The New Bubble: Cash

As the deleveraging tsunami continues, fears of deflation loom large, and the value of stocks, commodities and virtually all other asset classes is being decimated, investors are flocking to the dollar.

Cash and treasury bills (which are really cash) have done very well in comparison to everything else, and people sitting in cash are feeling pretty smart.

But will it last?

Well, a team of UN economists “who foresaw a year ago that a US downturn would bring the global economy to a near standstill” are now forecasting a hard landing of the dollar. As the Financial Times writes:

The current strength of the dollar is temporary and the US currency risks a hard landing in 2009 . . . .

The overall trend remained a downward one, however, reflecting perceptions that the US debt position was approaching unsustainable levels. ***

“Investors might renew their flight to safety, though this time away from dollar-denominated assets, thereby forcing the US economy into a hard landing and pulling the global economy into a deeper recession,” the report said.

Those analysts who advised raising cash were very smart. But cash may very well be the new bubble. And when it bursts, the value of all of those pieces of paper might crash.

What should one be invested in when the dollar bubble collapses?

That’s the big question. There are many strong arguments for gold. And if the trillions of dollars being printed by Bernanke and the boys lead to hyperinflation, gold will be a good inflation hedge. Similarly, gold has historically performed well when fiat currencies collapse. But we are in unprecedented times, and so its hard to know for sure.

Note 1: Of course, the timing of when the dollar will collapse is an important question. People like Mike Shedlock – who told people to get into cash long before other advisors – has argued that the cash bubble could continue for a while. The trick is getting out at the right time – too late and you get creamed, too early and you lose money.

Note 2: I am not an investment advisor and this should not be taken as investment advice.

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