Monday, October 05, 2009

Who is Destroying the Dollar?

The Drudge Report has a most interesting headline for this article: "Arabs Plot to Drop Dollar."

Basically, what is happening is that the world has been doing business in U.S. dollars for a long time. In fact, the dollar has been the world standard currency since WW2, according to the Bretton Woods agreement. In a nutshell, after the war, the U.S. economy was the most stable, and the U.S. dollar - still given full gold backing for foreigners (but not for American citizens, who were not allowed to own gold per decree by President Franklin Roosevelt) - became the global standard for cash reserves and international transactions.

Any time the world needed to convert dollars into gold coins, they could do it, as the American dollar was (again, for foreigners) fully backed by gold. This gave international bankers great confidence in the dollar, as the gold backing acted as insurance for their deposits.

In 1971, President Richard Nixon abolished this feature (he "closed the gold window"), which left the value of the world's savings accounts to the tender mercies of the Federal Reserve Bank. If the Americans so chose, they could print dollars to infinity and pay their bills with it, and thus destroy the value of nearly every dollar in the world. After Nixon closed the gold window, that's what the Fed did - sending the world economy into the 1970s "stagflation" tailspin.

Fast forward to today.

The Obama government (following the lead of President George W. Bush) is printing money in record numbers. The effect on the purchasing power of each dollar is starting to become clear: the U.S. dollar is plummeting compared to world currencies, and gold is trading in dollar amounts never before seen in history.

China and the Arab world (who hold billions of American dollars due to selling to the Americans) are not happy to see the value of each dollar drop as the Fed prints more and more dollars to be used to "bail out" American banks and businesses.

It would be like running up a huge Visa bill, and then paying it off with monopoly money - with Visa being forced to accept it! Imagine how much stuff you could "buy" if you could simply run copies of Monopoly money on the photocopier and pay your bills with it. Eventually, Visa would want payment in something other than Monopoly money (which becomes worth less as more copies enter circulation). And when that happens, just imagine how painful it will be to pay back these huge debts in real money instead of play money!

In the U.S., we are stuck with the U.S. dollar. By law, dollars ("Federal Reserve Notes") are "legal tender for all debts, public and private." This means if you have a contract, it must be honored in U.S. dollars - even if the government irresponsibly drives the value of the dollar down to a penny each. We Americans, in essence, have no choice but to accept Monopoly money - and the government has the monopoly power (however unconstitutional) of causing an infinite number of Monopoly-style bills to be printed and circulated.

But China and the rest of the world are not obliged to trade in dollars any more than they must take Monopoly money in payment of cheap Walmart goods or petroleum. And it is their right to insist on payment in some other currency. It is their right to seek a reserve currency that the Americans can't simply run off a printing press - paying their debts in counterfeit scrip while stealing from those who have been frugal and saved their money by devaluing that money.

However, the article is spun as some kind of "Arab plot." The article's last paragraph correctly points out that the American invasion of Iraq came immediately after Saddam Hussein threatened to no longer accept U.S. dollars in payment for oil - thus potentially ending America's use of the Xerox machine to pay its bills. Many of the comments at the end of the article are also illustrative. A lot of folks seem to think the Americans are the "good guys" in all of this, that the rest of the world should somehow be compelled to accept endless amounts of Monopoly money for goods and services, as though legal tender laws to which we are subject are somehow binding on other countries.

The wisest thing Americans can do right now is get out of the dollar. Convert your savings into gold, foreign currencies, commodities, or investments not denominated in American dollars. The printing press may well be the ruination of the United States economic infrastructure - as it was receptly in Zimbabwe, as it was in the 1980s in Argentina, as well as the post WW1 German Weimar Republic. Once the rest of the world no longer feels bullied into using American money, when they feel they can no longer trust it, when they can safely divest themselves of dollars without a panic selloff, and when a new international standard is put in place - then the real value of the dollar will become clear to us back home, as trillions of increasingly worthless IOUs from China and the Arab world find their way back to our shores, flooding the country with money that buys less and less with each passing day. This could get very ugly.

The U.S. has been running a scam on the rest of the world since 1971, and it has especially kicked in over the last year (there are videos on youtube showing the spike in money printing since 2008, but all I can find right now is this cheesy Glen Beck illustration). It was a good run for a criminal enterprise, I suppose. But even Bernie Madoff couldn't keep the scam going forever. The sad part is that we will all be stuck holding the hot potato, and we've been so poorly educated about economics that the politicians will likely successfully convince us that the Arabs and the Chinese have somehow "done this to us," rather than our real enemy: our own Federal Reserve system and its bought-and-paid-for surrogates from both parties in Washington, DC.

To learn more about the Federal Reserve scam, I recommend this video and this book. To learn what can be done about it now (assuming it isn't too late), I recommend this book.

1 comment:

Paul said...

Thanks as always for speaking the truth.