The monster lurking in the near future is not an imminent invasion from foreign forces or a loss of freedom to move about, but a decline in the value of the dollar thereby causing the reduced purchasing power. This monster has been called the fraud inherent in fiat money, the hidden tax nature of runaway inflation, and debasing the currency. It has been caused by various government & economic policies related to a central banking system, excessive bailouts, ineffective regulation, unfunded entitlement programs, and essentially a country living beyond its means.
The consequences will be huge declines in the stock market, savings becoming worthless, and the bond market completely falling apart. As the value of the dollar falls, that dollar will no longer be worth a dollar; it will be worth only pennies on the dollar.
How has the US arrived at a position that the purchasing power of today’s US Dollar, compared to the purchasing power of the US Dollar 70 years ago, has been reduced to 4 cents?
It may come as a surprise to learn that today’s Federal Reserve System is America’s 4th attempt at a central banking system, not its first, and the outcome has been the same each time which is not good for holders of paper money or bills of credit.
Since we have been through all of this before, it shows that those who are ignorant of history are doomed to repeat its mistakes.
This causes us to ask, what is fiat currency and what is real money?
Fiat currency is a monetary system where there is no link between the paper money and any store of value such as gold or any other commodity that is a store of value.
Today’s US Dollar currency is paper money with no link to gold or any other store of value.
The US government issues the currency and decrees by fiat that “this money is a legal exchange medium and its worth is what we say it is”.
As a result, the US Dollar is not real money, it is fiat money. For the US Dollar to be real money, it has to be linked to something that is a store of value.
Science and technology have produced many wondrous breakthroughs however no matter how hard they try science will not allow alchemists to create paper that will have the same properties as gold or any other store of value. Said another way, you can not make gold out of paper. Having properties such as being rare and being durable, give gold that capability to store value; paper has a tendency to curl up and blow away.
In order to not make the mistakes of the past, it is worth taking a look at one of the first competitions, in modern times, between gold and paper money.
It starts with John Law … when he claimed to have discovered the secret of the philosopher’s stone and he proclaimed he could make gold out of paper.
Law, a Scotsman, landed in Paris and like Alan Greenspan or Ben Bernanke, he made himself useful to people in high places, like the Duke of d’Orleans who needed money for the court of King Louis XIV.
During the last 14 years of the king’s rule, he spent two billion livres (the currency of France until 1795) more than he collected in taxes causing his coinage system to be worthless.
Law was good with figures and put an elaborate Ponzi scheme into play where he created notes (paper money) issued by his private bank (a precursor to today’s Federal Reserve System) to facilitate trade and helped France to have an economic recovery, or so it seemed.
In return for providing this fix, the government of France granted him exclusive rights to control the currency, print money, control sea trade, and administer revenues from tobacco, salt, and the exaggerated riches of France’s newest colony, Louisiana.
Law's scheme increased France's money supply - including banknotes and shares in his Mississippi Company (that operated in France’s newest colony) - by 300%. Prices in Paris doubled between 1718 and 1720. When speculation accelerated and the scheme began to fall apart, the Duke d'Orleans "cranked up the printing press." By 1721, Law's money was worthless and "Banque" was a dirty word in France for the next 200 years.
This collapse of the monetary system in France was the beginning of the collapse of France’s empire and its influence on the global stage. A short 80 years later, France sold the Louisiana Territory to the US at a bargain basement price equal to 3 cents an acre, as the purchasing power of the United States was in its ascendancy and the purchasing power of France was on the decline.
This early Western experiment with paper money has formed the basis of today’s widespread currency system.
The USAs 4th experiment with paper money began early in the 20th century with the formation of the Federal Reserve Bank in 1913. It was at this time, on Jekyll Island in Georgia, that the federal government of the USA ceded its power over money, expressly given to it by the Constitution, to private interests.
In 1933, President Franklin Roosevelt signed an Executive Order that made it illegal for US citizens to own gold and violation was punishable by a fine or 10 years in prison or both. At this time, all US citizens turned in their gold to the Federal Reserve Bank at the exchange rate of $20.67 per oz.
In 1934, the US Government created the Gold Reserve Act which priced the gold at $35 oz. where it remained until the 15th of August in 1971, when Richard Nixon, the president of the US at that time, said that going forward, foreign countries that wished to exercise their right to trade US dollars for gold could drop dead. From that point forward, the dollar was worth only what someone would give you for it. Philosophers held their breath. But nothing happened. Many have died since, waiting for the dollar to succumb first. Still, the millstones of monetary history may grind slowly, but the more slowly they grind, the more fingers they pinch.
Gold prices floated on the International Exchanges at $35 oz until late in the administration of President Carter, circa 1979 / 1980, when it spiked to a little over $800 oz. After a few years of the Reagan administration, gold prices declined to $300 oz where it remained until sometime between the 9/11 terrorist attacks on the US and the start of the War on Terrorism with military operations in Afghanistan and Iraq. Gold has climbed since that time to a recent high of $1,217 oz in 2009 … a 30X increase in about 40 years; not 30% increase but a 30 times increase.
The new paper money standard, with a floating exchange rate for both the value of the US Dollar and the price of gold, allowed for a worldwide credit boom - just as in Paris, following the establishment of Law's scheme. The US created dollars. Its citizens spent them. The dollars accumulated as reserves all over the world...and every central bank raced to keep up. Soon, the exporters were producing too much. The importers were consuming too much. And there was too much money and credit everywhere.
The Japanese economy was the first to blow up - in 1989 (just after the Japanese purchased real estate in the USA – Rockefeller Center and Pebble Beach come to mind). The tech sector on Wall Street was next to go - in 1999. Finally, in 2007, the planet-wide bubble popped. Suddenly, the whole world was Japan. And now, every nation in Christendom, to say nothing of the others, is following Law's example. All issue paper gold - in the form of bills, notes, and bonds - as if they were the Banque Royale of Planet Earth. Europe is estimated to need $2.2 trillion in deficit funding this year. America will need at least a trillion more. If the depression deepens, America may need more than $2 trillion of additional capital. How long can this go on? Where will it lead?
No natural life survives the lifecycle. And no paper currency standard has ever survived a complete credit cycle. It is just a matter of time until we hear the explosion and see body parts flying.
As part of being savvy like the insiders, we need to obtain sufficient financial education to see the central banking system and the associated fiat currency, that is used to finance a political and economic system that overspends, for what it is … a menace to our wealth and way of life in terms of the hidden tax of inflation that is destroying the purchasing power, of the average person, for the next several generations. This loss of purchasing power will significantly decrease our standard of living.
I favor a quote from Steve Forbes … Forbes says that pursuing additional financial education and the resulting increase in our financial literacy will open our eyes to alternative wealth creating strategies and this will be they key to resolving our financial crisis.
To gain the necessary financial education, it is best to pursue association with, access to, and membership in, a wealth creation community. As a result, you will learn about alternative wealth creating strategies and consider investments in non dollar- denominated assets … perhaps emerging markets … perhaps energy assets that are inherently useful like oil rigs, hydropower, or methanol plants … perhaps precious metals, rare earths, water rights, oil, natural gas, potash mines, or gold mines … things hard to build, difficult to replace, and costly to substitute … definitely not financial stocks, definitely not retail stocks, definitely not commercial property.
For those wanting protection of their purchasing power in gold, there are several ways that may be appropriate to obtain this protection. These include direct ownership in minted coins, use of gold exchange-traded funds, gold mutual funds, and junior gold stocks. Many are investigating having part of their IRAs in gold, silver, precious metals, and non-dollar denominated currencies.
I trust this article provides a little more insight into the cancer that is destroying the purchasing power of the average person for the next several generations. If we remain ignorant of history, we are doomed to repeating its mistakes.
I will continue to provide examples of things we need to learn, the secrets of the insiders, as part of being savvy with our money, and introduce alternative wealth creating strategies, in future articles and updates at my blog over the next few weeks.
In addition, a good book to read would be the “Biography of the Dollar” by Craig Karmin.
Finally, be sure to share this post with anyone that you think would benefit from this message… thanks!