Bitcoin and the Death of the Dollar

There is a lot of talk about the US dollar losing its status as the world's reserve currency. While most people still wonder when this will happen, I am here to bring you a shocking fact: it is already happening before our eyes, but most people don't realize it because they don't understand the signs. Let me break it down for you so you know exactly how this is happening and, most importantly, how to protect your assets.

Since 1700, we have seen 750 different currencies in the world, of which only 20% are still around. All currencies have been devalued. This means they buy less today than they did in the past, and the dollar is no exception.

Why do currencies die?

According to Ray Dalio, founder of the world's largest hedge fund, Bridgewater Associates, when a country accumulates too much debt, its currency dies. The country ultimately has four different options:

1. Austerity (reducing spending)

2. Debt default and restructuring (such as bankruptcy)

3. Wealth redistribution (such as tax increases)

4. Printing and devaluing money

Of all these options, governments always choose to print money because it is the "easy" path. They don't have to cut spending, they don't have to upset creditors, and they don't have to hurt the rich. But this is how a currency starts to go downhill. Let me prove this to you with an example from history.

How did the US dollar become the world's currency?

When World War I broke out in 1914, many European countries abandoned the gold standard so that they could pay for military expenses with paper money instead of gold. The United States became the lender of choice for several countries, so that by 1919 the dollar had informally replaced the pound as the world's new dominant currency.

During World War II, the United States found itself in a unique position to profit from the war. Before joining the conflict, we sold ammunition, weapons, and other supplies to the Allies in exchange for gold. As a result, we accumulated two-thirds of all the gold in the world.

When nations came together at the Bretton Woods Agreement, they realized it was time to create a global monetary system pegged to gold. Since the United States held most of the world’s reserves, and the dollar was backed by gold, the dollar officially claimed its status as the world’s reserve currency.

While most people think the transition from the pound to the dollar occurred when the agreement was signed, it was actually a 30-year transition that began as early as 1914 when countries began borrowing dollars from the United States.

So when people ask me when the next transition is going to happen, I say, "We're in the middle of one." The world is already de-dollarizing, the signs are clear, you just have to know where to look.

The decline of the dollar

According to the International Monetary Fund (IMF), the dollar’s ​​dominance is already declining. In 2017, the dollar accounted for 64% of world reserves; today it’s down to 59%.

Another clear sign is the U.S. dollar index (DXY), which has fallen 10% this year alone.

Of course the pandemic plays a major role in de-dollarization, and the mainstream media is taking notice.

But here’s the big problem: the above metric only tells you part of the story, because you’re comparing the dollar to a basket of other currencies. In other words, you’re only looking at fiat currencies.

Instead we should look at what money is used for: to buy goods and services. This means we need to look at the purchasing power of the dollar. If you compare gold to the dollar over time, you can see that at the beginning of the 20th century, it took $20 to buy an ounce of gold. It jumped to $35/ounce in 1933, and then it went haywire after 1971.

Today, an ounce of gold costs over $1,800. Does this sound like the dollar is maintaining its purchasing power? I don’t think so.

What about real estate? How has the dollar maintained its purchasing power compared to real estate? You might think that house prices are rising, hitting all-time highs. But is it actually real estate that is rising, or is the dollar losing value?

The index below highlights the loss of purchasing power of the US dollar compared to real estate. Not only are house prices rising, but more dollars are needed to buy them.

We can also look at oil. It has risen similarly to gold, so is oil gaining value or is it just the dollar losing purchasing power?

Of course we can’t leave out one of the hottest assets right now – Bitcoin. Here’s the price of BTC compared to the US dollar. Do you see any similarities with the other assets I just showed you?

Is history destined to repeat itself?

Now let's bring this all together and compare our current situation to a historical example. Before we proceed, let me warn you. This will give you a "zoomed in" perspective that will most likely completely upend the way you think.

This was the situation in the Weimar Republic (Germany) in the early 20th century.

In 1922 Germany defaulted on its debts from World War I reparations. To recover the funds, France and Belgium invaded the Ruhr Valley, Germany's industrial heartland.

In response to the invasion, the German government ordered all workers to stay home and not work - this was called "passive resistance." Here is where the death spiral of the Weimar Republic began.

The country was already drowning in debt, but they still had to find a way to come up with cash to pay their workers. So what did they do? They started printing money (the fourth option we talked about earlier).

Now, look at what happened to their Consumer Price Index (CPI). The CPI measures the average change in prices consumers pay for goods and services (aka inflation).

What effect does this have on the population? A good example is a loaf of bread that cost $0.13 in 1914. Two years later in 1916, the same loaf of bread cost $0.19. By 1919 the price had doubled to $0.26, then in 1920 it reached $1.20, and in 1922 it reached $3.50.

Once they started printing money in 1922, the same loaf of bread went from $3.50 to $100,000,000,000 ($100 billion!) by December 1923. That’s when the German Mark collapsed.

In that period, you actually needed a wheelbarrow to move your cash around. Money was worth less than wood at the end, so they burned cash to keep warm.

What’s remarkable is that, at first, bread rose very slowly. Most people didn’t realize what was happening until it was too late. It was like a frog in boiling water.

Similarities between the United States and the Weimar Republic

We can’t go back in time, but we can look at historical examples and compare them to our current reality so we don’t repeat the same mistakes.

The first parallel between the United States and the Weimar Republic is money printing. Take a look at M1 and M2 in the United States, which are a measure of the amount of dollars in circulation. M2 is also a key economic indicator used to predict inflation.

It goes without saying that the similarities between these indicators and the German CPI are striking.

The third parallel we can draw from the Weimar Republic is our depressing debt. Debt defaults were the first domino that led to the rest of the events unfolding. In 2021, the U.S. budget deficit grew to a record $1.7 trillion in the first half of the fiscal year. This means that we are spending more than we are earning - exponentially more than in previous years.

It’s all a matter of perspective

The reason I bring you this data is so you can zoom in and see things from a better perspective. In Adam Fergusson's book When Money Dies, he says that most Germans can't see what's really going on. A lot of them really think they're getting rich because they think their assets are appreciating in value.

But now you know that wasn't the case, it was actually the German Mark that lost its purchasing power. So they started putting their cash in banks, selling their assets and exchanging them for currency. At the end of the day, they ended up with a pile of worthless paper.

Now if you were in the Weimar Republic at that time, what would you do?

The chart above shows the price of gold from 1915 to 1935. If you bought gold around 1920 and held it until 1935, this would be your trade for the decade. It is easy to see the upward trend from this angle, but it was not a clear straight line for someone who lived during that era. It was a very volatile period.

So what are you doing with your money now? Some are cashing out, exchanging their assets like real estate, gold, Bitcoin and even stocks for dollars because they are at all-time highs. The Germans are doing the same.

If we continue to increase debt and print money, the dollar will continue to lose its value and status as the world's reserve currency. Bread is going to cost more, and you don't want to end up with a pile of worthless cash.

My advice to you is to find inflation hedges, assets that rise with the inflation rate. Most importantly, start now before it's too late. Don't wait for the "next Bretton Woods Agreement," the transition is already happening - and it's happening right in front of you.