submitted by jwithrow.
Journal of a Wayward Philosopher
Why the U.S. Faces a Currency Crisis
September 11, 2015
Hot Springs, VA
The S&P closed out Thursday at $1,952. Gold closed at $1,109 per ounce. Oil closed at $45.92 per barrel, and the 10-year Treasury rate closed at 2.22%. Bitcoin is trading around $239 per BTC today.
Little Maddie is now on the verge of becoming a toddler. She has mastered the art of the crawl and the leveraged stand-up. Walking is the next frontier, and she knows it. To aid Madison in her quest, wife Rachel bought her a plastic toy that doubles as an obnoxious farm animal noise making machine and a child’s walker. Somewhat to my surprise, Madison instantly knew what to do – she pulled herself up on the handles and walked six steps using the contraption to achieve balance.
It was an exciting moment for a first-time dad, but the philosopher’s mind has a tendency to wander and I couldn’t help but envision the future. What happens when, in fifty years perhaps, little Madison buys her mother a walker? Will Rachel instantly understand the intricacies of its function as her daughter once did fifty years prior? Time shall tell.
Moving on to the wonderful world of finance and economics… all of the focus is currently on the Federal Reserve. Having beaten interest rates down to zero and left them for dead for six years in an effort to prevent the market economy from liquidating the cronies, the Fed has recently been talking tough about raising rates. Some say the Fed will follow-through and raise rates next week. Others say by the end of the year. Still others say they can’t raise rates without torpedoing the debt markets. My suspicion is that the economy has become so dependent upon low interest rates that any interest rate hike would be minuscule and nothing but an effort to save face.
Ultimately, the Fed’s decision is irrelevant in the big picture – a currency crisis is in the works regardless.
The U.S. dollar has dominated the global monetary system since the establishment of the Bretton Woods System in 1944. Bretton Woods fell apart in 1971, but the dollar has continued to dominate global finance thanks to a strategic alliance with the Saudi Royal Family which led to the pricing of OPEC oil exclusively in U.S. dollars.
This means that the entire world has been settling transactions – buying oil, importing goods, servicing debt – in U.S. dollars for seventy years now. U.S. dollars have been used in the vast majority of international transactions, even when a U.S. organization has not been involved in the trade.
This global demand for U.S. dollars has supported the value of the dollar and it has enabled the U.S. government to simply print money to pay external debts. As a result, there is nothing the federal government thinks it can’t do… and in the short term they are correct. After all, they are the only organization with the ability to create the international reserve currency at will. From thin air. Ex nihilo, nihil fit.
There are subtle consequences to this, however. The U.S. dollar has lost 21% of its value since 2002, and 98% of its value since 1913. As the national debt continues to pile up, the need to print more and more dollars increases as well. Which means the dollar will continue to lose value in an exponential fashion. This system is locked in a death-spiral, and the federal government has made it clear that no effort to shore up its balance sheet will be made. Spending cuts have never even been on the table; the recent debt ceiling arguments were over making cuts to spending increases. Meaning one side of the aisle didn’t want spending to increase quite so much the next year, but the other side did. Actual spending decreases were never considered.
Now most developed governments operate in the exact same fashion: they print fiat money from thin air to monetize government debt via the central banking system. The U.S. government is certainly not alone in this madness, but the spotlight is brighter because the U.S. dollar has dominated global finance for seventy years, and most people still consider it to be as good as gold.
We are starting to see a de-dollarization trend growing in the international community, however. There have been numerous bi-lateral trade agreements bypassing the dollar announced over the past few years, including a massive energy deal between the Chinese government and the Russian government. We have also seen a large emphasis placed on gold internationally over the past few years. China has been converting dollar reserves into gold on a massive scale. Several countries have expressed interest in repatriating gold held in foreign vaults. There is a reason every central bank in the world still stockpiles gold. We have also seen efforts to create cross-border payment and lending systems as an alternative to the U.S. dominated SWIFT system. The China International Payment System (CIPS) is the largest alternative scheduled to be up by early 2016.
As these de-dollarization trends gain steam, the aforementioned support for the U.S. dollar will decline. The ill-effects of monetary inflation in the U.S. will be felt more significantly as the global demand for dollars wanes. This means that the dollar will be devalued more quickly which will lead to rapidly rising prices on goods and services across the board.
The logical conclusion is hyperinflation if proper action and reform is not taken. By my estimation, the likelihood of proper action and reform being taken is approximately zero. Throughout history governments have responded to currency crises by blaming some other group and implementing crushing capital controls which further exasperates the situation. Look at what’s happening in Venezuela right now to get an idea of what this looks like.
As mentioned above, the U.S. government has demonstrated no interest in monetary reform, thus a currency crisis appears to be baked into the cake. We will probably see a few other countries go the way of Greece and Venezuela first because the U.S. dollar is still largely considered a safe-haven. But eventually the market will have its revenge.
The entire central banking system is an attack on free markets. Fiat money, deficit financing, and interest rate manipulations are all attacks on the free market. What’s been forgotten over the past one hundred years is that central banks are not instruments of capitalism; they are instruments of communism. In fact, the establishment of a central bank is the fifth plank of the Communist Manifesto. You know what else are planks of the Communist Manifesto? The graduated income tax, estate taxes, and the public school system. These are all attacks on the market economy, and major contributing factors to the precarious economic position most developed nations are in today.
Try as you might, the free market cannot be conquered. Fortunately, technology is enabling individuals to develop market-based solutions to the major economic problems we face. Even if government refuses to make the necessary reforms to avoid a currency crisis, you can choose to do so individually.
More to come,
For more of Joe’s thoughts on the “Great Reset” and individual solutions, please read The Individual is Rising: 2nd Edition. The Individual is Rising is available through Amazon and at http://www.theindividualisrising.com/. Please sign up for the mailing list to be notified of other projects as they come to fruition.