Remember the old saying “the dollar just isn’t what it used to be.” That phrase has never been truer than it is today.
U.S. paper dollars have been around for roughly a hundred years, compared to the history of asset-based money, that’s a mere heart beat. But when compared to the average lifespan of all historic debt-based currencies, most of these currencies die on average, in less than 80 years; the U.S. dollar has been a fiat currency (meaning debt-based) for 39 years. The way I see it is there are already 5 nails in the coffin.
Coffin Nail One
We’ve gone from an asset based currency to a debt based currency. Going back thousands of years, money was actual money, asset-based. The coins were silver or gold and had an intrinsic value. You literally carried your wealth around with you or buried it somewhere close. This was the way it was for centuries, the more gold or silver you had the wealthier you were. Marco Polo traveled the known world trading European gold and silver for Asian spices and silk. Gold and silver were recognized as a standard monetary unit and up until recently, most of the global day-to-day commerce was done in actual coin money. Early Colonial American States issued paper currencies that were short lived and coins again were the units of trade until the Civil War. Union and Confederate gold confiscations and the subsequent exchange to paper notes, provided the North and South with methods of paying for war materials from foreign sources that would not take either paper. After the war the country again reverted to real gold and silver money. The gold rush in California and silver strikes in Nevada and Colorado provided an ample supply of precious metals for the booming U.S. economy. Early in the 1900’s the government in coordination with the banks started the Federal Reserve. (The Federal Reserve is not a government agency and is about as Federal as Federal Express) The Fed is a SRO "Self Regulatory Organization,” i.e.; bankers making rules for bankers. I’m sure that made sense back then but to me that is like telling an eight year old to parent himself. The Fed was empowered to streamline banking and help regulate the national banking industry. Gold and silver coins were still the main currency and they were both bulky and a pain to store. Have you ever been handed a bag of silver coins? (Cannon ball in a bag) Big banks would use bank drafts, why not little drafts in place of coins? In 1913 the fed gave birth to gold and silver certificates which were at the time, fully exchangeable for the equivalent in real gold or real silver. The Fed established the fair market value of gold at $20 per ounce and paper money was based on that rate of exchange.
Now let’s get a handle on a concept. With gold and silver coins, money was real money. There was only as much money as you had in gold and silver. Mine more gold and silver and make into more gold and silver coins, you increase the money supply. What a concept, there is only as much money as you have gold and silver. This is asset based currency. This puts a finite limit on the money in circulation to the amount of assets, gold and silver that you actually have. A currency with controlled, real growth in the money supply and the asset carries no debt. Remember gold and silver have intrinsic value just for what they are.
Even with the introduction of paper money, the ratio was fixed based on our silver and gold reserves. If we had one dollar of gold in Fort Knox, then we could print one dollar bill. Pretty simple and we stayed that way until John Kennedy was elected President.
In an effort to stimulate the sluggish U.S. economy, he changed the $1 bill to $1 of gold to a more expansive $5 to every $1 of gold, thus allowing the money supply to quintuple. There were some protests but the event was basically overlooked and we geared up the economy and never looked back. We were still an asset based currency. The ratio had jumped 5 fold but we still had limits, inflationary though it may be.
Enter Richard Millhouse Nixon. He figured that if changing the ratio to 5 to 1 wasn’t working, lets just do away with the asset based concept all together. We hold tons and tons of gold, that’s all you need to know, FIRE UP THE PRESSES!
We have then moved to a debt based currency. No asset to currency limits. If we need money just print it. Look at a $100 bill, it says Federal Reserve Note. You have no right to exchange your money for gold or silver. The only thing your $20 bill can be redeemed for is two fives and a ten. Your money is only worth something because the person you are exchanging it with accepts that it has value. Cut to the chase, we left the gold standard, big mistake.
Coffin Nail Two
First the U.S. Treasury Dept is creating money out of thin air. It’s not that we are printing billions of paper dollars, if we were actually printing paper money we would be out of trees. This is really a highly involved sophisticated and laborious process, so I want show just how complicated the entire process is.
Let’s add a trillion dollars to the money supply. A clerk sits down at the U.S. Treasury’s computer system buried deep underground, types in a super secret password, clicks on U.S. Treasuries, goes to the “total outstanding balance,” adds $1,000,0000,000,000.00 to the balance, hits enter and in less than 10 seconds Uncle Sam has created $1 trillion. (Why waste all that ink and just think of all those trees we just saved, creating money out of nothing is even eco-friendly).
If you took all the money created since the paper dollar was introduced a hundred years ago through November of 2008 and totaled it up you would come up with $1,035,000,000,000.00 (a smidge over one Trillion). Why up till November 2008?
Because our government and the Treasury Dept. have been busy since then. In the last 18 months the government has raised the national debt ceiling three times telling the U.S. Treasury Dept to more than double the money supply. As of March 2010 the money supply is a whopping $2,075,000,000,000. That’s right, our Government created more money in the last 18 months than we did in the last 100 years, and you wonder why the dollar is loosing value. For us baby boomers, remember when the Canadian dollar was worth 72 cents. Not anymore, we’re dollar for dollar now. Believe me it’s not because the Canadian economy got 50% stronger.
Coffin Nail Three
We owe everyone. The almighty U.S. has gone from the number one creditor nation to the number one debtor nation in just 2 decades. That’s some slide. Remember in the paragraph above how we added the trillion to the money supply? The cash doesn’t exactly jump into the treasury’s acct. That trillion dollars is added to the weekly Treasury bill auction, it’s sold off the next week in the form of a bills, bonds or notes. They don’t actually jump the auction by a trillion, they ad $20-$30 billion into the mix so we can get the money without blowing our desperation. The buyers can be countries (China, Japan etc), associations (AFL/CIO, UAW, etc) or companies (Met Life, Boeing, and ET), or pretty much anybody that can pay. That’s where the actual money comes from. We owe it in debt.
The U.S. Government loves buy now pay later. Why would you worry if you could create money out of thin air? What’s a billion here or a billion there? When treasury bonds actually ran 30 years the system actually sort of worked. The U.S. Treasuries best friend was INFLATION. Buy the time 30 years had rolled by, Uncle Sam was paying back mere cents on the dollar in real money. But the Asian money men and women got wise to the long-term debt ploy and the fact that we were spiraling out of control with virtually unlimited credit, so they shifted their mind set. To China, Japan and most of our creditors we are on a short leash and it’s getting shorter. Right now to them 2 years is long-term. That means we have to refinance most of our debt on shorter and shorter maturities. Pretty soon we may be month-to-month. Bear in mind a lot of the long-term treasuries that are out there were issued 5, 10, 20, or 30 years ago. They are coming due and where is the money going to come from to retire them? This year 47% of all Americans don’t have to pay any taxes. I bet that puts a real damper on the GAO (Government Accountability Office) office party.
We have stripped every entitlement program to the bone. Do you think there is any real money left in the Social Security system to take care of you in your Golden Years?
What does to big to fail mean? What’s big? What’s too big? If the government goes bankrupt is it too big to fail? Talk to Greece, Iceland and California (6th largest economy on the planet), Japan, Germany, Russia or Zimbabwe. Our government must have the best accountants on the planet; robbing Peter to pay Paul and making us rejoice with all the big numbers with lots of zeros behind them that we see on their balance sheets. The fact is the unsinkable USS Treasury/Titanic will gladly take on the passengers of any sinking ship in the neighborhood. The USS Fannie Mae, The USS Freddie Mac, the USS Sallie Mae, the USS FDIC, the USS Wall Street and the newly christened USS Health Care all floating in deep financial waters have filled the life boats and added their charges (pun intended) to the passenger list of the USS Treasury/Titanic. The band on Board is playing “We’re in the Money.”
Reality check here folks, there is no way you can ever borrow yourself out of debt. The U.S. Treasury is getting a cash advance on its credit card to pay this week’s credit card bill.
Coffin Nail Four
The Middle East. Did I mention that Nixon took us of the gold standard in 1971? Well one of his other dubious distinctions is his deal with the Saudi’s. To make sure his campaign contributors, the auto industry and the oil companies had a lock on a seemingly endless supply of cheap oil. Curse those people that want cars that get good mileage or factories that burn fuel efficiently. Here’s the deal, the U.S. will provide a state of the art standing army, and we will have forces, army, navy, air force stationed strategically throughout the OPEC nations, keep the Israelis pacified and make sure that we don’t screw with their lifestyles and monarchy. Their part, all the cheap oil we could ever want, well at least all we could want back then and maybe the price might go up some day, but back then Nixon thought he had found Aladdin’s lamp. Oh yeah just like Colombo Nixon wanted, “one more thing” we want all oil priced in DOLLARS.
Ergo the term Petro-dollars. That means that if your country imports oil from OPEC you have to pay for it in American Greenbacks. That’s fine for all of us, that’s what we carry in our wallets, but the Japanese and the rest of the globe weren’t too happy about it. This deal put a huge demand on the dollar and further elevated its global status. This Petro-dollar worked just wonderfully for a couple decades but then the dollar started to slip a little, then it slipped some more, then the U.S. economy started getting shaky, then a financial meltdown in 2008, a rush to a massive financial bailout and China & Japan wanting guarantees on our IOU’s.
Over the years OPEC, not exactly thrilled with this long-term deal, and the pariah we represent having troops all over Islam, is having second thoughts. In November 2009 and January 2010, OPEC, met behind closed doors with the main topic of the meeting being bailing on the Petro-dollars and moving to Petro-Euros. Insert another coffin nail in the dollar casket. More meetings on this agenda are planned as the U.S. economy continues to spiral into more debt.
Coffin Nail Five
World Reserve Currency. Well let’s recap; the Government is creating dollars out of thin air, we’ve maxed out our Treasury credit cards with just about every industrialized nation on the planet, OPEC is looking for a better benchmark to hang their oil business on and now behind door number four “Ta- Da” The SDR. The what? SDR, that’s an acronym for “Special Drawing Rights.” For decades the U.S. dollar and U.S. Treasuries were the “World Reserve Currency.” The dollar was strong, dependable, had low inflation, rock solid U.S. Government guaranteed, instant liquidity, globally recognized, perfect for international commerce and the drug cartels currency of choice. (But it still doesn’t have the staying power and invincibility of GOLD)
That was then, this is now. In the last year or so the IMF (International Money Fund/ World Bank) has revived a global currency it has dabbled in since 1969 the Special Drawing Rights. In August 2009 the IMF met and passed the 4th amendment opening the door to issuing $250,000,000,000.00 in SDR’s; which it promptly sold and then a few months later the IMF sold an additional $60,000,000,000.00. The SDR is backed by the IMF and is made up of a basket of currencies, which makes it a more diversified and desirable place to store large wealth. Not putting all your eggs in one dollar basket.
First, this represents a new safe place to store large wealth, threatening the dollar for top of the hill in the global currencies market. Second, that $310,000,000,000.00 that went into SDR’s didn’t go into U.S. Treasuries. That’s real money we didn’t get and it’s opening the door to us not getting a lot more. It’s like bank just opened next door to your bank with a better rates and a stronger looking vault.
Last, but by no means least, China, Japan, India, Russia and European Union are pushing the IMF to have the SDR replace the Dollar as the world reserve currency. Recently China, Japan, India and Russia have all been looking to bolster their gold reserves and are rumored to be selling treasuries to do it. One snag, there isn’t enough gold to satisfy their demand and they don’t want to spike gold’s price. SDR’s will fill the gap. If more and more countries shift from dollars to SDR’s, we will have to try to sell more and more treasuries at higher and higher rates or until nobody wants them or has free cash to buy them.
Now imagine that the word gets out that China is dumping treasuries. Japan not to get caught holding devaluing treasuries decides to dump too; India follows … etc, etc. The dollar crashes. With the global internet this could happen very quickly.
Slam the lid on the dollar coffin, get out the air-nail gun, drop the box and start filling in the hole. Anybody got any money left for a headstone.