The Beginning of the End of Paper Money

As someone who I frequently read and visit, I've asked John Rubino from to come and give us his insight on the current state of the economy...and a BOLD prediction for 2015. Read on and comment on the prediction!


Today the Fed announced another rate cut, which is both a foregone conclusion and a big yawn. Short term interest rates are already at zero or thereabouts, so that policy tool is pretty much a spent force. The real excitement came when Ben Bernanke explained that short term interest rates are just one of the levers he can pull, and nowhere near the most powerful one. Going forward, the Fed will engage in what is known as “quantitative easing,” an obscure term for something both simple and terrifying: The Fed will create dollars--maybe trillions of them--and buy up other assets.

At first it will buy mostly longer-dated Treasuries, in order to push down rates at the distant end of the yield curve. But because long-term Treasury rates are already at record lows, that strategy has a limited value. Pushing the 30-year yield from today’s 2.93% to, say, 2% won’t have a noticeable impact on the world’s frozen credit markets. Because the problems are with corporate bonds and asset backed securities, the Fed will have to buy increasing amounts of them.

This will have the desired effect of reliquefying the banking system--for a while. But the global financial markets aren’t stupid (okay, they are. But they do learn eventually, after being smacked in the face with enough monetary two-by-fours). This flood of dollars will send the value of the dollar down versus other currencies, and push up interest rates on the very long-term bonds that the Fed is buying with newly printed currency.

The result? The mother of all currency crises, in which a falling dollar causes other countries to devalue their own currencies in order to keep their export industries from imploding, which causes everyone to avoid bonds (which pay interest in depreciating currencies), which causes long-term rates to rise world-wide, which causes central banks to print even more currency in a futile attempt to repeal the law of supply and demand.

It’s going to get very, very ugly, and--after a series of failed experiments with capital-and-price controls--will lead to the realization that the whole concept of fiat (i.e. government controlled) currency is fatally-flawed. Along the way, older forms of money like gold and silver, which can’t be created in infinite quantities by panicked governments, will soar in value. I’ll go out on a limb and predict $5,000 gold and $100 silver by 2015.

John Rubino