Iconic Chart Shows Biggest Devaluation of Our Generation

 

You own a company and you have one customer that accounts for 25% of your sales. Your customer is in another country and pays you in currency from his country. Unfortunately, you have a few other customers who also pay in that currency.

As the years go by, you start to accumulate more and more of the currency of your customer’s country. You take some of that money and buy assets in that customer’s country, like stocks, bonds, real estate, and anything you feel has value. You even buy some bonds issued by the government of your client’s country.

But after 30 years of taking in your customer’s money, even though you are investing it back in your customer’s homeland, you are still left with too much of a currency you really don’ t want.

That’s where China sits right now. Yesterday, China’s central bank said its foreign-exchange reserves have hit $3.0 trillion for the first time in its history. China is awash in dollars.

Aside from China, the U.S. itself has too many dollars floating in its financial system. Is it any wonder the U.S. dollar is collapsing in value against a basket of currencies made up of other major currencies?

The chart below is worth a thousand words. It is an iconic chart showing the collapse in the value of the U.S. dollar against the six major currencies: the euro; yen; pound; Canadian dollar; Swedish krona; and Swiss franc.

Chart courtesy of www.StockCharts.com

The U.S. dollar is only five percent away from falling below its record low set in early 2008. Will it happen? Sure it will. What will happen then? Interest rates will rise to support the dollar. But, by then, it will be too late. Inflation will already have taken hold in America. Forget about supporting the plummeting dollar, we’ll need high interest rates just to fight off all the inflation created by years of printing dollars.

Michael’s Personal Notes:

A reader wrote yesterday with a question that I believe is on the minds of much of our audience:

“Mr. Lombardi, if interest rates are higher because of inflation, the dollar will be stronger. Then it will make gold and silver less attractive. Is my understanding correct?

Unfortunately, dear reader, you have it wrong. Higher inflation will result in items requiring more dollars to purchase them. The more dollars required to buy an item, the less the dollars are worth. Precious metal prices rise rapidly during periods of rising inflation and interest rates.

The best way to see this is to look back to the early 1980s. The price of gold bullion hit $850.00 per ounce in January…

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