"America Will End in 2011"

Screen shot of video "End of America 2011"

A video widely advertized on TV and circulated on the internet claims the biggest economic crisis in American history will hit within a year, drastically altering American life as we know it. Is there any truth to this?

This video, titled “End of America” was created by Porter Stansberry the founder of Stansberry & Associates Investment Research and editor of Porter Stansberry's Investment Advisory.  You can watch the full video 77 minute video here.  First, I’ll explain his credibility, and then deconstruct a few of his reasons for the “looming economic” disaster. 

Credibility: 

Porter Stansberry begins the video by building his credibility.  He claims that – to his knowledge – he was the only financial advisor to correctly predict the 2008 financial crises.  That “prediction” includes the bankruptcy of Fannie & Freddie and General Motors.  If this is true, he certainly sounds like some sort of guru. However, he did fail to mention that in 2007, he and his investment firm, then called "Pirate Investor," were ordered by a US District Court to pay $1.5 million in restitution and civil penalties, the court stating "Stansberry's conduct undoubtedly involved deliberate fraud, making statements that he knew to be false."  So, it seems that Stansberry has a history of deliberately misleading people, presumably to turn a profit.  Not that this completely discounts any credibility he might have, but it is worth noting.

Stanberry’s Claim:

Stansberry essentially cites one significant catalyst for the inevitable economic disaster: The United States losing its hold on the reserve currency of the world. 

Most people don’t know what the “reserve currency” means, so I’ll give a quick explanation.  Since global commodities like oil and gold are sold throughout the world, it makes since to price them in one currency.  This is just for simplicity’s sake.  After World War II, the U.S. dollar became the currency that was used to price all of these global commodities. 

Therefore, when a country other than the U.S. wants to buy a global good like oil, they must first exchange their particular currency for dollars.  Then, with those newly exchanged dollars they can buy oil.   Stansberry gives an example of this in his video about Germany. If Germany wants to buy oil from Saudi Arabia, it can’t go directly to Saudi Arabia and purchase the oil with Euros, it first must exchange it for dollars.  Then, once it has the newly exchanged dollars it can purchase the oil.

Here’s the rub: When countries exchange their currency for dollars there is a transaction fee.  Most of the time, this fee is insignificant, but over time for many countries (especially smaller ones) this cost can accrue.  Conversely, the U.S. never has to pay this transaction fee.  Therefore, the U.S. can by these global commodities – most notably oil – at a relatively cheaper price than other countries.  No transaction fees for us!  Also, it allows the U.S. to borrow money (which we do a lot…) at a better rate, because there are more dollars hanging around in the world than any other kind of currency.  These are the reasons that the dollar is known as the world’s “reserve currency”.  It’s kind of a difficult concept to understand, so don’t feel bad if you don’t have your head 100% wrapped around it.  I’m not quite there yet either.

Stanberry’s Claim Revisited:

So, now that we know what it means to have the world’s reserve currency is (or at least sort of know) we can look at Stanberry’s claim that the world will give up the dollar as the reserve currency.  As with many doomsday predictors, Stanberry takes a piece of information or a possibility and extrapolates it to point that people are rioting in the streets and children starving. 

The truth is that the dollar could be renounced as the world’s reserve currency – but not in the near future.  The types of fallout that Stanberry describes in his video could happen to the United States and the rest of the world if the reserve currency was changed from the dollar.  But the world won’t get rid of the dollar any time soon for this very reason.  There are no good alternatives right now for a reserve currency.  The Euro is failing, the English pound is too closely tied to the Euro, and the Japanese Yen probably wouldn’t work.  The only other possibility would be the Chinese Yuan.  There have been rumblings in China throughout the past several years about trying to replace the dollar with the Yuan, but it seems unlikely.  China currently has $2 trillion worth of American dollar assets (that’s called a trade deficit ladies and gentlemen!), and if the dollar were to be replaced as the world’s reserve currency it would significantly hurt the U.S. economy and devalue the dollar.  The Chinese don’t want the dollar to be devalued because then their $2 trillion of American dollar assets would lose value. 

I suppose this is one positive aspect of the world economy being as connected as it is. For better or worse!

In other words, there’s no plausible situation where the U.S dollar will be replaced as the world’s reserve currency in the short term or even the medium term.  Seventy-five years from now? Perhaps.  No can know for sure.  Let’s go back seventy-five years.  In 1936, would people have been able to predict what the world would be like in 2011?  Not a chance! It’d be another three years until Poland was invaded for goodness sakes.  If you asked the most brilliant and forward thinking economists at the time what a subprime mortgage, credit swap or – gasp! – The European Union was they wouldn’t have a clue.  Today we’re in the same situation for predicting the future.  We can be sure, however, that the dollar won’t lose its status as reserve currency anytime soon.  Stansberry’s claim that this will happen by next August is hyperbole. 

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The Takeaway:  All of Stansberry’s doomsday predictions are predicated on the dollar losing its status as the world’s reserve currency.  That may happen someday, but not in the short term or medium term.  Take deep breath and let’s start investing in education, infrastructure, and research, reforming our immigration policies, and creating better rules to encourage capital investment.  This will allow the U.S. economy to thrive once again.