Seldom considered, but devastatingly real, currency fluctuations in the foreign exchange market affect every aspect of your social and economic security. It makes debtors out of creditors, failures out of heroes and beggars out of kings. It makes all the difference between what you owe and what you are OWED. Wreckages of past currency crises include:

If you can recall the financial carnage left in the wake of past crises and are open-minded enough to acknowledge the potential political and economic turmoil in store for the U.S., then read on. Because the world today is as rife with uncertainty as it has been at any time in history. And each of these threats bear directly on the fate of the dollar. Let me ask you, what happens to the dollar...

...when Iran tests its first nuclear weapon?

...when North Korea steps away from nuclear discussions again?

...when the price of oil or gold is no longer set in dollars but rather in Euros or British Pounds?

...when the U.S. finally exits its mission in Iraq?

...when we move further into the 2008 election year?

...when the tides of global sentiment toward the U.S. and its ever-expanding deficit change and payment is demanded for all the credit it has been extended?

Powers are shifting. Economies are teetering on the brink. And the consequences of it all are reflected in the world's currencies, especially the DOLLAR. So, how will you protect yourself from the impact of any or all of them?

Don't Let Unseen Forces Cripple Your Investments

Just open your newspaper or favorite news weekly and have a look. You can't miss them. News reports about them are everywhere. But what many investors don't realize about these political and economic stories, is that they bear directly on currency exchange rates, the value of one country's currency priced in terms of another's. And these potentially devastating currency fluctuations have been at the core of nearly every economic boom and bust.

And to make matters worse, rampant U.S. borrowing and spending has cornered our economy into a perilous situation. Like pedaling a "dollar" unicycle upon a global financial tightrope, while balancing a tray full of champagne glasses filled with debt and deficits in each hand, all without a net. And only a little disruption will bring the whole thing crashing down. And right now this is the very real danger facing the dollar.

Foreign Exchange Made Simple

Most people don't understand global currency markets. They'll hear on the news that the dollar is up against the yen or down against the euro but they don't know what that really means, or understand the potential significance of that news. They think that currency trading exists in an arcane and complex world reserved solely for huge banks and institutions that have the financial muscle to take on billions of dollars of positions in foreign currencies. A world that has little to no impact on their investments. Well, I'm here to tell you that's not the case.

You see, the world of currency trading is not all that complex. Think of a country's currency as simply a share of stock in that country. Market participants trade for those shares with their own currency depending on how they see the investment potential of that country. Let me ask you, what do you look for when you're researching a stock to buy? Do you look for a company with weak or negative earnings? A company that is laden with debt? A company whose budget is out of control? One with little or no growth potential? Would you sink your hard earned money into a dog like that?

No, of course not.

A smart investor would want to buy profitable companies with great earnings and growth potential. Not debt-laden shares with no assets in their coffers.

Well, it's the same in the currency markets. Banks and traders invest in different countries depending on how they perceive that country's fiscal and economic health. Countries that could provide a substantial return on their currency investment. And, like robust companies in the stock market, countries whose economies are very promising attract investment capital. And their currencies, like shares of stock in a bull market, reflect that increasing value.

However, countries that spend more than they earn, that carry huge debts and deficits, those with poor fiscal policies and no stores of value, those unlikely to payoff on any investments they attract...well, they get ignored, or even worse, dumped by the rest of the world.

And when a country's currency gets hit like that, the shock waves are felt through its entire economy. Imports become more expensive, international debts become more difficult to pay, interest rates rise trying to attract investor capital, taxes rise to pay for continued fiscal spending, stock prices begin to fall, consumer prices inflate, real estate prices tumble... Now, do you see the devastation that can erupt out of a troubled currency?

The Unthinkable Realities Of Collapsing Currencies

Imagine conditions right here in the U.S. that would result from a collapsing dollar, like those of other casualties of modern economic history. Countries whose economies were blown to bits, their standards of living decimated and crippled when their currencies fell into disfavor and collapsed against the rest of the world. Have a look at the following brief case studies and you'll see the real-life impact that an imploding currency can inflict upon its country and its economy.

Unthinkable Reality #1: Germany

To finance their war efforts during WWI, the German government suspended their gold standard and began borrowing rampantly on the belief that the huge debts they amassed would be repaid from external sources after they won the war.

Bad plan.

They lost the war and were held accountable for huge reparations. This, combined with the debt they had amassed, led to a devastating collapse of their German mark. And their solution to the problem only made things worse. They began printing money day and night to cover their debts, thrusting their entire economy into a state of hyperinflation. They effectively devalued their currency from 9,000 marks to the dollar in January 1923, to 100,000 to 1 in June of 1923, to 4.62 MILLION marks to the dollar in August of 1923!! A loaf of bread at the market cost 580 BILLION marks!!! In the end, their money became worthless and a horrific spiral of decline took hold:

But the fundamental warnings were there for anyone who was paying attention. No reserve value of their currency, an exploding money supply, wide open access to credit, a faulty debt financing plan.

Just imagine (if you were German) if you could have seen the warning signs and quickly moved your capital into an investment that would have made you impervious to the effects of this hyperinflation. In 1923, there were no means readily available by which investors could protect themselves.

Unthinkable Reality #2: Mexico

By 1993, Mexico had experienced an enormous economic boom fueled by foreign investment. This expansion, which had inflated the peso on the global stage, was about to propel them out of their Third World status. However, rampant spending by then President Salinas' administration spiraled their deficit to 7% of their GDP, suddenly making them a bad bet to foreign investors. In order to support their currency and attract essential foreign funds, the government piled on their debt by issuing high interest junk bonds. The boost was short lived. The combination of debt, deficit and political instability caused investors to dump their holdings...leading to a near immediate 43% crash of their currency.

The result? Take a look:

And in 1994 you would have been at the mercy of such market forces. But not anymore. Now you can learn to take control of your investments and insulate them from the fluctuations of the dollar.

Unthinkable Reality #3: Asia

Throughout the early 1990s, the South Eastern countries of the Pacific Rim were the darlings of investment capital. The influx of capital to Thailand, the Philippines, Malaysia, Indonesia, and Korea brought enormous economic prosperity to the whole region.

Until, that is, investors became aware of their exploding debts and current account deficits which approached 8% of GDP. Massive selling of local currencies brought the whole region under crushing economic pressures. And without foreign investment reserves to support them, their fundamentally overvalued currencies collapsed. The results, predictably, were devastating. Economic impacts echoed like shock waves through the region and then the entire world:

Within months, this contagion spread to North Asia, Latin America and Eastern Europe, threatening in all $184 billion of capital.

The collapse played out quickly, but it was developing for some time. Think for just a minute what a windfall it would have been if you could have positioned yourself to capitalize financially from this disaster.

And right now the United States might be on the verge of an implosion very similar to any one of these!

Could The Next Unthinkable Reality Happen In The U.S.??

All these countries had a series of economic conditions chaining them to their fates. Screaming high trade deficits, unserviceable debts, and no real store of value whatsoever. The very same conditions that exist in the United States today.

And I don't care how big and powerful you think the American economy is, it is inter-connected to every other country within the web of foreign exchange. And when the world decides to dump your stock, it doesn't matter who you are!

By the end of 2006, America's totals added up like this:

Does this sound like a good deal from an investor's point of view? The market doesn't seem to think so. In fact, it hasn't thought so for some time.

In the past 5 years the dollar has lost:

33% of its value against the Swiss franc,

The price of dollars based in Swiss francs. The lower prices go, the weaker the dollar gets. In 2001, you could have had more than 1.70 Swiss francs for US$1.00.
Now the greenback buys less than 1.17 Swiss francs.

45.7% against the British pound,

The price of British pounds in dollars. It now costs over US$2.00 to buy 1 British pound. The same British pound you could have bought for around US$1.40 in 2001!

73.4% against the euro,

The price of euros based in dollars.
What you could have bought for around 85 cents in 2001
now costs you over US$1.40!

and a MASSIVE 84.6% against the Australian dollar!!

The price of Australian dollars in U.S. dollars has nearly doubled in the past 5 years!

Now -- you can see the threats that are looming and the potential consequences that could ensue. And yet this may still just be the tip of the iceberg!

The Frayed Threads By Which Our Economy's Dangling

If things are so bad, what's holding everything together? Well there are two shaky propositions at work keeping the greenback afloat.

First, there are countries that are still more than willing to stockpile United States' currency. Parts of Asia, including Japan, along with the world's biggest creditor, China, own nearly one trillion U.S. dollars. That's a big chunk of our country in their hands. And if the U.S. isn't the investment darling of the world, you may be asking yourself the even more important question, what are their motives?

Simple, they're protecting themselves... at our expense.

In addition to being the biggest creditor on earth right now, China has also surpassed Mexico as America's biggest trading partner. By holding dollars, they are effectively keeping their currency, the yuan cheap. Which means that U.S. imports from China far outpace our exports to them, to the tune of $232.5 billion in 2006. That accounts for over 30% of the U.S.'s total trade deficit worldwide!!

And if you need any proof of the seriousness with which the U.S. takes this imbalance, Treasury Secretary Henry Paulson called it "a symbol of the real and imagined downside of global compeition." China's response? "We should not easily blame the other side for our own domestic problems." Any effort to politicize the economic relationship between countries would be "absolutely unacceptable."

The Artificial Dollar Demand Holding Back The Dam

The second factor propping up the dollar is the fact that it is currently considered the world's reserve currency. Essentially, that means that everything of value worldwide -- gold, oil, commodities -- is priced in dollars. So if you want to trade in the international market for any of these, you'll need dollars to buy and sell.

This creates a "mandatory" demand for our currency, even when our trade deficit is at such a dangerously high percentage of GDP, even when we borrow mercilessly to fund our fiscal responsibilities. In other countries, this kind of economic behavior would send investors fleeing in panic and crush their currency. But for the moment, the U.S. gets a pass.

But what if that changes? What if the UNTHINKABLE really comes to pass and the rest of the world decides that it's too dollar dependent? That they no longer want to keep funding our deficit spending and accepting more and more worthless dollars in payment on our debt?

Shifts In World Economic Dominance

Not possible you say? Well, it was less than a century ago that, not the dollar but the British pound set the standard for purchasing everything international. This island nation was the world's leading military and economic power for the 18th, 19th, and into the 20th centuries. There was a saying that "the sun never set on the British Empire" it was so widespread.

But in the aftermath of WWI things did change dramatically for the U.K. Debts from their war efforts mounted. Their deficits grew out of control and their perception as the protectorate of the world began to wane. In all, it's been estimated that WWI cost Great Britain a quarter of its total wealth, massively eroding its base as the world's industrial, military, and economic superpower.

Then, by the aftermath of WWII, with no cash reserves, having overspent on everything, the mighty British Empire effectively collapsed economically and a new economic power emerged to take over. A mighty industrial manufacturing powerhouse, whose debts were negligible, whose budgets were balanced, whose economy was strong, and whose currency was backed by a gold standard - the U.S. dollar.

And we have been the world's reserve currency for over half a century. A position that has sustained all U.S. financial dominance. But, that too, may be shifting.

Compare America's situation to that of Great Britain in the aftermath of WWII. Our debts continue to mount and we continue to spend our deficit out of control, especially feeding our own war effort, to the tune of over a TRILLION dollars so far. Could America's status as reserve currency actually be in jeopardy?

The Timer On That Bomb Is Already Ticking

You bet it can. In fact, actions have already been taken.

President Bush has dubbed Iraq, Iran and North Korea the "Axis of Evil." Is that threat military or economic?

And should the Saudis, or any member of OPEC for that matter, follow suit pricing any oil exports in euros, it would be an unmitigated disaster for everything American.

By the end of 2006, 64.7% of the identified official foreign exchange reserves in the world were held in U.S. dollars, 25.4% were held in euros and 4.4% were held in pounds. That's a change of -2%, 8% and 1.6%, respectively.

Other Unknowns Waiting To Make The Unthinkable Real

Either of these, a change in Asian sentiment or a further drop in the dollars reserve status, could send the dollar crashing and your life savings with it. But that's not the end of the threat. What other, UNFORSEEN threats might push the dollar past the tipping point?

Any of these unknowns could be the spark that sets off the explosion of:

There is one more critical reason for you to UNDERSTAND and watch the currency markets like a hawk.

Just last year (through Q3) a timid rally attempt was beaten down further still, dealing the dollar even more massive losses to the tune of 6.04% against the pound, 7.5% against the Swiss franc, 10.9% against the euro, and an incredible 15.4% against the Australian dollar.