Lurching Toward the US Dollar’s ‘Critical Threshold’

This simple model illustrates just how easily the US dollar could collapse.

It demonstrates how markets can lose confidence. It shows how tenuous and dangerous the dollar’s situation is today…not that policymakers would admit that.

Let me give you a very plain English explanation of it.

Imagine you’re in a room of 300 people listening to a lecture. Everything is going smoothly until, suddenly, four people get up and run out of the room as fast as they can.

What would you do?

I dare say you would do nothing. You’d think that’s odd or rude. Maybe you’d figure they got a text message. You’d assume something urgent came up where they were late and had to run. Meanwhile, you’d stay in your seat to listen to the rest of the wonderful lecture.

Now, what if it was the same exact situation, except 100 people suddenly got up and ran out of the room as fast as humanly possible. What would you and the people seated around you do?

I dare say you’d be right behind them! You wouldn’t know why. Maybe you’d think that place is on fire. But you wouldn’t stick around to find out.

The collapse of the dollar will be no different…

Terrifyingly simple

My point is to show what we call the ‘T-Factor’ or ‘critical threshold’.

The critical threshold is the point at which your behaviour changes based on the behaviour of others. Where is it? It’s probably different for every one of you.

Going back to our illustration, for some people, 10 people running out of the room would be enough to convince them to run out right behind them.

For another person, maybe 200 people running out wouldn’t be enough to convince them there’s a danger. The thresholds are all over the place. They change all the time. Some days people are bolder, and some days they’re more fearful. Some days people are tired, and other days, they’re energetic. We all have different thresholds.

Think of the complexity of just that room of 300 people. Extend that dynamic to the whole world. Now you get some idea of how complex systems work.

Take a look at this table for evidence:

Source: Editor

In ‘Case 1’, we assume that 100 people repudiate the dollar. What does that mean? It means that they no longer want dollars. They no longer trust dollars as a store of value.

If you’re among that initial 100, you dump your dollars and you buy some hard assets. It could be gold, other precious metals, fine art or land.

The next thousand people have a critical threshold of 500. That means 500 people would have to quit the dollar before they’re convinced to quit too.

The next million people have a critical threshold of 10,000. In other words, 10,000 people would have to quit the dollar before they quit.

These numbers on the right of the table are the thresholds at which the numbers on the left also ditch the dollar. In the first case, 100 people quit the dollar. What happens? The answer is nothing.

Nothing happens because you haven’t hit the threshold for the next thousand people. A hundred people quitting the dollar are like four people running out of the room in my first example. It’s not enough to get anyone to do anything, and so the dollar is stable.

A tiny change causes catastrophic collapse

If you move to ‘Case 2’, what we call the ‘critical state,’ you’ll notice that I’ve lowered the threshold from 500 to 100 for the first group.

I’ve also lowered the threshold from 10,000 to 1,000 for the second group. The rest is unchanged. I haven’t changed the information for the other 310 million people. All I’ve changed are the preferences of three one-thousandths of one percent of the US population.

What happens then? When 100 people quit the dollar, we hit the threshold for 1,000 more people to quit.

When those thousand people quit the dollar, we hit the threshold for one million people to quit.

At one million people quitting the dollar, you’re way past the threshold for 10 million more people to quit it too.

At 10 million people quitting the dollar, you’ve hit the threshold for 100 million people quitting the dollar. You can see what happens next.

The dollar collapses because no one wants them. Here’s the point. If case one was stable, case two is a catastrophic collapse.

But the only difference was three one thousandths of one percent of the US population.

You didn’t have to change three hundred million people’s minds. You only had to change a tiny, tiny fraction.

This is typical of complex systems. Tiny changes in initial conditions cause catastrophically different outcomes across the system.

How you can protect yourself

This is the world we live in. This is an actual model that describes the economy — not the one the US Federal Reserve uses.

Are we at this point?

Not yet, and we won’t know when we’re there until it’s too late. I can tell you, however, that we’re getting closer with the Fed money printing, bank derivative creation, increase in the scale of the system and the concentration of assets.

We’re getting closer to that critical state and the point at which the entire system collapses. It’s happening slowly and invisibly, but you can see the momentum.

That momentum is going to build until suddenly we get to the point where there is a new global reserve currency, which, of course, is highly inflationary. Investors need to get out of the dollar system, and there are a number of ways to do that.

You can buy gold, silver, land, fine art, carefully selected hedge funds, some mutual funds, and select stocks to protect yourself. Plenty of companies own hard assets that will survive the coming collapse.

It’s a fairly dire forecast. But that doesn’t make me a ‘doom and gloomer’. I’m just realistic about what I see.

The coming dollar collapse doesn’t mean you have to live in a cave. I don’t.

I wake up every day. I’m an investor, a writer, an advisor and an analyst. There are always things you can do to protect your wealth.


James Rickards,
Contributing Editor, Money Morning

James G. Rickards is the editor of Strategic Intelligence, the newest newsletter from Agora Financial. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. Jim also serves as Chief Economist for West Shore Group.

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