Just wrote this... Welcome the ET community to comment. Please distribute ... http://scriabinop23.blogspot.com/2008/03/on-usd-grand-polarization-ron-pauls.html Today is a day to talk about paradigm shifts. One theme of our times is the US dollar 'collapse' all facilitated by political mismanagement of our system, unsustainable trade deficits, bloated budget deficits, horrible energy policy, and most recently, a credit crisis causing a loss of faith in US assets. You don't need to go far to find areas of the blogosphere and youtube where goldbugs congregrate and call to an end of time, soliciting everyone to buy their duct tape and prepare to deal with our transition to becoming the next Zimbabwe. So amidst all of this, plenty of emotion is gathered. Who can deny that any threat to the sanctity of the dollar is upsetting and definitely a threat to national pride? Its easy to understand how disappointing this situation can be for us Americans, who for the better part of our lives have lived under the notion of a nationalistic and even moral superiority. What a dilemma that puts us in this past few years, having to gather some humility having 'failed' on multiple levels? So now everything is finally catching up with us. We are paying the price for fiscal mismanagement, years of bloating money supply without fear of repercussion, and as Ron Paul would say (I'll paraphrase his concept) a "flawed and unnecessary central bank driven system based on broken fractional reserve banking policy backed by no credibility (gold)." That is at least what everyone you talk to would believe. The public notion is one of trend following. At the peak of any bubble, the public has resounding confidence in whatever the bubble is. During the tech bubble, Dow was going to 40k. During the housing bubble, you better buy now, or you'll be unable to afford anything ever again. The commodities bubble? The Long any currency but US dollar bubble? Well we're still dealing with that. But the gold and silver bubble of the early 80's has a familiar ending. Ron Paul's folks are merely blind trend followers who do not realize innovation that defines America is by the large part fueled by a deflation-avoidance driven policy that serves to provide incentive to invest. The gold standard was a resounding failure as the US was trapped in a deflationary mire for decades on end, holding back economic and technological innovation unnecessarily. The herd is never good at realizing the risk rises (at least in the long term) as we get further and further from the mean, <em>because they assume every trend reflects a <strong>permanent</strong> paradigm shift</em>. The reality is contrary - paradigm shifts are the exception; cycles are the commonality. The resounding truth and best opportunity is always somewhere everyone is not looking. And that is this: The US Dollar is still a fundamentally sound currency, despite like any developed nations we face very real challenges in our entitlement systems(Medicare sustainability), energy policy, and war spending policy. But all of those problems are fixable. One needn't look far to realize that speculative flows to the euro are not quite justifiable on news reel of <a href="http://www.spiegel.de/international/business/0,1518,536635,00.html">German bank stability</a>. It also doesn't take a rocket scientist to realize Japanese dependence on the American economy, nor its dependence on a weak Yen to buoy strength, thus justification for higher interest rates and more favorable currency fundamentals. Our debt to GDP ratios are still amongst best in the developed world, and a few mere changes of government policy with respect to entitlement sustainability, tax policy, energy and food subsidization, and redirection of war spending to local infrastructure improvement can easily usher an era of US broad economic leadership. As far as money supply: we are in a deflationary time, not inflationary, as the goldbugs would have you believe. Money supply is coming down as the financial world is reassessing its risk models. Less money is moving around; credit is reigned in. In a market where fiscally sound municipal debt is chaotically unwound, you realize we are having a market dynamic driven detachment from risk related to the actual holdings determine new values of assets. The FOMC is merely swapping paper not able to be properly valued with treasuries to prevent a cascading liquidation effect. This is a stabilizer, not a monetary flood! Aggregrate demand is falling. That is the short term trend until bottom is found. And yet, commodities have generally reigned (Did you know crude oil is the new 30 year bond?). While world equity markets have mostly become sharply negative bears, somewhat predicting global recession, the commodity bulls argue a contrary and nonsensical notion, of stagflation, where commodity demand is miraculously maintained. Baltic shipping indexes sharply disagree; rates on the movement of goods are coming down. While there are genuine issues in supply, especially concerning <a href="http://scriabinop23.blogspot.com/2008/02/open-letter-to-barack-obama-and-all.html">misguided food/energy policy</a>, they are all repairable in a very real and attainable way. As I've previously detailed, our structural price problems could largely be remedied by investment instead of consumption spending. By investing, and merely going to all electric/battery vehicles, we could stop oil importation. Just imagine the cascading benefits on the broad economy of a lesser 'energy tax' (higher productivity), lesser dollar exportation to petro producers, and a disappearing need to use food for fuel. The whole equation changes. Suddenly oil is no longer worth its weight in gold, the dollar is, and hundreds of billions of dollars are no longer necessary to be 'invested' in stabilizing the mid-east. So my point? The world will (likely already) obviously experience a global cyclical recession of some extent and decoupling will prove to be a fantastical myth, thus undermining commodity bulls' claim as their sole justification for continued high prices. Financial memories are short, and never let the equity markets get far ahead of themselves following the 2000 bubble pop. With that said, the beef of substantial risk (as an investor, not a short term trader) is entirely in holding long commodities and USD short positions. Deflation is the name of the game, and reversion to the mean based on fundamentals, not momentum, is where the value lies. The years of 2008-2009 will likely mark a multi-decade bottom in dollar weakness, as a new political and financial landscape with a fundamentally sound direction will take hold. The fundamentals in so many trade partners have detached from their currency valuations, and this provides opportunity. New financial memory will prevent further debacles of excess, and hopefully crude will stay high long enough to stimulate a new era of energy efficiency, leading to the next great bull. Call me the optimist, even a contrarian, but selling the US short is a foolish thing to do after the proverbial toilet has already been flushed.