If one were to turn on the television right now, the mainstream media would be painting the picture of an economy that is in a recovery and a U.S. dollar that is strong as ever. Yet there is a strong contingency of people on the Internet declaring the U.S. dollar is heading for a major collapse of proportions not yet seen before. The obvious question to ask is: how can there be two radically different ideas on the state of the U.S. dollar at the same point in time? Logically, one would have to concede that they both can’t be right. The mainstream media, which continues to influence the majority of society, paints the pretty picture of a strong economic recovery based on low unemployment, high stock markets, and increased credit availability. On the contrary, a case could be made for an imminent U.S. dollar collapse. Let’s dive deep into the rumors, the facts and everything in between.
This is a complex issue, with no simple one-cause answer to explain it. Instead, the case stems from a combination of forces, all adding up to a potentially historic collapse. The best place to start might be the basic understanding that all money created within society today is fiat currency, as well as an instrument of debt. Fiat currency is currency that derives its value from confidence and law alone, rather than a currency like gold, which is a physical precious metal with other uses such as being a commodity. Fiat money is an instrument of debt because it is loaned into society rather than spent into existence. To understand this, one must grasp the concepts of fractional-reserve banking and central banking.
Fractional-reserve banking is a practice in which banks take in deposits, but only hold a fraction of the deposit (frequently 10% but sometimes even 0%) in their reserves. The rest of the deposit is considered bank credit and can then be loaned out at interest to someone else. A major problem with this type of banking practice is that the money supply becomes far greater than the base supply of money originally created. Another way to phrase this is that there is much more credit in the market then actual money to be earned. This is known as the money multiplier effect. For example, if someone were to deposit $100 in a bank, the bank would hold 10% of the deposit ($10) in reserve and then loan out the other $90. If this $90 were deposited again in another bank, the bank would also put 10% ($9) in reserve and loan out the rest. A $100 deposit could therefore lead up to almost $1000 added to the money supply ($100 actual base money, 900 bank credit). When this is done on a mass scale, one can easily see how a large accumulation of credit would build up in society, especially when the same money is loaned many times over. This also means there is a large amount of debt, since credit is debt that needs to be paid back like a loan. Society needs constant access to loans to pay back its existing debt. There would be no money if all debt was paid back and only through perfect money flow can this system stay balanced.
Another major factor is central banks. A central bank is an institution that manages the state’s currency, money supply, and interest rates. The U.S. central bank, The Federal Reserve, plays a major role in the money supply by having the sole ability to enact monetary policy to increase or decrease the supply of the U.S. dollar; hardly do they ever decrease the money supply. The printing press is a powerful tool for the central bank. When the U.S. government needs more money, it issues government treasury bonds in exchange for Federal Reserve Notes (U.S. dollars) that the Federal Reserve simply printed into existence on a bank account balance of zero. They simply just created credit through their legal authority. Therefore, the government of the United States creates money through taking on debt by issuing treasuring bonds (IOU’s), which the Federal Reserve buys up with it’s own printing press of IOU’s and collects interest on the bonds. Simply put, the United States pays interest on the printing of its own money rather than simply printing it itself and spending it into existence.
What is even scarier, is the fact that The Federal Reserve, is an independent agency of the United States. It is not a government agency, but rather a privately owned institution of which the owner is actually unknown because it was formed in secret and has never been fully audited in its 102-year history. Proponents of a detailed Federal Reserve audit, like Zero Hedge, claim,
“The Fed should be audited as a brokerage firm would be — its financial holdings, its transactions, market orders, emails and phone calls.”
But those at the Fed claim it will obstruct their autonomy. Weirdly enough, the two presidents, JFK and Abraham Lincoln, who had tried to abolish the Federal Reserve and nationalize the central bank to print its own money, were both assassinated.
To quickly recap, one can see that through fractional reserve banking a huge accumulation of credit builds up in society, well above its base value. One also notices that the central bank has possibly the most power in society, as it controls the money supply, as well as traps the entire nation in its web of debt, since all new money is loaned into existence by the central bank rather than spent. The nation is the borrower and therefore must pay back the central bank. Finally, the most devastating effect of the current form of money creation is interest. When money is created by printing or making a bank loan, let’s say $100 dollars for example, only the principal of $100 exists. Where does the interest come from if only the principal is created? A simple way to think about this is to look at it as if one were to start a new country. If a country was sought to be started through the current system, the government would spend 100 million new dollars into existence through a loan given to them by the central bank, of which they must pay back. Since there was only 100 million dollars created to start the society, how can the people pay back the principal plus interest on that loan if only the principal of 100 million dollars exist? Once again, done on a mass scale, one can see this creates a massive buildup of credit, or in other words debt, that can never be logically paid back because it doesn’t even exist in the first place. It’s a nation in constant debt to its banks; debt slaves.
Now that some basic fundamentals have been explained, one can dive a little deeper into the real meat of the issue. The first major observation is the huge accumulation of debt in society. In many senses, the United States (also much of the world), has become a buy now (through credit, which is debt) pay later society. For this reason, massive amounts of credit are issued, which leads to increasingly massive amounts of debt in society. Debt is not necessarily a terrible thing, as Zero Hedge points out,
“Our networked economy requires debt in order to extract fossil fuels from the ground and to create renewable energy sources, for several reasons: (a) Producers don’t have to save up as much money in advance, (b) Middle-men making products that use energy products (such cars and refrigerators) can “finance” their factories, so they don’t have to save up as much, (c) Consumers can afford to buy “big-ticket” items like homes and cars, with the use of plans that allow monthly payments, so they don’t have to save up as much, and (d) Most importantly, debt helps raise the price of commodities of all sorts (including oil and electricity), because it allows more customers to afford products that use them.”
However, the degree to which debt is used is very importance to the equation. Right now, it’s proposed that the average American household is $203,163 in debt. The Federal Reserve doesn’t set a limit to money creation, but instead it sets interest rates, which affects how many loans are made, the interest paid on those loans, as well as the health of the overall economy. High interest rates usually mean the economy is going well.
On the contrary, elevated amounts of money printing at low-interest rates can lead to many problems. First, it naturally leads to constant inflation. Inflation is often a hidden tax on the public because as prices increase, money saved loses purchasing power. This largely affects the lower rungs of society disproportionately. Easy, cheap money printing can also lead to a build up of large financial bubbles. For example, if the Federal Reserve is printing large amounts of money at low-interest rates, investment might flow heavily into certain assets and prices will naturally rise, but if there is a weak economy with no middle class, then there is very few buyers for the investments. Basically, the investments are overvalued since they don’t match up with the real demand and the ability of most consumers to purchase. This then encourages predatory lending to encourage spending. Since money is cheap and banks don’t have to put much collateral down to make loans, predatory lending is a common practice to make easy money with little risk. Predatory lending is when banks make loans to people at amounts that they are probably not able to pay back. This a win-win for the banks because they made the loan without any collateral since most loans are just bank credit derived from a small portion of deposits. Whereas the person taking the loan has to put up their asset as collateral. If the bank feels these loans will go bad, they can just bet on them to fail in the derivatives market.
A largely misunderstood field, the derivatives market is nothing more than an unregulated casino where people make bets on instruments that derive their value from the performance of an underlying entity. Bets can be made on a wide variety of things, from betting on the price of a stock to go down, to betting on the interest rate to go up on a certain date, or even betting on loans to fail. Sometimes even betting on whole countries to default on their loans (Greece?). The casino is not only run and operated by the big four (Goldman Sachs, JP. Morgan, Cititgroup, and Bank of America), but the biggest bettors in the casino are also the big four. They make up an estimated 94.4% of the risk on the derivative market, which is an estimated $1.2 QUADRILLION market.
This is why this type of derivatives market, where one could regulate the market while also being allowed to bet in it, was previously illegal by law as a form of gambling until the year 2000. This is especially dangerous when such massive institutions are involved and make up virtually the entire market. Their downfall in the derivatives market can literally crush the entire global economy. This was all sanctioned by law when Bill Clinton smashed through the regulations in 2000, destroying the Glass-Steagall Act and allowing for a widely deregulated casino market to exist with little to no distinction between the rules for commercial banks and investment banks. To make the situation worse (at least for the average American), even in the event that the house looses (to itself), the public bails them out because they’re “too big to fail.” The banks never lose.
The 2008 bailout was allowed to happen because the U.S. Federal government is so indebted (because of its own excessive money creation from expansion and constant budget deficits) that it has put itself at the mercy of the banks, its creditor. In many ways, the banks (Wall Street) regulate the government and not the other way around. A budget deficit is when a government spends more than it produces in revenue. This is in large part, due to an ever-expanding Federal government mainly brought on by the economic theory known as Keynesian economics.
Keynesian economics teaches the view that in the short-run, especially during recessions, economic output is strongly influenced by total spending in the economy. In a recession or depression, the government can “stimulate” spending by having the Federal Reserve enact monetary policy (money printing) while the government enacts fiscal policy by investing in its infrastructure. Keynesian economic policy was used to counteract the Great Depression, by the signing of the New Deal in 1933, by Teddy Roosevelt. Keynes’s had designed this to be a short run tactic to stimulate the economy back to normal business level cycles, but instead it has been used much longer then anyone expected.
Once the federal government invests, it often grows in size and function and doesn’t return back to the level it was before. In fact, it has been growing fairly consistently since the federal income tax was started in 1913; ironically the same year the Federal Reserve came about. While in pure spending terms the U.S. Federal Government hasn’t grown each year since 1913, if one takes into account its power as an entity, then it definitely has grown each year. It has transformed from a small Federal government meant to protect the rights of its citizens, to a large apparatus designed to further the country’s financial well-being in whatever way it sees fit. Economics has become its purpose now, not the will of the people. This seems to make sense, as it’s commonly understood today that money rules politics.
Stimulating the economy might increase spending, but the government is in a massive amount of debt as a result. In fact, the U.S. government has run a budget deficit in 63 out of the last 75 years. The system is basically piling on more debt to try to stimulate the economy to pay off the original debt. This naturally leads to a constant expansion of the money supply, because more money (debt) is needed to pay off debt since it exceeds the base supply in existence. If the economy doesn’t grow constantly in a debt society like this, it will logically collapse unless money expansion is constant enough to secure that the nation doesn’t default on its current debt. Keynesian economics has been quite influential since the 2008 collapse, as the U.S. has been printing massive amounts of money at 0% interest rates, trying to stimulate the economy. This questionable domestic policy has supremely indebted the U.S. and inflated its whole economy. This is obvious because prices have been in a constant state of inflation since around 1933 when the New Deal was signed.
This begs the question: How is the U.S. able to get away with this and maintain the appearance as a recovering economy? This leads to a much greater overarching layer at play on the macroeconomic stage; the U.S. losing its role as the World Reserve Currency.
In July of 1944 at the Bretton Woods conference, the leaders of the 44 allied nations gathered in an attempt to rebuild the international economic system, even amidst the fighting still going on in WWII. During the conference, a new monetary order was established in which each country was to adopt a monetary policy that maintained the exchange rate of its currency to gold at a fixed rate and for the newly created International Monetary Fund (IMF) to bridge temporary imbalances in payment. This was designed so countries couldn’t cheat, because they all had to tie their currency to a fixed price for a certain amount of gold. Since the U.S. had around two thirds of the world’s gold at the time, they decided that international transactions would be converted to the U.S. dollar since it had a lot of gold and gold just wasn’t a realistic option. All countries in agreement were supposed to tie the value of their currency to the U.S. dollar and the U.S. was supposed to tie its currency directly to gold, but this was on the honor system. Countries were allowed to purchase gold from the U.S. at the fixed amount in order to keep them honest. This agreement allowed the U.S. dollar to be pegged as the world reserve currency.
From this point forward, most international trade would be done in U.S. dollars, thus countries needed to have large supplies of U.S. dollars in their reserves. Since there had to be tons of U.S. dollars in circulation for this to work, the U.S. had to run trade-deficits in order for there to be enough liquidity in the global market. Since the U.S. had superior technology for manufacturing, it didn’t want to import goods in exchange for dollars, so instead it traded dollars at huge profits with developing countries to acquire their raw materials and expand U.S. industries abroad. It then exported those profits to Europe through programs like the Marshall Plan to rebuild their economy, provide liquidity, and eventually export those products back to the United States.
However, a big problem began to arise. Since the U.S. dollar was tied to gold, countries could convert their currencies at the agreed upon rate of $35 per ounce of gold. Holding dollars was more valuable for countries than gold due to its liquidity, but that’s only if the currencies value matched its fixed gold convertibility ratio. Since the U.S. had to keep running deficits domestically to keep up with the growing liquidity in the global market, as well as an increased government apparatus, the confidence in the dollar began to erode as countries began to speculate it was supremely overvalued. The gold price in the black market become higher than the fixed amount. The problem of domestic monetary policy affecting world currency reserve requirements internationally is known as Triffin’s dilemma.
Domestically there was a huge amount of public debt from wars, vast money inflation through fractional reserve banking and Federal Reserve policy, and a negative balance of payment amounts, while internationally the world was rapidly loosing confidence in the U.S. dollar as a world reserve currency. Countries wanted their gold back instead of dollars, which lead to a huge decline in U.S. gold reserves, before eventually culminating in the Nixon Shock, in which President Nixon halted the direct convertibility of U.S. dollars into gold at the fixed amount. Countries were unhappy, so to prop the value of the dollar back up, Nixon made a deal with Saudi Arabia and ultimately other OPEC nations, to provide them arms and protection (military support), while in exchange they agree to make all oil sales in U.S. dollars. This gave rise to what is known and the Petro-dollar. It secured that dollars would be essential for almost all nations to hold in order to buy the world’s most sought after asset, oil. It is no wonder the U.S. is always invading countries for oil. It’s also clear how the U.S. can do such damage by enlisting economic sanctions, as that international trade is quite difficult without U.S. dollars. It should also come as no surprise either that any country that attempts to break away from U.S. dollar hegemony, by establishing new international trade systems in currencies outside the web of U.S. dollar, are considered threatening or dangerous. The list of countries include Russia, China, Iraq, Libya, Iran, North Korea, Venezuela, and Syria amongst others.
Hopefully the picture is starting to come together now. By using the ferocious capability of U.S. military, the U.S. has successfully protected the U.S. dollar from a collapse for quite some time. Because of it’s title as the world’s reserve currency, it has been able to rack up large amounts of public and private debt on the credit card, dominate geopolitics, and police the world, all because the world financial system is so heavily tied to the dollar. The U.S. literally exports its inflation to other countries. It’s very hard to tell where the dollar’s value ultimately is these days because the system is so large, the Federal Reserve is so secret, and U.S. propaganda is so engulfing. The U.S. has basically been allowed to raise its standard of living largely through an unfair system. However, all good things must come to an end.
The U.S. is in the midst of a major problem. The U.S. dollar is hugely inflated compared to its true value, but kept artificially strong through the geopolitical protection of its use in international trade. The U.S. might have been able to keep this going for a lot longer, but it’s extremely weak national economy might lead to an internal collapse first. With the excessive money printing, large budget deficits, and weak trade balance, the U.S. economy is on the verge of a collapse. There is essentially way too much debt in the system and not enough economic activity due to a massive inequality gap. The only thing keeping the system going and allowing the U.S. to avoid default on payments of its debt, is the military, media, and printing press.
The media has misled the public on how the U.S. uses its military as well as how the Federal Reserve has kept the economy on life support through Quantitative Easing 1, 2, 3, and maybe infinity. Quantitative easing is basically a glorified form of money printing in which the Fed buys financial assets from commercial banks and other institutions in exchange for newly printed money. This is mostly achieved by buying long-term assets instead of short-term bonds to ensure the owner receives a greater yield and instant liquidity. However, with so much debt in the system and a poor economy, the apparent question is whether these assets the Fed purchases are worth anything at all; as well as whether the U.S. economy can even function without constant money printing. This has been done at zero interest rates since 2008, in the hopes of a massive stimulus to the economy. Yet, so many years in, what has it achieved?
The problem is that there are no buyers in the market because the middle class has been virtually abolished. Federal Reserve money printing, especially during quantitative easing, only makes the wealth gap worse as those closest to the Fed, like banks, government, and corporations, receive most of the money. Profits go up as they invest, but once again, when no one has money to spend, these investments are nothing but bubbles on the verge of popping. Another problem is that the middle class gets trapped in debt as well because there are not enough good jobs to keep up with the price increases, so people take out loans to purchase big items like cars, houses, or to pay for college, as well as to run up the credit cards just to get by month to month. That isn’t real growth and has molded the U.S. into what Chris Hedges refers to as a “neo-feudal” society, in which you have a super elite ownership class. Everyone else in the lower working class is reliant on its masters to rent from and survive. There is no smooth transition up the chain anymore. The U.S. continues to ignore the fact that it needs an underlying makeover of its social system. Yet instead, it simply kicks the can down the road and inflates the bubble even larger. This only makes the crash worse in the end because it just adds on more debt to society and rewards the mega-rich with artificial profits.
To give the appearance of a recovering economy, clever tactics are implemented, like using newly printed money for stock buybacks to increase earnings per share, as well as using high frequency traders in the derivatives market, which can artificially pull the market up by itself. Another way to boost profits and increase inequality is through job layoffs as well as a build up of part-time work that lacks benefits. The deepest deception method however, might be the media. The media, which is owned by many of the same power players in banking and corporations (since these groups finance the media) can distract people, fuel the perception of a thriving economy, and keep this whole thing one big secret. This is what propaganda is, and the U.S. is king of that particular hill.
There is no longer true investigative journalism today in the mainstream. CNN, as well as almost every other mainstream media outlet has eliminated their investigative journalism divisions because sadly, it is no longer profitable, so information is constantly skewed towards a false narrative. Take unemployment numbers for example, in which they use a clever tactic of omitting people from their numbers who stopped looking for a job as well as not putting into context the build-up of part-time work and loss of good paying full-time work. Another example is housing sales, where the price numbers appear to be strong, but if one looks closer they see much of it is investment by large investors with access to cheap Fed money, therefore high prices are inflated and buyers eventually dry up. This is why many large investment companies have bought large amounts of property and rented it out at a high price rather than selling it; bleed them forever. It’s a better way to keep extracting profit and still own an asset. One can also see the numbers fudged in retail as well as stocks and bonds.
The fact is, the U.S. has all the signs of a major economic collapse: high unemployment, weak retail sails, 0% interest rates for an extended period of time, huge layoff numbers, no middle class, and high amounts of debt. One can only ignore reality for so long before the bubble completely implodes and slaps one in the face. If it were to implode, it would be catastrophic. A massive deflation in the valuation of capital assets could result, leading to huge drops in the stock market and a panic in the confidence of the U.S. dollar, which could then turn into a run on the banks, and even ultimately a hyperinflation of the currency. If the world loses its confidence in the dollar and decides to facilitate international trade in other currencies, all those dollars could come crashing home and an external explosion of hyperinflation is all but certain. The U.S. has printed far too much to escape its debt at this point and at the same time can’t stop printing money if it is to continue making payments on the debt. It trapped itself within a vortex that it might not be able to escape. In many ways it can be compared to the build up of an enormous international ponzi scheme that is in its final days of funny money life support before an massive socio-economic collapse.
There are already clear signs of the world de-dollarizing, as China and Russia are dumping massive amounts of treasury stock therefore depleting high portions of their reserves. To help the transition, a new central bank called BRICS (Brazil, Russia, India, China, and South Africa) has formed to provide adequate liquidity for international trade outside dollars. This has allowed tons of trade agreements between nations wishing to trade outside the dollar to pop up. This fear of a U.S. dollar collapse has convinced many to invest in alternative currencies such as gold, silver, foreign assets, Bitcoin, and even completely new currencies. These are financial assets that are outside the U.S. dollar system and could protect one if a large crash were to occur. People will argue that precious metal prices are low, which they are. However, many argue that the precious metal markets are rigged at artificially low prices by the same trick of creating an overabundance of paper claims to precious metals way above the actual physical amount in existence. Since most people don’t want to actually physically hold their gold or silver, this is able to persist and subdue the price by meeting demand. It’s important to keep the price of gold and silver low because usually when their price goes high, it’s a signal the dollar is losing value. People also fail to take into account that several mints around the world have problems meeting the current high demand for physical currencies.
A crash of this magnitude would undoubtedly cause social chaos for some time and possibly even provoke the government to invoke martial law to maintain order of an economic system with no valuable liquidity to oil its engine. There are also many who believe that most wars, even the current fight in Syria, are all based upon U.S. dollar dominance. In Syria, the U.S. and its Middle-Eastern allies in the Gulf who protect the U.S. dollar as world reserve currency in exchange for military protection, want to build a gas pipeline from the Gulf through Syria and eventually into Europe to provide the European market with gas. This would guarantee the use of U.S. dollars for oil in a very large market. However, Russia, the current supplier of most of Europe’s oil, as well as China and Iran, are looking to break away from the dollar in what is being called in China, “The Great Shift.” Some believe this could culminate at a boiling point and lead to WWIII: U.S./NATO/Arab Gulf States on one side, and China, Russia, Iran, and a few select others as their adversaries. Some believe there will only be a shift in global monetary power, while others just believe this is all a lie and conspiracy.
Certainly this is a lot of information to take in. What one does with the information presented here is entirely up to them to decide. Just remember, this wouldn’t be the first time a fiat currency collapsed. In fact, all fiat currencies eventually collapse, even vast empires like the Roman Empire. It should also be noted that the world is ever so interconnected today, and therefore a collapse of the U.S. dollar would no doubt lead to a global crisis. It’s not as if other nations are not equally buried in debt. In fact, the Euro and Japanese Yen are clearly struggling on cheap credit life support as well.
On the other end, this could be a positive collapse. It might be hard to see now in the short-term, but in the long-run, global trade could become more balanced in terms of equal value for both sides, ensuring greater chances of enduring peace in the world. This is just part of life. Sometimes one has to go through pain and failure in order to grow. It doesn’t seem morally right for the U.S. to continue to wage war on nations who refuse to accept the dollar just so the U.S. can maintain it current way of life. This is a new world now, and new systems are necessary. Technology has given rise to unprecedented possibility, but they can’t be fully explored until strong social systems are aligned with them. Maybe it’s time for a new system. Do American citizens really want to risk the threat of international nuclear war over this economic system? Is a system built on this much credit even real anyways? One doesn’t usually get to experience the fruits of his labor before labor begins. Maybe a new balance is necessary. Maybe the United States needs a wake-up call. It doesn’t have to be viewed as an end, but maybe just a new beginning.
So will the U.S. dollar collapse? I don’t know. The best advice I can give is to do your own research and think for yourself with an open mind. It’s up for you to decide at this point. Thoughts provoke actions, so choose wisely.
[accordion title=”Sources” close=”1″]http://www.economist.com/news/united-states/21643196-all-sorts-americans-are-feeling-more-prosperous-last-proper-recovery