When a currency collapses

The ominous opening line of The Day After the Dollar Crashes: A Survival Guide for the Rise of the New World Order by Damon Vickers ( www.wiley.com ) is that we are at ‘a crossroads of immense proportions.' Nationally, internationally, and globally, we are living in a manner that is absolutely, unconditionally, irrevocably unsustainable, he adds. The US and its fellow nations, in his view, are facing an Armageddon of economic collapse as every nation slowly spins into ‘a death spiral, pulled down by debt that appears impossible to repay.'

Watch the trend

An instructive section in the book is what is titled ‘What can an investor do to prepare for this crash?' Investors who want to make it to the new world after the dollar crash must focus on surviving, the author urges. He believes that those who survive the coming rout will be able to realise a period of global economic prosperity unlike anything we have ever seen before.

In all markets, however, pay attention to the trend, advises Vickers. Markets rise and fall, but if a market is headed down, one of the most dangerous things we can do is to try to anticipate a bottom too soon, he notes.

As for buying equities on dips, his counsel is that seeming ‘bargains' can become bigger bargains. “There is no way to tell which companies will be standing after a bear market has run its course. And even the ones still standing likely never resume being leaders when the bull market returns.”

Collapse of bonds

One of the first things we will see is a collapse of bonds, the author foresees. Reminding that millions of investors around the world have put tonnes of money into bonds and into treasury securities that represent the ‘sovereign debt' of Westernised economies, he frets that right now debt is as common as sand on the beach. “We have a huge supply of debt and depressed prices and few buyers.”

A scenario that the author describes – if we see heavy dollar dumping, which is likely in the event of a dollar crash – is that we may see interest rates climb as countries compete for the available liquidity. While this could create new demand for bonds with these higher yields, and with that demand we could see a spike in bond prices, his recommendation to investors is not to try to profit from this possibility as it would require precision timing.

“The markets would probably be in chaos at that point anyway, which would interfere with the execution of orders. By the time your order was executed, the profit could have come and gone. It's probably more prudent to ‘Just say no' to bonds right now.”

A sobering read for a summer afternoon.