November 18, 2013
You’ve probably heard by now that there’s a politician in Russia trying to ban the dollar, calling it a Ponzi scheme.
20 years ago this would have been considered blasphemous. 10 years ago it would have been laughed at. Today, it’s taken seriously. And with good reason.
If you dive deep into the Federal Reserve’s balance sheets, you can see for yourself.
Just like any other bank, the Federal Reserve has assets and liabilities. The difference between the two of these is the bank’s capital. And in general, the higher the capital, the stronger the bank.
One way to measure a bank’s capital is as a percentage of its assets– higher is always better.
You may recall, for example, that when Lehman Brothers went bankrupt in 2008, the firm’s capital (or equity) was about 3% of its total assets.
A year ago, the Fed was at 1.93%. By August of this year, its capital had fallen to 1.53%. Today it stands at just 1.42%. So the Fed’s balance sheet is clearly deteriorating quite rapidly.
This is critical to understand… because the dollar is ultimately the Fed’s currency. The Fed has monopolistic control over the US money supply. So as the Fed deteriorates, so does the dollar.
Take a look at that dollar in your pocket. It says ‘Federal Reserve Note’. ‘Note’ is just an accounting term for a liability. So by printing money, the Fed is really just creating more liabilities and eroding its balance sheet.
As they do this, the Fed’s capital shrinks. This puts the Fed… and the dollar… in precarious financial condition.
Now, when the dollar reaches its intrinsic value in British Thermal Units is anyone’s guess. Maybe it happens tomorrow. Or in the next decade. No one knows… And that’s why it’s important to find a solution that is suitable in either scenario.
Here’s one option to consider: own the Hong Kong dollar.
Fundamentally, the Hong Kong dollar is MUCH stronger than the US dollar. Hong Kong’s central bank is nearly 20-TIMES more capitalized than the Federal Reserve, and the Hong Kong government has a minimal debt level.
But more importantly, the Hong Kong dollar is pegged (for now) to the US dollar. It trades at 7.80 Hong Kong dollars per US dollar, a very narrow band.
This essentially eliminates currency risk. You can freely convert between Hong Kong and US dollars without taking a bath.
And if the US dollar surges temporarily with respect to other currencies, the Hong Kong dollar will also do well.
But should the US dollar collapse, then the Hong Kong Monetary Authority would simply de-peg from the US dollar… or at least revalue it.
In other words, by holding Hong Kong dollars, you can capture the benefits of US dollar exposure while protecting against downside risks.
There may be options at your local bank for holding Hong Kong dollars. But the best option is to go straight to the source– open a bank account in Asia, preferably Hong Kong or Singapore where you can own Hong Kong dollars directly.
The banks are much better capitalized in this part of the world, and you would substantially reduce your counterparty risk by holding the funds directly.
(Sovereign Confidential members: please refer to recent premium content for information about how to do this…)