HOW WILL THE DOLLAR DIE? / MACLEOD FINANCE

How will the dollar die?

The days of the fiat dollar are numbered, unless it returns to a credible gold standard. Using history as our guide, we walk through the process of the death of a fiat currency

Alasdair Macleod

Introduction

Commentators find it hard to explain why the dollar price of gold has soared in recent months, variously attributing it to risk aversion by nervous investors, speculation, and market seizures. 

None of them take it as an advance market signal of an accelerating decline in the dollar’s purchasing power and of the other major currencies which refer to it, believing instead that the normality of lower interest rates and bond yields will return.

But gold’s signals must be taken seriously. 

The dollar is only credit, whose value is based on faith. 

Gold is the true, legal money without counterparty risk, signalling danger for fiat currencies, notably from a credit bubble implosion, which is the obvious risk ahead.

With mounting debts and the largest credit bubble in history puffing up stock markets, they are heading for a 1929—1932 style crash. 

Unlike 95 years ago when the dollar was tied resolutely to gold, it has no sheet-anchor today. 

In these circumstances, it will be the value of credit which is wiped out, rather than banks and zombi corporations which governments will try to preserve.

Recently, we posted an article comparing the dollar’s current position with that of the Reichsmark following the First World War. 

The basic assumption is that the days of the post-Bretton Woods dollar-based fiat currency system are drawing to a close: no fiat currency system has survived the build-up of government debt that accumulates over its life, and today’s debt mountain is becoming unsustainable.

Because Germany’s post-WW1 years were so different from anything following the end of Bretton Woods, to compare the end of the reichsmark with the dying of the dollar might seem inappropriate. 

But in 2020, we had a war which was as economically disruptive as any major conflict, even though it was short. 

The enemy was covid, causing total economic paralysis. 

From that point US government debt rose by over $4.5 trillion in 2020 alone. 

That was a jump of nearly 20%:

Alarmingly, interest costs are soaring, pointing to a debt trap:

Despite these deteriorating fundamentals, the Fed is now turning its emphasis away from controlling inflation (meaning maintaining the dollar’s value) towards supporting the economy, informed by its Beige Book which signals that the economy is stalling. 

It cut its fund rate last week, is stopping quantitative tightening this month, and will be restarting QE in the face of liquidity constraints. 

But CPI inflation officially at 3% is still above target, and Trump’s tariffs are bound to push prices higher in the new year. 

Already the Treasury is funding itself predominantly through T-bills, which being near-cash is similar to just printing dollars.

Tim Congden of the UK’s Institute of Monetary Research was quoted in last Friday’s Daily Telegraph as saying that the Fed is aiding and abetting the monetisation of America’s deficits. 

He has a point.

Very few analysts expect inflation to be a serious problem in 2026—2027. 

But from this introduction to the meat of our subject it is clear that it will be, driving bond yields higher, popping the equity bubble, and forcing the combined efforts of the Treasury and the Fed to then support the banking system and the entire US economy — by printing yet more dollars.

The dollar seems to be where Germany’s reichsmark was in late 1921.[i] 

There had been a period of stability following the post-war inflation, when domestic prices rose 620% between Armistice and February 1920. 

Domestic prices then rose by only 4.6% between February 1920 and May 1921. 

Later that year, they began rising again more than doubling by the year-end.

The similarities between the last years of the reichsmark and today’s dollar are best illustrated in the relation with gold, which is and was common law money in both jurisdictions, while the currencies are and were unbacked credit. 

It is notable how gold anticipated changes in the general price level which reflects the currency’s declining purchasing power — an important lesson for our observations today.

The comparison of patterns is striking, as the chart below illustrates.

It should be noted that the upper chart of gold priced in reichsmarks is logarithmic in scale, while the lower one of dollars is arithmetic. 

Furthermore, the timescales are different, but as a fiat currency the dollar’s existence has been far longer. 

Allowing for these factors, as an illustration of where we are today in the death process of fiat currencies, we appear to have limited time before the dollar’s purchasing power begins to really slide.

It is consistent with the likely official response to a new stock market crisis, which will be to attempt to prevent it by reflating without limit.

The period between the first and second pecked lines reflects the gold price in reichsmarks rising from 157 to 2548 on the scale of 100 at the suspension of note conversion on 31 July 1914 at 90 reichsmarks to the ounce. 

That rhymes neatly with the rise in the dollar price of gold between 2005—2011.

In February 1920, the reichsmark stabilised, more than doubling against gold by June 1920 (i.e., gold fell measured in reichsmarks which was probably the strongest currency in the world briefly), and gold didn’t rise above the February 1920 level until October 1921. 

Shortly thereafter, the stock market bubble ended and the reichsmark entered its hyperinflationary stage.

Similarly, following covid gold in dollars appears to be tracking its footsteps in reichsmarks. 

The rise is not as violent, obviously. 

But the parallel between the relationship of the two currencies to gold is remarkable. 

With the Fed currently abandoning the inflation target in order to provide liquidity in credit markets, the stage is set for an acceleration in the fiat dollar’s decline. 

The next event to drive the relationship will be the credit bubble imploding, which we can tentatively assume will happen shortly.

Similarly, an index of 100 leading German shares put together by Collet and Fohlin[ii] had a boom in late 1921, as the following chart of their index in both reichsmarks and gold illustrates:

Between February 1920 and November 1921, C&F’s stock index almost tripled from 400 to 1250. 

But measured in rising gold, it was broadly unchanged. 

By February 1922 it had declined to 800, more or less maintaining that level until October 1922 while a rising gold price showed its real value to have declined 97% (just to the right of the pecked line).

This is perhaps a lesson for our own investment outlook. 

Today’s portfolios are likely to switch from post-bubble momentum stocks into gold, contributing to a significant rise in the gold price and a substantial decline in equity stocks priced in gold. 

Following Germany’s precedent in early 1923, at some point stocks could become an escape route from an accelerating decline in the dollar’s purchasing power.

Ultimately, this would be very good news for banks holding stock as collateral, giving them temporary solvency, before a reset collapses markets entirely.

How likely is the dollar to end the same way as the reichsmark?

Already, we can see short-term credit being used to finance the US Treasury’s deficit, which is the equivalent of a Reichsbank inflationary cash injection into the economy. 

A collapse of the credit bubble will accelerate the process, just as it did in Germany in 1921—1922. 

It will lead to selling of dollars by foreign holders who now hold $20 trillion of US equities, up from $9 trillion in 2020 (US Treasury TIC figures).

Additionally, geopolitics can be expected to contribute to the dollar’s decline with China preparing to back and protect her yuan with gold for trade settlements between Shanghai Cooperation Organisation and BRICS nations. 

These nations, representing over 70% of the world’s population stand ready to dispose of dollars for most trade settlement purposes, releasing much of the $80 trillion intermediate dollar balances held offshore in foreign exchange markets (BIS estimate).

The demise of the dollar could indeed be rapid once it starts. 

Furthermore, global portfolio ownership of gold at less than ½% is pitifully low, and the gold price is likely to be chased higher as investors in both America, other G7 nations, and the rest of the world realise their error.

The start of Germany’s hyperinflation was probably in July 1922, when the gold price rose 55% that month and kept accelerating higher. 

The final months from May 2023 onwards saw a sharp acceleration in the reichsmark’s decline as the population finally realised it was not prices rising but the currency collapsing and they began ridding themselves of it as rapidly as possible in exchange for anything, needed or not.

At its death in November 1923, the reichsmark was worthless, and a new mark notionally valued as a gold mark replaced it.

We cannot know the dollar’s future until it becomes the present. 

But history rhymes, it is commonly said, and it is becoming evident that the dollar’s fiat status is drawing towards a close. 

Saving it will require the reintroduction of a credible gold standard along with the economic adjustments to make it stick, seemingly an unlikely prospect today.

This article is by way of a thought experiment and a warning to alert readers to the mechanics behind the death of a fiat currency — in this case an entire currency system based on no more than their users’ faith in their value.

[i] Gold prices expressed in reichsmarks are calculated from relevant data in Constantino Bresciani-Turroni’s The Economics of Inflation.

[ii] Stephanie Collet of Deutsche Bundesbank, and Caroline Fohlin of Emory University, The Berlin Stock Exchange in the “Great Disorder”.