Imperial Finance

By: John Mackenzie | Tue, Dec 20, 2005
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As the medium of International Exchange, the United States and its Currency remain in the unique position of Seignorage or having our currency accepted as the medium of International exchange. From this privileged perch the United States has been able to spend far in excess of what it earns in trade merely by having the Federal Reserve create whatever amount of money it needed.

Other nations have no choice but to accept the Dollar. When the Dollar's remaining link to GOLD was removed in 1971 it had to compete with other currencies on the basis of comparative value. The privilege of seignorage required competing currencies to first be converted to Dollars in order to participate in Global Markets. This provided a firm foundation to the Dollar's exchange value.

Demand for the Dollar since 1971 has remained limitless or so it appears, which in turn, allowed the United States the ability to finance its Current Account and Budget requirements with Fiat currency.

This monetary feat of exchange has no precursor.

Contrary to the boundless conventional wisdom prevalent in analysis of the "Trade Deficit" and the weakening of the Dollar, it should be clear we benefit at the expense of everyone else engaging in International Trade. We are exporting Monetary Inflation; paper from nothing for something.

We are allowed to spend more than we earn by our trading partners. Increasingly, there are recent and compounding warning signs our free ride is approaching an end. At a time when Trillions of Dollars are residing in foreign hands bound with the unpleasant realization that Dollars are increasingly becoming worth less and perhaps on their way to worthless.

When the day arrives foreigners stop taking our paper for their products, inflation will arrive like an enormous tsunami as our Dollar holding friends chose to convert them into something tangible. A seemingly endless flood of Dollars will wash ashore barring any protectionist actions.

Far and away, the greatest bubble of them all is not stocks, bonds or home prices; it is the United States Dollar.

The Dollar is, by any reference, Debt Money created from nothing, exchanged as a currency.

Debt default will destroy Debt Money, leading to a cascading of Debt defaults and contraction of the Debt Money monetary base.

GOLD has an important role to play in all our lives and although the price in Debt Money may become wildly volatile, there is no better place to put ones hard earned capital.

Protect yourselves.


Author: John Mackenzie

John Mackenzie

John Mackenzie manages private capital.

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