If we listen to the mainstream news, we should clearly be panicked about stock prices, interest rates, trade deals and the latest political scandals. However, there is a whole new parallel economy taking shape that is based on open source, decentralized solutions to many of these Wall Street problems. Out on Main Street, new methods of entrepreneurship, trade, and competing currencies are giving people more options than ever to succeed, despite the doom and gloom of the daily news cycle.
In 1988, an Economist
magazine cover depicted 2018 as the year that government currencies will fail and a new “world currency” will emerge. If this prophecy is to come true, we can expect to see an epic collapse in the trust of major fiat currencies like the US Dollar in the near future. Signs of instability with the dollar are beginning to emerge at the same time trade wars are heating up.
Could this be the start of the dollar collapse? How can you protect yourself?
The dollar collapse is already happening. It’s been happening in slow motion since the Federal Reserve’s founding in 1913. The purchasing power of the USD has been diminishing every year by design. The Federal Reserve’s stated annual goal is 2% inflation to the cost of living. Using the government’s conservative inflation number of 2% per year, the dollar has lost half its purchasing power in last 35 years. In other words, it’s a doubling of prices every 35 years. Yet every consumer knows that real inflation is much higher, especially for things like health care and college. And due to runaway national debt, inflation is accelerating, which may result in another dramatic dollar revaluation event.
There have been two significant dollar-devaluation events since the Federal Reserve system began. The first happened when President Franklin D. Roosevelt made owning gold illegal in 1933, forcing citizens to sell their gold to the government for $20 per ounce. Almost instantly after the US government had all of the gold, they adjusted the price-per-ounce up to $35. A 75% devaluation of the dollar practically overnight.
The next substantial devaluation of the dollar happened in 1971 when President Nixon unilaterally canceled the direct international convertibility of the dollar to gold. The Vietnam War had basically bankrupted the US and Nixon needed a way to deal with the debt.
Inflation was seen as the least politically painful method to dissolve unpayable debts. The price of gold jumped from $40 to $183 per ounce by 1974. That’s 457% inflation in just three short years. Six years later, in 1980, the price of gold hit $600/ounce.
Due to unsustainable debt levels, I expect the Federal Reserve to continue to print their way out of debt. But they could also resort to a dramatic write-off or devaluation event of the dollar. The Economist cover seems to indicate a dramatic event (burning fiat money) may occur.
Either way, the effect will be a steep rise in the price of anything measured in dollars – including assets. Some have referred to this steady destruction of the dollar as a “melt-up” in the markets because the price of stocks and other assets is climbing without fundamental cause.
Investopedia describes a melt-up as “A dramatic and unexpected improvement in the investment performance of an asset class driven partly by a stampede of investors who don’t want to miss out on its rise rather than by fundamental improvements in the economy.”
Investors stampede because they’re seeking an asset that holds its value or grows against a rapidly weakening dollar.
This appears to be happening over the last six months in the FOREX markets, in the price of oil, and gold to a smaller extent. And you all know what happened to the price of cryptocurrency in the last 12 months.
The price of oil has marched higher. The USD has at times lost over 10% against other currencies and gold. And until Trump’s recent call for tariffs, the stock market was melting up nicely, but it certainly seems unpredictable day to day. Could we be headed toward a breaking point?
Protecting Yourself From A Dollar Collapse
There are many mainstream articles about how to protect yourself from the dollar collapse. They include basic advice like get out of debt, store food and water, buy gold and silver, start a side hustle, and so on. These are definitely smart things to do.
I previously outlined 14 ways to build wealth outside of Wall Street which also apply to insulating yourself against the dollar collapse including investing in your food pantry, useful equipment, precious metals, cryptocurrency, collectibles, real estate and more. These are just a few assets whose prices will melt up in a dollar collapse scenario. These are self-evident steps. I want to dive a little deeper.
You’ve probably heard the statement that if you took all the money in the world and split it evenly to all humans, the rich would end up with most of the money again within a generation. Why is that? Is it because of intelligence, work ethic, or something else?
Money is only one form of capital. And money is merely a measure of the amount of value an individual exercises in society or the market. In fact, money (dollars) may be viewed as one of the weakest forms of capital. That’s why investors stampede to find assets more valuable than their money. Since value comes in many forms, so does capital.
There are eight forms of capital. Understanding and cultivating them in your life is essential to making yourself into the type of person who can succeed against all odds, including a once-in-a-generation economic event like a dollar collapse.
8 Forms of Capital
It’s important to build all eight forms of capital because some of them are things that can’t be taken from you through force or inflation. Money and valuable things (financial and material capital) can be taken, but you’ll likely get it back very quickly by tapping into your other forms of capital. In fact, financial capital is usually just a reflection, or result, of your value in the other categories.
Financial capital is what most people think of when they hear the word capital. Money, stocks, precious metals, and cryptocurrency are all forms of financial capital. In a slow dollar collapse, or rapid melt-up, the dollar-value of assets like stocks, precious metals and cryptocurrency are likely to increase dramatically. We’ve already seen the stock market climb to record highs, cryptocurrencies explode, and oil moving higher. And the bulk of the necessary money printing hasn’t even begun yet.
Material capital is resources, structures, equipment and tools. More broadly, it’s all non-living physical objects. Raw and processed materials like stone, metal, timber, and fossil fuels. Structures and other infrastructure count as material capital: buildings, roads, bridges, water wells, power lines, etc.
Other types of material capital include equipment, tools, and software.
When I lived in Costa Rica, every time a local builder saw me working on my computer he referred to it as my “machete” because it’s the tool (material capital) that I use to make money (financial capital).
Social capital is the relationships that you have with other people. It’s your network. It’s your ability to make friends and negotiate.
Social capital is built on trust. Jack Spirko says the key to entrepreneurship is to “Say what you do, and do what you say.” It’s as simple as that. That’s what builds social capital.
There’s a perennial best-selling book that can help you expand your social capital. It’s called How To Win Friends and Influence People by Dale Carnegie. It’s worth owning and re-reading every few years to refocus yourself on the importance of relationships.
Natural capital, or living capital, is another form of wealth that persists despite what happens to the value of the dollar. Living capital is food and water. It’s land with the ability to produce something of value like having a fruit orchard, natural spring, garden, livestock, a trout pond, timber, oil or gas reserves, etc.
You don’t even need to own the land for it to represent a form of natural capital for you. If you live near wilderness and you know how to hunt, trap, fish, forage and collect and purify water, you can tap natural capital as needed.
Experiential capital is your marketable skill set. Vin Armani is fond of saying “You can’t be broke with a pocket full of diamonds.” By diamonds, he means skills. But not skills alone. Skills combined with a history of using them in valuable ways. This wisdom (skills + experience) is sometimes called “Human Capital.”
Intellectual capital is made up of knowledge assets. The majority of the education system is focused on imparting intellectual capital. College or any professional training is primarily an exchange of financial capital for intellectual capital. In our culture, intellectual capital is touted as one of the surest ways to find success, but it’s becoming less about what you know and more about what you know how to do. Being seen as an expert, or having knowledge or the truth about any particular subject, gives you enough intellectual capital to convert into financial capital at will.
Spiritual capital is gained by being motivated by a higher purpose. Knowledge of and dedication to a belief system has incredible value. Mormons are a great example. The Mormons practically have their own economy based on spiritual capital. When Mormons move to a new area, a welcome party of strangers is there to help them get settled. Among that welcome party are business owners of all types offering services, jobs and even welfare to the newcomers. But not all spiritual capital is religious.
Our project CoinText is motivated by a higher purpose. We believe humans should be free to trade value with other humans without permission from a formal authority. Thus our mission is to deliver honest money and financial sovereignty to anyone with a mobile phone; to free them from dependence on corrupt central banks and commercial banks.
When you spend any significant amount of time in a foreign country, you will likely seek out other expats from your native country to hang out with. This happens because you value your common culture. There is an infinite amount of sub-cultures that also bring people together. Entrepreneurs who’re authentically participating in a specific culture (niche) will always possess “capital” to overcome deficiencies in other forms of capital.
A good example is Apple Inc. who became the Goliath they are today because they had more cultural capital with artists and rebels than they had financial or material capital. Again, financial capital is usually the result increasing other areas of capital.
On a micro-level, there are countless skills you can learn within sub-cultures that give you the ability to accrue other forms of capital. Learning to play the blues guitar or to make a killer brick-oven pizza gives you cultural skills that allow you to build more social capital, at the very least. Back when people traveled by sea, the bards and the cooks were often the most valued shipmates because of their cultural skills.
If you focus on building each form of capital and currency, you’ll be able to withstand just about anything.
I wouldn’t be surprised to see the stock market, cryptocurrency and gold cool off for a bit longer before the next phase of the melt-up commences. But if we’re to take The Economist cover prophecy seriously, we could expect to see a severe devaluation or loss of confidence in the dollar as the year ends.
Get prepared and stay free!
Let’s examine some other practical solutions and what we can do to support a free economy in all of its forms…