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Guest Post: Is The US Monetary System On The Verge Of Collapse?
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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what a phucing great post btw... ahh, the ol hedge
and I remember reading the business wire....
As long as the dollar keeps its status of a global reserve currency there is no risk of a default. Sure, technically it is possible that interests eventually exceed revenue. However, I don't expect this to happen any time soon ;)
So what are the consequences of the status quo (more printing, less growth in developed nations)?
Problems are worsening following the exponential function.
At some point geopolitical pressure will lead to "the day the dollar died" or a great war. It is inevitable.
"As long as the dollar keeps its status of a global reserve currency there is no risk of a default."
When China has built up a large quantity of gold reserves, and has allowed a transparent audit, I expect that China will back it's currency with gold, to some extent.
If China doesn't move to a gold backed or gold referenced currency, some other nation will... But, China is the most likely candidate.
This will be the game changer...
Snidley Whipsnae @ 05:09
If China doesn't move to a gold backed or gold referenced currency, some other nation will...
The one that does will have to be the reserve curency,because every nation left on planet earth will be converting into that currency.
In the end, this is the only way possible for currency to remain a viable trade unit.
No one trusts anyones currencies now, and it's just going to get far worse.
When central banks have the ability to create money out of nothing, they can do anything with that money. They can control the bond market by buying bonds to keep interest rates on them artificially low, they can buy stocks to keep stock markets artificially high, etc. They can make the stock and bond market go up, or they can crash both, since they control both. All this is done in secret, of course. They control the economies buy either stimulating it by giving loans to people, or they can crash the economies by withholding loans. These people don't earn their money, they create it out of nothing. There is news out now of money being pulled out of European banks. There is news of Greece, and possibly Italy defaulting on their loans. The IMF just downgraded the world economies. This is all being planned to crash the Euro, and eventually the dollar so a one world currency can be introduced. So look for the Euro zone to crash first. Eventually, currencies will be nothing more than digits. No more cash. Our credit cards will be replaced by an RFID chip in our hands. No one will be able to buy or sell unless they have this RFID chip. (It will also contain our insurance info, drivers license info, medical records, library card info, etc. How convenient. But it will be used not for our convenience, but to monitor and control each and every one of us. While they are at it, they might as will throw GPS on this chip so they will know where we are at all times). Scary stuff, but Revelations talks about it (Mark of the Beast), and everything is pointing in this direction...They have the capability to do it now!!!
Mailll... You need to take your meds before you go completely postal. While you are at the medicine chest check the mirror, your hair might be on fire.
Snidely,
mailll, is dead on, IF your a believer (now if it's an RFID chip ) who knows, but you will take a mark in the hand, or on the forehead,if you do not, you can neither buy,sell, nor work. You will be dependent on handouts if you do not have food, and or friends that will risk their lives to help you.
And once the Antichrist is in power,he will demand to be deemed God Almighty, and demand that HE be worshiped as such,if you do not bow the knee you and worship him, you will be murdered.
With the global scenario I see now, it would not in the least surprise me if he were to show up,he will SEEM to have all the answers to all the worlds ills, and the vast multitudes will follow him, and take the mark.(to be eternally damned).
It's all in Revelation, if you care to try and follow up.Whether you believe or not is immaterial at this point, but if and when you are given the choice to take the MARK, do not do it.
If your alive when HE comes.
Your understanding of Scripture is way too "carnal".
Gold is headed a lot higher in the weeka and months ahead. http://bit.ly/q03yyU
I thought you said, "far less leaders". Seems more appropriate.
Only a matter of time. This time it is different. Before it was just fear this time it is the mathematics.
Roubini says: print more money to avoid a recession *sigh*
The only sane way out...
https://libertyrevival.wordpress.com/2011/01/09/ending-poverty-and-polit...
Because they have been told over and over that government can do anything, the big Sugar Daddy will take care of them for the price of just a few more billions in taxes. Now the lie is revealed, they are bewildered. Self-reliance is not over-rated!
The US dollar continued its worldwide acceptability after '71 because no other paper currency was redeemable in gold. It was the best worthless currency of all worthless currencies, and that status quo has been maintained by military force bullying other nations to keep pricing their exports in US dollars.
"Worthless" is a relative term though. Worthless in the sense of non-redeem-ability, but definitely worth something in terms of trade. It still buys oil, and oil-producing nations can turn around and buy other things with the dollars they receive for their oil.
The trade value of the US dollar depends on how many are in circulation, following the supply and demand principle. If the supply of US dollars starts significantly exceeding demand, the trade value drops.
Two factors affect how many dollars are in circulation: (a) America's trade surplus / deficit, and (b) central bank purchases of government debt.
If America maintains a trade surplus, dollars are removed from world markets as fast or faster they go into world markets, keeping the global supply stable or slightly shrinking, and keeping the trade value up. If America runs a trade deficit, dollars go into world markets faster than they're removed, thereby increasing the worldwide supply of dollars with corresponding drop in trade value.. This is what began happening in the 70s when America began running consistent trade deficits. Dollars were leaving American faster than they were coming back in.
To counteract this, the US government started borrowing more money and selling more Treasury debt on world markets. This brought dollars back into America, stabilizing the worldwide supply of dollars, even though America was running consistent trade deficits. US government debt sold on world markets more or less counteracted trade deficits, maintaining the trade value of the dollar.
This relative stability continued many years until a point where other nations started becoming concerned about the large amount of US government debt relative to America's GDP, and corresponding ability to collect enough in taxes to operate the government and service the debt.
This is when China and other nations holding large amounts of US government debt started having doubts about its credibility, and started cutting back on purchases of US government debt. At this same time America was running large trade deficits. The result was dollars flowing out of America way faster than they were coming back in, increasing the supply of dollars on world markets with resulting drop in value.
This was around 2007 and explains why oil prices started climbing significantly on world markets around that time, along with gold and silver prices.
Dollars leaving America faster than they came back in caused the opposite effect domestically, with the domestic supply of dollars shrinking. This is what precipitated the housing crash in America. It wasn't subprime. It was a shrinking domestic money supply.
It also precipitated the American financial collapse in '08. Again, it wasn't subprime. It was a shrinking domestic money supply, combined with increased domestic purchase of US government debt to compensate for lower foreign purchase, draining more money away from domestic consumer lending, exacerbating the housing collapse, and causing the general economy to virtually implode in '08 and '09.
The Fed and Bernanke had to do something. Quick. The domestic money supply was shrinking and more of it was being diverted to buying US government debt, virtually collapsing consumer lending and imploding the economy.
This is when Bernanke decided to start quantitative easing, printing money and pumping it into the domestic money supply. Since it has to be done via debt creation, Bernanke decided to start buying US government debt, but he couldn't legally buy it directly from the government, so he started buying it through certain banks called "primary dealers". To give these banks funds to buy Treasury debt, Bernanke started buying some of the less valuable securities these banks were holding, and there were plenty of them from the housing market collapse. Trillions of dollars worth.
Quantitative easing was more or less the only fast way to reverse the shrinking domestic money supply, get consumer lending going again, and hopefully get the economy going again.
But the Fed purchasing US government debt for the first time spooked everybody around the world, and other nations started losing confidence in the US dollar, along with dollars flooding world markets at the same time further reducing their value.
This is when oil prices spiked, along with gold and silver prices. Oil prices fell back from falling demand as the American economy and American oil consumption dropped off significantly, but gold and silver prices continued climbing as the trade value of the dollar continued falling along with overall confidence in the US dollar falling.
While the domestic supply of US dollars hasn't grown that much, the worldwide supply of US dollars has grown rapidly, with the resulting loss of value on world markets being felt domestically in the form of higher prices on anything imported into America. At the same time Americans are losing jobs and taking lower paying jobs due to the economy's continued shrinkage, putting Americans in a double bind of lower income and rising prices, which makes the economy shrink even more, creating a feedback loop of downward economic spiral.
Now the Fed and Bernanke are in a damned-if-you-do-damned-if-you-don't situation. There are no good options. If Bernanke continues printing and buying government debt, worldwide confidence in the dollar falls even more and the dollar loses more value. If Bernanke stops printing and stops buying government debt, the US government collapses, the American economy implodes, the US dollar collapses, and everybody starts dumping US government debt they hold, collapsing its value.
So Bernanke's choice now is slow dollar collapse or fast dollar collapse. Either way the American economy is fucked. It continues its slow collapse, or moves to rapid collapse.
There is a simple solution that would reverse all these calamities: Slash government spending overnight and crank up American manufacturing and exports at an unprecedented pace.
Do both of those things NOW. IMMEDIATELY. AND FAST. There is NO time to lose.
But sadly it seems there is no action to do either of these things.
We collapesed in July, silly. Ruppert said so. It's conspiracy facts and shit.
sign a petition to restore the gold standard!
http://wh.gov/4Tq