Guest Post: Is The US Monetary System On The Verge Of Collapse?

Tyler Durden's picture

Submitted by David Galland of Casey Research

Is the US Monetary System on the Verge of Collapse?

Tune into CNBC or click onto any of the dozens of mainstream financial news sites, and you’ll find an endless array of opinions on the latest wiggle in equity, bond and commodities markets. As often as not, you'll find those opinions nestled side by side with authoritative analysis on the outlook for the economy, complete with the author’s carefully studied judgment on the best way forward.

Lost in all the noise, however, is any recognition that the US monetary system – and by extension, that of much of the developed world – may very well be on the verge of collapse. Falling back on metaphor, while the world’s many financial experts and economists sit around arguing about the direction of the ship of state, most are missing the point that the ship has already hit an iceberg and is taking on water fast.

Yet if you were to raise your hand to ask 99% of the financial intelligentsia whether we might be on the verge of a failure of the dollar-based world monetary system, the response would be thinly veiled derision. Because, as we all know, such a thing is unimaginable!

Think again.

Monetary Madness

Honestly describing the current monetary system of the United States in just a few words, you could do far worse than stating that it is “money from nothing, cash ex nihilo.”

That’s because for the last 40 years – since Nixon canceled the dollar’s gold convertibility in 1971 – the global monetary system has been based on nothing more tangible than politicians' promises not to print too much.

Unconstrained, the politicians used the gift of being able to create money out of nothing to launch a parade of politically popular programs, each employing fresh brigades of bureaucrats, with no regard to affordability. 

Such programs invariably surged during political campaigns and on downward slopes in the business cycle when politicians hearing the cries of the constituency to “do something” tossed any concern about balancing budgets out the window of expediency. After all, the power to print up the funds for debt service whenever needed makes moot any concern over deficit spending.

Former VP Cheney, who fashions himself a fiscal conservative, let the mask drop when, in 2002, he stated that “Reagan proved deficits don’t matter.”

Those words were echoed just a few weeks ago, when both former Fed Chairman Alan Greenspan and Obama economic advisor Larry Summers, in separate interviews, said almost the same, paraphrased as, “There is no chance of the US defaulting on its bonds, not when our government can borrow dollars and print new dollars to meet any future obligations.”

Of course, Greenspan and Summers were referring to an overt default – of just not paying – and not to a covert default engineered by inflation. Unfortunately, like virtually all of the power elite, both miss the point that the mountain of debt that has been heaped up since 1971 is fast reaching the point of collapsing like a too-big tailings pile and taking the monetary system down with it.

Importantly, the debt shown in this chart whistles past the government's unfunded liabilities, in particular for the Social Security and Medicare systems. Adding those would more than triple the US government’s acknowledged obligations – to over $60 trillion.

Given the role the US dollar plays as the world’s de facto reserve currency – with all major commodities priced in dollars, and dollars forming the bulk of reserves held by foreign central banks – the dismal shape of the US monetary system spells trouble for the global monetary system.

Making matters worse, following the lead of the United States, governments around the world long ago adopted similar fiat monetary systems. You can see the deficit contagion in this next chart. It is worth noting that the dire condition of the United States now leaves it in the same muddy wallow as Europe’s desperate PIIGS. 

In a recent article in The Telegraph, Ambrose Evans-Pritchard referenced a paper out of the BIS that paints the picture using appropriately stark terms.

Stephen Cecchetti and his team at the Bank for International Settlements have written the definitive paper rebutting the pied pipers of ever-escalating credit.

“The debt problems facing advanced economies are even worse than we thought.”

The basic facts are that combined debt in the rich club has risen from 165pc of GDP thirty years ago to 310pc today, led by Japan at 456pc and Portugal at 363pc.

“Debt is rising to points that are above anything we have seen, except during major wars. Public debt ratios are currently on an explosive path in a number of countries. These countries will need to implement drastic policy changes. Stabilization might not be enough.”

Viewing the situation from another perspective, we turn to the work of Carmen Reinhart and Ken Rogoff, who studied the factors contributing to 29 past sovereign defaults. They found that default or debt restructuring occurred, on average, when external debt reached 73% of gross national product (GNP) and 239% of exports. Using the Reinhart/Rogoff findings, Casey Research Chief Economist Bud Conrad prepared the following chart showing that the US government is already far along on the path to bankruptcy.  

It’s hard to argue against the contention that the situation is, to be polite, precarious. Given that the obligations of the US government, as well as most of the world’s other large economies, are now impossible to repay and that their reserves are just IOUs backed by nothing, the stage is set for a highly disruptive but entirely necessary do-over of the fiat monetary system.

“Preposterous!” say the lords of finance and masters of all.

Is it?

Of course, these very same mavens completely missed the looming housing crash and the depth and duration of the subsequent crisis – a crisis that is still far from over. In other words, listen to them at your peril, because in our view it’s essential in calibrating your financial affairs to understand that, if history is any guide, we are now well down the road to a collapse in the monetary system.

In fact, over its relatively short history, the US monetary system has come unglued time and time again thanks to politically expedient attempts to interfere with the workings of a free market in order to reward constituents or kick the can on the economic problems of the day down the road.

Thus it is our contention that while the mainstream media focus on the daily gyrations of equity markets or the futile political charade that is Washington, they overlook powerful tectonic rumblings indicating the world’s prevailing monetary system is about to fracture. 

A Brief Timeline of US Monetary System Failures

Here’s a brief history of past disruptions here in the United States. Importantly, with the US dollar now the de facto reserve currency of the world, this time around it’s global.

1861 – When the Civil War begins, the dollar is convertible into gold and silver.

1862 – Congress passes the Legal Tender Act and authorizes the issuance of non-redeemable "Greenback" currency. Convertibility into gold and silver is suspended for all US currency.

1863 – National Banking Act authorizes the chartering of banks by the federal government.

1865 – A 10% tax is levied on the issuance of bank notes by state-chartered banks, effectively ending that practice.

1879 – The US Treasury resumes redeeming dollars for gold and silver.

1900 – Passage of the Gold Standard Act, adopting the gold standard by the United States and demonetizing silver.

Specifically, the act provided for "...the dollar consisting of twenty-five and eight-tenths grains (1.67 g) of gold nine-tenths fine, as established by section thirty-five hundred and eleven of the Revised Statutes of the United States, shall be the standard unit of value, and all forms of money issued or coined by the United States shall be maintained at a parity of value with this standard..."

But 33 years later, to gain the power to inflate the currency and collect the profit from doing so…

1933 – By executive order, Franklin Roosevelt prohibits the private ownership of gold. Congress passes the Gold Reserve Act, which enacts Roosevelt's executive order, abrogates all gold clauses in all contracts public or private, past or future (which cancels the convertibility of Federal Reserve notes into gold), though it confirms the convertibility of US Treasury notes held by foreigners into gold. Eleven years later, the US government takes its show on the road…

1944 – Bretton Woods system adopted with signature countries agreeing to tie the exchange rates of their currencies to the US dollar, which itself is linked to a fixed price of gold. Foreign trading partners retained the right to swap dollars for gold, imposing a de facto restraint on printing more dollars. For all intents and purposes, the US dollar becomes the world’s reserve currency. But 27 years later…

1971 – Nixon abruptly closes the “gold window,” unilaterally reneging on the Treasury's  promise to allow foreign governments to redeem dollars for gold. Bretton Woods collapses. With no remaining tie to a tangible, the dollar is reduced to a paper token. The transition to a global fiat monetary system is complete.

Until 40 years go by and the inevitable consequences of giving politicians free rein over money creation become untenable…

Present day – Sovereign debt crisis. Desperate, debt-laden governments around the globe – the bulk of their reserves composed of fiat US dollars and euros at risk of going up in smoke –  turn to the only thing they know, printing more money and issuing yet more debt. The global monetary system cracks and heads toward failure with no workable alternative on the horizon.

Governments, corporations and investors alike are caught unprepared in the downward spiral of failing fiat currencies and are wiped out by a combination of frantic currency debasements, higher taxation, exchange controls and worse. Social unrest spreads, with the public paradoxically demanding that governments do more, not less.

That’s because all the world’s major currencies are at risk, simultaneously, as the issuers engage in a dangerous race to the bottom. As the monetary system moves inexorably toward terminal debasement and collapse, the results will be catastrophic for the unprepared.

Importantly, while the list of historical attempts to re-jigger the US monetary system have, to this point, more or less succeeded in kicking the can a bit further down the road, the sheer scale of today’s government obligations has driven us into a box canyon, with no way out. As the government’s debt and spending obligations are mathematically impossible to resolve, it is now a certainty that a lot of people are going to wake up one morning to the reality that they are a lot poorer than they thought.

Fortunately for those now paying attention, the collapse of a monetary system doesn't happen in a flash. It is a progression, like the spiral of water down a drain. Thus, while no one can predict exactly when the downward spiral will accelerate out of control, there is still time to prepare.

Dark though the lens may be, this is the lens through which we here at Casey Research view all our investments. Simply, being right or wrong about your investment decisions in the years just ahead will be insignificant if the currencies underpinning those investments shrivel to just a fraction of their current values.

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wretch's picture

With everything but, "Social unrest spreads, with the public paradoxically demanding that governments do more, not less."

When social unrest reaches this country, it won't be about reform.

Fish Gone Bad's picture

When there is a currency crisis, people run out and spend all the money they have to buy things that are actually valuable.  The saying, "Got gold?" is probably better said as, "Got food?".  As always, plan ahead.

FEDbuster's picture

Don't forget "Got Guns?" and "Got Ammo?" to protect your gold, food, water, etc...

Michael's picture

Just watch this shit if you want to know everything that is fucking wrong with our country and the rest of the fucking world.

best of walstreetpro2 (greatest fuckin hits) - 1 of 3

best of walstreetpro2 (greatest fuckin hits) - 2 of 3

best of walstreetpro2 (greatest fuckin hits) - 3 of 3

nmewn's picture

Hush little baby, don't say a word...Papa's gonna buy you a mockingbird...

jeff montanye's picture

what do we make of the fact that on the graph of deficit as a percent of gdp the lonely surpluses of the second clinton administration are clearly giving the left-handed finger to the observer?

eisley79's picture

maniacresearcher's actual identity possibly discovered lol:!/designerdean

eisley79's picture

and today he deleted his account :D 


guess its harder to talk trash when people know who you are....


Maniac Researcher:


Maniac Researcher:


Maniac Researcher:


Maniac Reseacher:!/designerdean


Maniac Reseacher:



Hurdy Gurdy Man's picture

... and if that mockingbird don't sing / Papa's got an AR-15 for it's right wing...


CosmicBuddha's picture

I have just watched the first video. I was drinking a cup of coffee at the time and it was all I could do to stop myself spraying coffee all over my PC screen: that was the funniest thing I have seen in years! Superb, that gets a triple A rating from me.

Snidley Whipsnae's picture

Too funny Michael... But, he could have left off the sugar coating and told us what he really thinks. :)


jdelano's picture

blow + oxy + jack n' coke + north Florida redneck = fucking hilarious.  Where is that, Jacksonville?

lolmao500's picture


rwe2late's picture


the Pentagon , EXXON, Goldman Sachs, and their parasitic institutional brethren are dependent on gorging themselves at public expense.

sunnydays's picture

We have been on the verge for a few years, the ball has been kicked down the road and hitting the wall.  But it is now bouncing back off the wall into the faces of those who think they can keep getting by with the fraud.  All things end and it is time for the manipulation and fraud to end.

Hero Protagonist's picture

The question has always centered around timing of the end and the issues are what factors influence predicting that timing.  Given that we have removed all safety valves (e.g. mark to market, to big to fail, etc.), for what it's worth I think these three are the keys:

1. The money doesn't truly run out until debt service exceeds tax revenue. With low interest rates we are, at this point, far away from reaching this point.

2. A drastic increase in prices so that John Q. Public can't purchase essentials and would rather fight and risk what they have than stay quiet and subsist. Seems like we're far away from this point.

3. People outside of the US figure out that they can't afford to eat while in the US we continue a life style of borrowing that directly removes food from their kid's mouths.  Doesn't seem like those outside our border will ever recognize this in sufficient size to influence their governments who have a huge interest in keeping the status quo.

It's not like any politician has an incentive to do anything but say "Yes" to their constituents when the credit card hasn't come close to its limit.

kurzdump's picture

Only a minority of people who are forced to cut their life styles significantly is required to start a spiral of riots. Social things tend to follow exonential functions. Do not underestimate the consequence of exponential growth.

Ignorance is bliss's picture

We have a powder keg. Your premise is basically that no one with a lighter has tehe will to light it. Yet I see an entire generation with matches walking toward the powder keg. I think our "Y Gen coming back from the military, or not able to pay their 6 figure college debts are one of many perfect catalysts running toward that powder keg.


When it goes will go quickly. There is a lot of pent up anger in the country looking for an excuse..

espirit's picture

Fiatsco, meet gold.

Zero Govt's picture

Fiatsco, meet the zero you always were, born of the zeros (crooks and politicos) that fabricated you

JLee2027's picture

Former VP Cheney, who fashions himself a fiscal conservative, let the mask drop when, in 2002, he stated that “Reagan proved deficits don’t matter.”

Except Cheney never said that.  That is crap from Paul O'Neills book.

LetThemEatRand's picture

Unless you were there, you don't know.  One thing is certain -- Bush/Cheney policy was consistent with the alleged statement.  Assuming actions speak louder than words, Cheney fucking said it really loud.

Bring the Gold's picture

I believe he borrowed the sound system from Spinal Tap in fact...

JLee2027's picture

Unless you were there, you don't know.  

Same applies to your statement. Repeating unproven allegations is just rumor mongering. 

One thing is certain -- Bush/Cheney policy was consistent with the alleged statement.  Assuming actions speak louder than words, Cheney fucking said it really loud.

True, but that doesn't prove it either.

srelf's picture

Me thinks thou wouldst be lost in a world without "prove"

rwe2late's picture


And presumably one could not "prove" to you that Bush said "The Constitution is just a god damn piece of paper".

Ever hear of reasonable doubt? True, no one can say with 100% certainty that any quote is accurate (including witnesses in the room according to psychological testing and some alien invasion believers). But there is a witness, and the quote seems credible enough given the circumstances and what is known about Bush's behavior and policies.

Point is, given Bush’s political actions, the choice is only between being an arrogant hypocrite (claiming respect for the Constitution), or an arrogant cynic (boasting his disrespect).

Finally, you're grasping at a straw in order to defend what? Cheney's reputation re: the Constitution or fiscal conservatism? If Cheney had not said "deficits don't matter", given his policies, he may as well have said it.

Actions DO speak louder than words.


JLee2027's picture

You must be joking. A single witness selling books is not a credible witness.

DaveyJones's picture

The point is moot cause God knows Cheney never said self centered things like that. Things that emphasized executive power, minimized democratic process, and enhanced his military industrial business interests. He was also known for contradicting himself like the famous speech in 91 on the costs and mistakes of trying to take Baghdad.    

ElvisDog's picture

The Cheney comment is often taken out of context. What he meant was "deficits don't matter politically", and he was right up until the rise of the Tea Party in 2010. As far as the future, we shall see.

StrangerThanFiction's picture
The world Monetary System On The Verge Of Collapse. The question is what comes next?
Bring the Gold's picture

Well now you've gone and made an ass of yourself.







A luscious ass I might add.

Cliff Claven Cheers's picture

are you sure it is woman's ass?  

OT, whats with all the dudes here using femal avatars, is it lika a tranny think. Each to own I guess.

prole's picture

Same sort of thing goes on in Thailand.
(I heard)

Zgangsta's picture

Reality doesn't matter. Our perception of reality is all that matters.

GoldBricker's picture

Yup. And that was why deficits didn't matter (see Cheney rants above); they were not perceived as a problem. At some point, however, reality's dog dumps on your lawn and you run over the large, fresh pile with your mower.

Maybe the pile doesn't exist or you don't exist, but something exists, and you perceive its odor.

Bring the Gold's picture

No, actually I'm not, disturbing thought. Femaleness was assumed, not something that would happen in real life. Always, ALWAYS check under the hood. :)

Cliff Claven Cheers's picture

I mean it looks feminine but with out a link to the original it is hard to verify.

MisterMousePotato's picture

Are you people crazy? Blind? Virgins? That is a woman's ass. (And not just any woman's, for that matter.)

Consider ... if you took that shot of my ass, there would be, uh (how do I put this) in the picture.

kill switch's picture

No, that's Hank Paulson and his twin brother...

X.inf.capt's picture

short answer, fiction,

war, a big one


pakistan, mena


control of oil, resourses

and the obvious

the eternal search for cheap labor by TPTB.

westboundnup's picture

Assuming Saudi Arabia, Iran, Russia and Venezuela are among the new axis powers (or their supporters), where will the US get the oil needed to fuel the war machine?  The last time there was a world war, we had cheap, easily accessible petroleum. 

X.inf.capt's picture

that was easy pitch, west.

why, all the untapped reserves we have here

we been buying oil from these countries with worthless fiat

while saving ours, you really didnt think leaving these alone was an enviromental issue.

they have been seizing oil andcoal reserves, and making national parks of them

president clinton and the sulfur free coal deposits in utah, remember?

and those laws will be overturned immediately, when we need them...

stategic oil reserves?

until then well continue to do what were currently doing....

X.inf.capt's picture

thanks freddie

and the leaders who want to stop accepting dollars for oil....

yeah, very unhappy ending....