If the politicians don't act, do we eventually face a choice between very high inflation or a deep recession? It is going to be an extreme. What I suspect will happen—and I am just speculating, I don't have to make this
decision yet—is that somewhere along the line a recession will develop. Initially, the politicians will say, "We've got to
bite the bullet and suffer through this. This is good for us; it will help clean out our system." People are going to buy
that for a while. Then it is going to start to hurt. Then it is really going to start to hurt. At that point, the politicians
are going to give up, and they are going to start to inflate their way out of it. But the only way to inflate your way out
at that point is to really print money!
In that scenario, we start off with a recession and end up with very high inflation. Right, but we could have wild inflation first and then deflation. Another very real possibility is that we will
eventually have exchange controls. Fortunately, I don't have to make my investment decisions for two or three years
forward right now.
What kind of exchange controls? By exchange controls I mean limitations on capital flows. If you want to go to Europe, you can't take more
than $1,000. You can't ship money out of the country without the government's approval.
What happens to the relative values of currencies in a situation like that? The dollar disappears. What would bring on exchange controls is the dollar getting weaker and weaker. The
politicians would then try to bring in Draconian exchange controls, which would just make the situation worse.
When you say disappear, are you talking about the dollar becoming like the Argentine peso? Why not? Why couldn't it happen? Remember the Civil War expression, "I don't give a damn about a
greenback dollar."
You talk about the collapse of the dollar as if it's an inevitability. In 1983, we were the largest creditor nation in the world. In 1985, we became a debtor nation for the first
time since 1914. By the end of 1987, our foreign debts were greater than all of the foreign debts of every nation
south of the Rio Grande put together: Brazil, Mexico, Peru, Argentina, and all the rest.
