Tuesday, November 22, 2011

the rational course for tiresome dollar pessimists

I Am Not A Financial Advisor. Nevertheless, here's some advice for the most tiresome dollar pessimists.

I'm not referring to lowly savers who are understandably anxious about the negative real interest rates of their risk-free deposit accounts. I'm referring to the strident soothsayers who remark repeatedly that the dollar is primed to become worthless in the near future, i.e. within the next two years. They know just enough about economics to support the opinions that they hold from the beginning to the end of time, because changing your thoughts in response to objective data is considered a sign of weakness. They're enthusiastic to spread their discoveries of the various factors that are poised to sink the dollar.

If any of them are reading this, please accept the criticism that you're missing a once in a lifetime opportunity to exploit your special knowledge about the dollar's imminent path. First, you need to keep quiet. The more that the rest of the market shares your information, the lesser advantage you have. They don't know that their dollars are attached to little imaginary fuses that have almost run down. If they did, they would compete directly with your financial strategies; in any case they'd refuse to be the ignorant suckers whom you need to carry out the transactions.

Second, you need to act immediately. Your prediction is time-limited by its very nature. Once the shocking collapse springs into action, no more profit is possible. The longer that you delay, your unique prescience decreases in value. Like a stock, it's best to jump in before everyone else, at the earliest time, on the "ground floor".

Third, now that you've established the supreme unreliability and undesirability of the US dollar, you should think of a suitable alternative store of value. Since other economic agents will foolishly continue to expect that you honor their dollars and demand that you exchange dollars for their goods/services, the alternative must be relatively easy to convert. You could opt for a number of wild choices, but I suggest acting conservatively in this instance: gold pieces. Find a trustworthy local dealer who's not afraid of high volume and low margins. Don't resort to one of those huge gold piece dealers who show TV commercials; they're far too inconvenient for everyday use.

After buying gold pieces with your volatile dollars, treat the local dealer as your replacement bank. That is, periodically trade some of your gold pieces for intermediate dollars so that you can make your next batch of purchases.  And when someone tries to hand you dollars, hurry to the your dealer to trade those "hot potatoes" for comforting hard gold pieces. Throughout your dealings, keep in mind that for you, dollars are like credit card balances. You use dollars purely for convenience and never hold the dollars long-term. That way, the horrible inflation rate that's right around the corner won't affect you too deeply. Going back to the stock analogy, you're closer to a day trader than a value investor. True, your earnings will be affected by the unfortunate fluctuations of the dollar, but only over very short time spans. You can also expect to lose some value due to the constant churn of conversion between dollar and gold piece, because the dealer probably expects to be compensated for his or her service and the general overhead of running the business. Think of these transaction costs as a reasonable price to pay in return for your peace of mind.

All this dependency on the gold market may make you queasy. Apart from the projected inflation of those irritating dollars, what if there are significant swings in that individual part of the economy? Those swings could erode the value of your gold pieces. To avoid that risk, you might diversify. In addition to the gold dealer, you might pursue other nonperishable assets for storing value. eBay is packed with smooth open markets for a wide variety of options. As one market goes down, you could buy using that market rather than the rest. As a second goes up, you could sell using that market rather than the rest. Call your diversified collection of markets your "basket of goods". Perhaps, at that point, you could publish your forecast of massive inflation far and wide, and then your audience would scurry to buy from your basket of goods. In this brave new world, where market participants cease to hoard dollars, you will be king.

Or you could avoid both gold pieces and diversified baskets of goods. Consider the Canadian dollar. The Loonie could be quite apropos.

1 comment:

  1. Anonymous7:51 AM

    As an alternative, my Nigerian friend informs me that there is a large amount of unclaimed money in a bank account awaiting you, if you would kindly pay a release fee...