The Destiny of the Dollar

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Status: Finished  |  Genre: Non-Fiction  |  House: Booksie Classic
the causes and effects of the demise of the dollar.

Submitted: February 18, 2019

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Submitted: February 18, 2019

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The Destiny of the Dollar

Inflation is not something new, it has been around for at least two thousand years. In the early days of their empire, the Roman coin called the Denarius contained 4.5 grams of pure silver. With a limited supply of silver and gold coming in it was difficult to finance their wars and palaces, so the rulers found a way around it. They reduced the amount of silver in the coin while retaining its value. This went on for about two hundred years until the coins contained only 5% silver. The effect was to transfer wealth away from the people and to the wealthy. Inflation reached 1000% and the Roman empire crumbled.

Unfortunately, this method of increasing currency has become addictive to governments during the two thousand years that followed. They deliberately cause inflation to pay off their debts with cheaper money and the middle class ends up paying the bill. It is sometimes also caused by gross government incompetence.

Hitler paid off Germany’s debt from the first World War by inflating its currency to the point where it required a wheelbarrow full of money to buy a loaf of bread. Venezuela’s 2018 inflation rate was over one million percent according to the International Monetary Fund. This was caused by its Socialist government printing money to pay off its debts. It caused mass rioting in the streets and an attempt to over throw the government, which resisted by shooting at the protesters.

Unfortunately, deliberately causing inflation to pay off debts has become a standard practice in many countries, including our own. The Federal Reserve, which is independent from our government, generally targets an inflation rate of two percent a year. This allows them to pay our debts with cheaper money instead of raising our taxes to pay them. This is like a magician’s sleight of hand trick. He diverts you with one hand while he fools you with the other. You are still paying the debt because the money you have in your wallet and savings account will buy less than before the inflation. Deflation is the only thing that really worries governments. For them it is the worst of all worlds. The economy slows down, they collect less taxes, and they must pay off their debts with more valuable money.

There are several things that can cause inflation, but the main one is an increase in the money supply that is not supported by economic growth. The United States dollar is now Fiat Money. It is not backed by a physical commodity such as silver or gold, as it theoretically was until 1971. It only has value because our government says it does, and we believe it! Its value is easily manipulated to serve the government’s needs, and often is.

How does inflation affect us? Look at the difference in the increased percentage of income required to buy some basic things. These are the increases from 1950 to 2014: Average home 8%; average car 15.5%; tuition at a state university 50.2%.

  Our debt to GDP ratio has gone form 53% in 1960 to 99% in 2018 and is projected to exceed 100% for the coming years. In that same period our national debt went from $286 billion to almost $22 trillion. Our debt is now larger than our total economy and is projected to remain that way if we don’t reduce spending. It is twenty-two trillion dollars, about $180,000 per tax payer, and a bill has just been introduced in congress that would add more than $6 trillion to the debt! It is called ‘The Green New Deal” Following are some excerpts from a Bloomberg Opinion about the costs of this plan.

Proposal and estimated cost

Medicare for all:  $3.2 trillion per year 

Switching to renewable energy:  $400 billion per year

Retrofits for all buildings: $1.4 trillion per year

Universal basic income: $3.8 trillion per year

Housing for everyone ?

There are other “smaller” proposals that I will not detail because the above planed expenditures are overwhelming enough. The estimate, which does not include all of the proposals in the plan, adds up to about $6.6 trillion per year, 4.7 times more than what the federal government collected in income tax revenue ($1.43 trillion) in 2016. If no other programs were cut about three-quarters of the economy would be spent by the government. How will it be paid?  The money will be created out of thin air with fiat money! This is how it would happen.

 The government wants to spend six trillion dollars it doesn’t have, so it asks the Federal Reserve for it. The Fed can credit accounts without having real money, so with a few keystrokes on a computer the Fed credits the treasury with $6 trillion and with some more keystrokes the treasury issues $6 trillion in bonds to the Fed. The Treasury sends the money to the Federal reserve banks for dispersal. The Fed treats the bonds as an investment. It collects interest from the Treasury. The Fed declares the interest (after some overhead costs) as profit and sends the profit right back to Treasury. The interest payment never leaves the Treasury building.

 

We are told that these programs can be paid for by razing the taxes on “the rich” to 70%, this is not true. Here are some facts based upon taxes collected in 2016.The total taxable income was $10.2 trillion, the total taxes paid $1.4 trillion. The top 10% paid $1 trillion., which was 71% percent of all taxes paid. If they had been taxed at the 70% rate, they would have paid $3.3 trillion, half of the estimated cost. Every taxpayer’s income would have had to be taxed at 70% to raise $7 trillion!

Most of us don’t pay much attention to the government’s various Ponzi schemes, like social security, until they cause a disaster that affect us. If the “Green New Deal” ever became law, it could easily cause the greatest economic disaster this country has ever seen. This country could default on its debt! This is what Treasury Secretary Tim Geithner told Congress would happen if we defaulted on our debt:

 

Interest rate would rise, since Treasury bonds represent the benchmark borrowing rate for all other bonds. This means increased costs for corporations, state and local government, mortgages, and consumer loans.

The dollar would drop, as foreign investors fled the "safe-haven status" of Treasury’s. The dollar would lose its status as a global world currency. This would have the most disastrous long-term effects.

The U.S. government would not be able to pay salaries or benefits for federal or military personnel and retirees. Social Security, Medicare, and Medicaid benefit payments would stop, as would student loan payments, tax refunds, and payments to keep government facilities open. This would be far worse than a government shutdown, which only affects non-essential discretionary programs.

Even if investors only think the United States could default, the consequences could be almost as bad as an actual default. U.S. debt is seen worldwide as the safest investment anywhere. Most investors look at Treasury bonds as if they were 100 percent guaranteed by the U.S. government. Any threat of a default could cause debt rating agencies, such as Moody's and Standard and Poor's, to lower the U.S. credit rating.

Mr. Geithner was not exaggerating. In April 2011 S&P only lowered its outlook on the U.S. debt from "stable" to "negative." As a result, the Dow immediately dropped 200 points and gold gained $10 an ounce.

So, if we cannot default on our debt, what can we do? Follow Rome’s example, make our money worth less but not change its value, i.e., cause inflation. If we do not do it ourselves, it might be imposed upon us by changes in the world-wide monetary system.

This is how it could happen. Fiat money is currency that our government has declard to be legal tender, but it is not backed by a physical commodety. It only has value because the government maintains that value. Because it is not linked to physical reserves it risks becoming worthlesss due to hyperinflation. If people loose faith in a paper currencey ilike the dollar it will no longer hold any value. This differs from gold, which has historically been used in jewelery and industry and has established value. 

Prior to 1971, any Federal Reserve Note issued was theoretically backed by an equivalent amount of gold held by the U.S. Treasury. However, under President Nixon, the goldstandard was abandoned creating the fiat currency

Our money is not backed by gold, but we have about eight thousand metric tonnes of it in our vaults. The current price of gold is $1,308 an ounce. There are 32,151 troy ounces in a metric ton, therefore that gold is worth about one third of a trillion dollars. In January of 2019 there was 1.7 trillion dollars of currency in circulation, more than 99% of it in Federal reserve notes. This amounts to about twenty-two cents in gold for every dollar in circulation, which explains why we cannot get gold for our dollars. The gold is used to pay our international debts.

This is not a problem now, but what would happen if our money was no longer the world’s reserve currency? It almost happened in 1978. That year our government had to issue bonds denominated in Swiss Franks because foreign creditors did not trust our dollar. The dollar lost half of its purchasing power between 1977 and 1981 and the inflation rate was over 50% during those years. The International Monetary Fund created special drawing rights to provide “liquidity” as the dollar declined. The price of gold rose 500% from 1977 to 1980.

Once again there is consideration of replacing the dollar as the worlds reserve currency. One Euro is currently worth $1.17. Special Drawings rights are a possibility, as is a totally new currency based on a gold standard. In 2010 banks around the world changed from being net seller to net buyers of gold. Venezuela is an exception, having to sell 25 tonnes of it to pay its debts because no countries wanted it currency. China, Russia and India have been increasing their gold holdings in recent year and they could combine to issue a new gold backed currency.

What would happen to the dollar’s value if a gold backed currency became the world’s reserve currency, replacing the dollar? The dollar would be devalued. The dollar was devalued in 1933 when the price of gold wasset at $35 an ounce by the Roosevelt administration when it had been valued at $20.67 an ounce. That was a 41 percent devaluation of the dollar. It is possible that a new currency could be created valuing gold at thousands of dollars per ounce, causing a substantial loss of value for the dollar. Savings in dollars would be wiped out. Only hard assets such as gold, silver and land would be protected. There would be a run on the banks, which would cause them to lock their doors until the Treasury printed more worthless money to pay their customers with.

This scenario must be avoided. Our government cannot, and should not, be the rich uncle for its citizens and the rest of the world. If we try to be that we will end up destroying our economy and not being able to help anyone. Our dollars would be like leaves on a tree, so plentiful that, like a penny on the ground today, nobody would bother to pick one up. If Federal spending is not reduced, that will be the dollar’s destiny.

 


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