the US Monetary System on the Verge of Collapse?
by David Galland: Stupid
Tune into CNBC
or click onto any of the dozens of mainstream financial news sites,
and youll 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 authors
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 worlds 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!
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.
because for the last 40 years since Nixon canceled the dollars
gold convertibility in 1971 the global monetary system has
been based on nothing more tangible than politicians' promises not
to print too much.
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.
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 dont
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.
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.
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 governments
acknowledged obligations to over $60 trillion.
Given the role
the US dollar plays as the worlds 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.
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 Europes 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
and his team at the Bank for International Settlements have written
the definitive paper
rebutting the pied pipers of ever-escalating credit.
debt problems facing advanced economies are even worse than we
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.
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.
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.
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 worlds 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.
say the lords of finance and masters of all.
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 its 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 worlds prevailing monetary system is about to fracture.
Timeline of US Monetary System Failures
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 its global.
When the Civil War begins, the dollar is convertible into
gold and silver.
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.
National Banking Act authorizes the chartering of banks by
the federal government.
A 10% tax is levied on the issuance of bank notes by state-chartered
banks, effectively ending that practice.
The US Treasury resumes redeeming dollars for gold and silver.
Passage of the Gold Standard Act, adopting the gold standard
by the United States and demonetizing silver.
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
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
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 worlds reserve currency.
But 27 years later
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
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.
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.
because all the worlds 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.
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 todays
government obligations has driven us into a box canyon, with no
way out. As the governments 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.
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.
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.
state of the US economy and out-of-control government spending affects
every Americans life and wealth. In our free online event,
The American Debt Crisis How Big? How Bad? How to
Protect Yourself, five Casey Research experts were joined
by guests John Mauldin, Mike Maloney and Lew Rockwell to discuss
the potential for a breakdown in the monetary system, and specific
ways to protect and build your assets. Watch
the video now.
September 26, 2011
is the managing editor of Casey
© 2011 Casey
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