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March 13, 2005

The Dollar is a Risky Scheme
by Alex Wallenwein

The fiat-dollar is a confidence game. No more, no less.

At its core, its "value" is based on nothing other than the confidence that it (and the government's ability to tax economy underlying it) can instill in its users.

Question: what happens to a confidence game when people lose confidence in it?

People and governments world-wide are in fact losing confidence in the dollar - at a very rapid pace. Here are the factors undermining that confidence:

• A $617 billion per year (2004) US trade imbalance.

• A $427 billion projected US federal budget deficit for 2006.

• $2-plus trillion international indebtedness of the US government (net outstanding treasury bonds liabilities).

• $37 trillion total private, local, state, and federal government indebtedness.

To put just these last two figures in perspective, the total current US money supply (M3) circulating domestically is about $9.5 trillion dollars. Of those, only $697 billion are in physical cash currency. The total estimated US GDP in 2004 was only slightly under 12 trillion dollars. That's all US economic activity added up for one whole year.

Irredeemable Debt

The debt racked up under the current dollar system cannot be redeemed. It doesn't matter how hard Congress tries to restrict its spending (good luck!) or how well the econo0my is functioning.

The reason: the dollar itself is nothing but debt. It is a money-substitute that has been totally denuded of any connection with that which it is supposed to be substituting for. In other words: real money - gold and/or silver.

This is not news for most of you who read this, but it is worth remembering when we talk about "paying back the national debt."

How can such numbers ($37 trillion in total private and public indebtedness) ever be paid back - even if the means of payment (fiat dollars) was actually capable of retiring that debt?

Why go into all of this?

Because even die-hard gold investors are still "not quite sure" about gold being destined to go up in dollar terms for a long, long time (and actually going off the charts before too long - and staying there for the foreseeable future!)

And, as you can easily deduce from all the foregoing, gold is not going to do this just in dollar terms alone. This is happening - and will be happening - all across the entire fiat currency spectrum. The only difference is that some of the other currencies out there might actually survive this.

There are basically two scenarios here, but the outcome for the dollar will be the same.

It will happen either slowly - or quickly.

A Slow Death:

If it happens slowly, maybe the dollar in its current fiat incarnation (you can't really call it an "incarnation" because there is really no "flesh" on its bones) can survive as a currency in some form of use by some people.

Instant Death:

If it happens quickly (a so-called "crash-landing") the dollar and its underlying economy will disintegrate on impact.

Dead - Either Way:

But in either case, just as in the case of a landing or crashing airplane, the direction of the dollar's future movements (down) and the distance it is destined to travel (all the way down) remains the same.

What is the meaning of "all the way down" then, in practical terms?

It means all the way until all of the debt the dollar has racked up over the decades is either repaid (a literal impossibility, as we have seen) or repudiated, i.e., defaulted on.

What is the effect of total repudiation of all debt racked up under the dollar system?

The dollar - itself being a mere instrument or legal fiction evidencing that debt - will simply cease to exist, as there will no longer be any reason for its existence!

Unless ...

... unless US elitists, in their utter desperation, somehow magically come to their senses and begin to try and tie the dollar to something other than a mere con-game once again, like oh, say, maybe ... gold?

Who knows. It could happen. After all, the people who conceived the euro understood that somewhere down the line, they have to give up some of the control that was formerly afforded them by a pure, gold-adverse fiat system - just to survive the inevitable (should we call it "[John] Law's law"?) Namely, that all fiat ends up returning to it's intrinsic value: zero - or worse, since it's actually a negative number..

Can that happen, here in the US, though?

Probably not until after a serious, bone-crushing depression - and some major popular upheavals.

Rate-Hikes No Cure for Higher Imports

I'm not quite sure where this insanity comes from, but a lot of "experts" expect Greenspan to raise rates faster if inflation ticks up as a result of higher natural resource prices. That would be a knee-jerk reaction if I've ever seen one - jerking the knee right back into Greenie's face.

Rate hikes are the prescribed (but poisonous) medicine for internal demand driven price hikes. The idea is to cool off demand so the economy won't "overheat." Keynesian Economics 101.

But when prices climb due to external reasons (falling dollar, higher oil, etc.) then rate hikes could only further crimp the already crimped budgets of private households and businesses. That would choke off all remaining economic viability (i.e., consumer spending) as even cheap Chinese imports won't do their trick of stretching already overstretched budgets any more.

Chinese imports keep consumers breathing because they are falling right along with the falling dollar due to the yuan's dollar-peg. But the relief they offer will be cut short when rates rise. Greenie may be a sellout, but he isn't stupid. The only way he'll do this is if his agenda actually includes crushing the US economy. Some argue that's exactly what he is doing - in a way that nobody could track it back into his den. We'll see.

Where Will It All End?

There are two likely outcomes:

Outcome A: If the Planners Get Their Way ...

If the currency planners get their way, we will either end up in a total RFID chip society, or with all currencies freely floating against gold. I believe there are two camps among them, quietly battling each other. Which one will win? There's no way to tell at this point.

Outcome B: If People Get Their Way ...

If popular upheavals lead to any kind of eventual return to monetary sanity, we may end up with a purely private bullion standard, traded both in physical and digital form. What's the likelihood of this? Very, very slim - but then again, so was the likelihood of success of the American colonists fighting the British Empire.

Don't count America out until she's really dead. And as long as some of her people have gold and the means to defend it, she ain't dead. Of course, more would be merrier...

Got gold?

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

Just like driving your car, investing only makes sense if you can see where you are going. The Euro vs Dollar Monitor is your golden windshield wiper that removes the media's greasy film of financial misinformation from your investment outlook. Don't drive your investment vehicle without it!

Copyright © 2003-2008 Alex Wallenwein

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