15% of the population will reach elderly status. By 2030: the percentage goes up to 22%. By 2050: 4th oldest country in the world. Average age exceeding 60 years old.

So, if you are going to invest in properties and other investments from 2013 and the next following 30 years, which countries will it be?

Merry Christmas and a Happy New Year!

 

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To your investment success,

 

Gerald Tay


About the Author

Gerald Tay Author, entrepreneur, professional investor and loving father, runs crei-academy.com with a tongue-in-cheek approach to property investment - and himself. He is widely regarded in the industry as 'The Common-Sense' Investor. Gerald writes with passion and straight-forwardness, disclaiming wild claims and impractical investment strategies behind lies and ignorance pervasive in the property industry for vested interests. His well-known statement, "All I did is to value my investments with science, logic and common sense.'

Comments (6)
  • Jannie Aug 3 2013 - 11:28 am Reply

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  • Aaron Aug 15 2013 - 6:03 pm Reply

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  • Frederick Apr 19 2016 - 9:29 pm Reply

    Gerald,

    Great read. Only the aging portion of Singapore. You projected we would have 25% elders in 2030. That is correct if nothing is done to veer it. I think the Singapore Govt is serious enough to do something to change this landscape. The 6.9m population policy is one. The current slowdown of foreign immigrants is probably temporary and after a while, when the xenophobic maelstrom is over, it will probably resume. It is a survival thing and we have a responsible government( haha, with responsible citizens)

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