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Chapter 3: Phase II: The Aftershock


Pop Go the Dollar and Government Debt Bubbles

In our presentations, we often tell people that the real impact of the bursting housing, stock, private debt, and discretionary spending bubbles is not the immediate problems caused by the popping itself—although it has been very upsetting and very costly to the economy—that is not the worst of it. The real impact of these four bursting bubbles is the terrible downward pressure they are now exerting on the two remaining bubbles: the dollar bubble and the government debt bubble.

It won't be hard to convince you that we have an enormous government debt bubble, so we'll get back to that in a few pages. Right now, we'd like you to keep an open mind and consider the possibility that we have a vulnerable dollar bubble. We know this is hard to believe. All we ask is that you read on a bit more before coming to your own reasonable conclusions. If we are right (and based on our first book in 2006, we have an excellent track record), you cannot afford to ignore this. We know it feels fundamentally wrong, but please let logic be your guide.

The Dollar Bubble: It's Hard to See Without Bubble-Vision Glasses

Remember how hard it was to see the Internet stock bubble before it popped in early 2000? Remember when buying real estate was considered a great quick-flip investment before the housing bubble began to burst in 2007? Unpopped bubbles really can be very deceiving. Of course, after they pop, hindsight is 20/20. But before they pop, you need special glasses in order to see an unburst bubble.

Here are your bubble-vision glasses for the dollar. Once you look at the dollar this way, you'll see for yourself that this bubble has no choice but to pop.

The key is to understand that the value of the dollar is set by the same forces that determine the value of many assets, which are supply and demand. Of these, demand is clearly in the driver’s seat. Supply matters too, but unless there is significant demand, an asset simply cannot retain value. Therefore, the future of the U.S. dollar has nothing to do with what a great country we are or the proud history of the greatest economic power the world has ever seen. The future value of the U.S. dollar depends entirely on future demand.