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"Paul Robinson, one of [Barclays Bank's] strategists, said: 'We're dollar bears. The dollar is coming up for an important few weeks. We expect it to get quite a bit weaker.' The bank fears that the dollar could fall to as low as $1.50 against the euro."

-- Dollar's weakness to intensify, experts warn, by Richard Blackden, London Telegraph, 10/18/2007 (dated Friday the 19th)

 

"The dollar may 'plunge' in 2008, prompting the U.S. , the European Union and Japan to intervene in foreign exchange markets, said Eisuke Sakakibara , Japan 's former top currency official."

-- Sakakibara Says Dollar May ‘Plunge,’ Forcing Response, by Stanley White and Kazumi Miura, Bloomberg.com, 10/18/2007  

- 1 -  

Could any prediction be more credible and certain today than the prediction of a falling dollar?  

Not that a falling dollar is anything new. When the Federal Reserve was unconstitutionally created in 1913, one dollar was worth, by law, one-twentieth of an ounce of gold (more precisely, the ratio was $20.67 per ounce). For the most part, the dollar had been defined in terms of gold since the late 1700s – Civil War era greenbacks being the major exception – and the U.S. Constitution still requires that nothing "but gold and silver Coin [be made] a Tender in Payment of Debts" in any State in the Union.  

Hmm. Well, perhaps that's in an alternate universe. Still, you can read Section 10 for yourself, here. *  

For large purchases and for savings, Americans used one-ounce $20 gold coins until the Fed had degraded the dollar so badly that in 1933 Franklin "internment camp" Roosevelt illegally ended the gold standard for American citizens, who immediately took up arms and – oh, wait. That would be the alternate universe again.  

Earlier this year when I wrote Destruction by Paradigm: How the United States wrecked the world’s most robust economy and impoverished its own people ( March 20, 2007 ), it took $652.20 to buy an ounce of gold.  

As I write this sentence seven months later, it takes $768.70 to buy an ounce of gold:

So an ounce of gold now costs $116.50 more than in March, an increase of about $16.64 per month. In the first 18 days of October alone, the jump was over $20. Hey! Didn't $20 buy an entire ounce of gold not long ago? (For the current gold price, check Kitco or 321gold).  

Gold has provided a return of almost 17.9% in seven months, or an annualized return of over 30% – on something real, of intrinsic value, and which has been used as a store of value for 5,000 years. (Ignoring the collector value, what would a 5,000-year-old, one-ounce gold coin be worth today? Right: $768.70). For the most part, it isn't so much that gold is gaining in value lately as that paper dollars are declining in value. And it isn't only the dollar that is being inflated away; here are charts for the gold price in various currencies since 1971.  

Doing the math, we see that one dollar in 1933 was worth about what thirty-seven of your dollars are worth today. Assuming you have thirty-seven dollars, of course. Increasing numbers of Americans don't. Well, many Americans at least have equity in their homes.  

Oh, wait. That was last year.  

The dollar's dramatic loss of value happened because one of the Fed's functions – perhaps its most important function – is to "stabilize the dollar." Right? And not just the dollar alone: the Joint Economic Committee says that "The Federal Reserve stabilizes the financial system." But that doesn't make any sense, does it? Maybe I'm thinking of the alternate universe again.  

In fact, your dollars fall in value because we have the Federal Reserve: increasing the supply of money is the Fed's major purpose. Why? So that government and banks and defense contractors and various Anointed Others can have use of ever-more of that wonderful, sweet-smelling cash, that's why. The military-industrial complex and ten thousand other corporations and government agencies and special interest groups would have to get by without all that government largess if new money wasn't being created constantly; taxpayers can (or will) only pay so much in direct taxes. Inflating the money supply is easier to get away with than raising taxes, but each added dollar degrades the value of all existing dollars. "Counterfeiters-R-Us" would be a more accurate name for the Fed, and certainly a more entertaining one. They might as well provide us with SOMETHING in return for wrecking the country.  

As long as the United States dollar remains an undefined fiat currency, tied to nothing real, it will continue to fall in value until it goes the way of all fiat currency: to zero. The fall can be faster or slower, but eventually every fiat currency dies (although often a dead currency is replaced with a new one of the same name). Prices go up as the value of the currency goes down. At some point it becomes cheaper to use paper money in your woodstove directly than to use it to buy firewood.  

Of course, other than gold, most things aren't going up in price right now. That is what we hear, isn't it: "inflation is low" and "inflation is under control" and so on. And you can believe that, because you actually hear it on television. Although oil did hit $90/barrel today. Well, that probably won't affect the price of anything.  

Except trucking and other freight (for everything you buy) and driving and flying and plastics and fertilizer and food and, well, maybe a few other things. Nothing to worry about. Besides, you can be sure that hedonic and other adjustments to the CPI will take care of it all. Well, most of it, anyway. Remember: inflation remains low!

Chart from http://www.shadowstats.com/  

- 2 -  

There are other views on the topic of future inflation: Here is Gary North explaining why deflation might be in our future, and how that might affect your precious metals investments. Or not: North points out that "Prices fell in relation to gold coins. So, gold did well in deflations."  

Either way – with inflation (as in today's America or [shudder] Zimbabwe), or with deflation, as in our very own Great Depression of the 1930s – you, the ordinary person, are screwed. Gold would appear likely to do well in either situation, however; if so, then gold stocks, bullion, exchange-traded-funds (ETF's) such as the StreetTracks Gold Trust (GLD), and so on should be good investments (see disclaimer at end of this column), but the ordinary person – even the ordinary investment fund manager – will not likely invest in gold until gold reaches the mania phase and most of the gains have already been made. Then, sooner or later, the mania ends, gold begins trending downward to a realistic level (but never to zero or even near it, unlike paper money) with the "buy high, sell low" crowd screaming all the way down. When gold is used as money, the commodity-cycle and investing mania ups and downs are smoothed out to a very large extent; that is, gold's value relative to the dollar (by definition with a gold standard) and to other things remains fairly constant. See if you can spot the point on the graph below where Nixon ended dollar convertibility into gold even for foreign nations (i.e., declared bankruptcy for the United States):

Chart from Kitco.com (note that chart ends in 1998; today's gold price would literally be off the chart)

Since most dollars today are electronic entries denominating debt (e.g., your mortgage), and since people and organizations are having increasing trouble paying that debt, and since the financial system has created a nightmare funhouse of leveraged debt instruments and other exotic forms of investment that nobody truly understands or can value accurately, the possibility that trillions of dollars will simply vanish forever (perhaps with a soft popping sound and a whiff of smoke) cannot be dismissed.  

Declining number of dollars = deflating money supply = deflation, so perhaps Dr. North is correct. No one knows, really, so be sure to invest accordingly. Good luck.  

On the other hand, the staggering list of obligations the United States has set up for itself, including Social Security (which last week began welcoming Baby Boomer retirees), Medicare (a problem five times bigger than Social Security, according to David Walker, head of the General Accounting Office) and a world-wide empire with military bases in over a hundred nations, ensure that the pressure to inflate our debts away will only intensify. The flipside of how easy it is for electronic blips to disappear is that they can be created just as easily; you, personally, may not be getting any of these shiny new dollar-blips injected into your account, but that doesn't mean our benevolent leaders won't be creating them out of thin air and depositing them somewhere. After that happens, the blips will make their way into the wider world as they are spent by Homeland Security or Medicare or whomever, and presto: inflation.  

So what do you think: inflation or deflation? Or, somehow, both? That last choice sounds all-too-likely, and it might be the worst possible outcome: higher prices for food and clothing and fuel and other things we need for daily life, plus lower prices for the assets (houses, stocks, bonds) that Americans – and their pensions and 401(k)s – are most heavily invested in. Add that to high unemployment and a police state imposed to quell dissent and anger at the power elite who have created this mess, and you have – well, exactly what we seem headed for.  

I could be wrong. No one, including me, knows what is coming for certain. In some ways America 's current situation is unique in history, and many things could go in unexpected directions. How quickly and completely will other nations dump the dollar? How fast will the Fed inflate? How will the increasing hatred of America around the world (not to mention simple awareness of our ever-more- precarious economic position) affect use of the dollar and willingness to invest in American companies, goods, and bonds? How will peak oil affect the American economy? You can probably come up with another twenty or thirty such questions easily; the number of unknowns is staggering.  

One thing is certain: The dollar is losing value very quickly. It may soon lose something else: reserve currency status. So says The Economist, which adds, "And that would hurt: the privilege of being able to print the world's reserve currency, a privilege which is now at risk, allows America to borrow cheaply, and thus to spend much more than it earns, on far better terms than are available to others. Imagine you could write cheques that were accepted as payment but never cashed. That is what it amounts to."  

Even against other fiat currencies (which are also being inflated away), the dollar is losing value rapidly, and has been – barring the inevitable ups and downs of the market – for a very long time:

http://mwhodges.home.att.net/exchange_rate.htm  

- 3 -  

It is critically important that more people understand the reasons for our unfolding monetary disaster. The single corrupt foundation for the crisis is this: coercive government.  

The out-of-control United States government, empowered and not very well restrained by the Constitution, is the sole reason for the dollar's problem. Ever-larger coercive government led, inevitably, to corporatism, by creating an armed source of power that corporations could buy or meld with. Corporatism fosters the worst characteristics of both government and big business, by giving the greed of business access to the legalized coercion of government and by giving government access to the financial power and global reach of corporations.  

The Federal Reserve may be the ultimate corporatist institution. [Link is to a 41 minute video about the Fed by the Ludwig von Mises Institute].  

In the absence of coercive government, we would have competing banks, some of which might be corrupt but none of which would have a government-enforced monopoly and other coercively-protected powers that make the Fed so dangerous. Without the United States federal government, the Fed would not exist and the money used by Americans would be gold and silver – things which could not be counterfeited constantly to supply "money" for war, for special interests, and for other groups and purposes opposed to the interests of the average American. Nor would Americans be forced to literally borrow money – money created from thin air – from a privately-owned central bank (as our government does now) and then pay interest on it as part of the national debt.  

What a scam!  

The Fed has been used to transfer trillions – yes, by now, trillions – of dollars from ordinary Americans to the power elite, to corporations, to harmful (if often well-meant) government programs, to a military empire, to foreign dictators (including Saddam Hussein, Ferdinand Marcos, the Shan of Iran, and many others), and to special interests of every kind. It boggles the mind to think what we might have done with all that wealth had it been left in the hands of the people themselves.  

- 4 -  

There is no inherent reason for economics to be so problematic. There is no need for money to degrade in value, year after year – prior to the Federal Reserve, it didn't: a dollar bought significantly more in 1900 than it did a century earlier.  

There are other ways to handle exchanges in the marketplace than with money. In particular, before there was money, there was barter. Barter is the direct exchange of goods and services. I have milk from my cows; you have eggs from your chickens. Perhaps we can work something out: milk for eggs, eggs for milk.  

Barter is still a sensible and obvious market activity, but the limitations are clear: What if you don't need any milk? What if I have my own chickens in addition to cows: I don't need eggs, so how will you pay me for milk? What if you want something (a car, say) made by people in another state or nation: will they take your eggs in trade? Maybe not. And how will you save for the future, considering the shelf-life of chicken eggs?  

- 5 -  

The answer to such conundrums is money. Money is a medium of exchange: an intermediary that allows you to pay me for milk even if I don't want any eggs. We can thus trade whether or not our personal goods or services are a match for what the other wants at the moment. Money is also a store of value: with money, you can sell your eggs (or labor or whatnot) and keep the profits on hand for later use, or pass them on to your heirs. It is money's role as a store of value that inflation weakens and eventually destroys – which, at the extreme, also destroys the money's ability to act as a medium of exchange. When a currency is sufficiently worthless, people refuse to accept it in trade. That has very serious consequences.  

Destroying money's ability to store value and to act as a medium of exchange is a disaster because money is much more than a convenience. Money is an important method of information transfer, for one thing. For example, when something becomes scarce in the marketplace, the price rises, signaling the need for more production and providing incentive for someone to do the work needed to produce the scarce item or service. Interference with the value of money (as with inflating the money supply) sends bad information throughout the market, which in turn causes people to respond to false signals instead of to actual conditions.  

Even more critically, the invention of money opened up the division of labor dramatically and was thus among the keys to creating the modern world. The practical reality is that I cannot invent, design, and build my own iPod, television, automobile, internet, solar cells, or most of the other things I need and want. I could grow and hunt my own food, spin cloth (if I could find some thread and the necessary machinery) and make my own clothing (after making my own scissors, needles, and sewing machine), and build my own furniture (and the tools to do so), but even that is impractical and would be very time-consuming.  

In short, the division of labor is what allows for modern life. In turn, money is what allows for the division of labor, at least beyond the most basic levels. Money is thus a critical element in the maintenance of civilization, and when governments or banks are allowed to degrade and ultimately destroy the integrity and value of money, a danger is created that exceeds even the dangers of outright war.  

For that matter, destroying a nation's money is one of the most powerful ways to create the conditions leading to war.  

- 6 -  

Money itself can be almost anything, including feathers or sea shells. Still, as you'd expect, some things work better as money than do others. Well-chosen forms of money hold their value over time; they resist rust and fire and rot and other forms of physical destruction; they do not melt when wet or otherwise change easily into something of lesser value. It helps if the material used as money has intrinsic value of its own, as do gold and silver – both of which are useful in jewelry, industry, medicine, and in increasing numbers of high-tech products and processes.  

Well-chosen forms of money are also relatively scarce and their supplies cannot be easily increased without significant cost or effort. If a supply of money CAN be increased without much cost or effort, that money will be counterfeited by either the state or by other groups or individuals – and each new money unit brought into circulation reduces the value of all existing units. Artificially double the number of dollars in circulation and you have twice the dollars chasing the same number of houses, cars, carrots, accountants, and so on. Goods and services do not magically increase in availability just because the number of dollars has increased, and the market quickly and unavoidably adjusts to the new situation with a general rise in prices. Prices are raised until demand diminishes to what the market can handle.  

Because an increase in dollars (or other monetary units) for one individual represents immediate, increased prosperity for that person, this general inflation of the money supply is easily misunderstood, especially at the start of an inflationary period. "More money – whoopee!"  

It is only later in the inflationary cycle that the upbeat (and false) sense of prosperity turns to unease, and then to fear, and then – if the cycle is allowed to go far enough – into outright terror.  

- 7 -  

A nation that destroys its own currency is a nation headed for a nightmare. Germany 's hyperinflation of the 1920s was among the factors that brought Hitler to power.** Every episode of hyperinflation – and there are many in history – has brought extreme hardship and, typically, violence.  

In today's Zimbabwe, as in Germany 's Weimar Republic , people have seen their life savings become almost literally worthless. In 1980, the Zimbabwean dollar was worth significantly more than the U.S. dollar. By 2006, when that currency was replaced by a new dollar (the "second dollar"), the original currency was worth essentially nothing: the exchange rate was over half a million Zimbabwe dollars to one U.S. dollar.  

So: You had a half-million dollars in 1980 (under your mattress because you don't trust the banks), representing years of hard work; that money is now worth a single U.S. dollar, which has also degraded in value. Your savings are thus worth perhaps one one-millionth of their original value. Even with bank interest, you'd have a staggering loss.  

The present rate of inflation in Zimbabwe is, if anything, even worse than in 2006; one recent estimate is 1.5 million percent. For all but the very fortunate and well-connected, keeping up with such inflation is impossible. What had been a vibrant middle class in Africa 's wealthiest nation is now living in severe poverty.  

Of course, America is not Zimbabwe . America is special!  

Among the ways we are "special" is that our former wealth and power (and our continuing military might) have allowed us to squander more wealth than most nations ever see, without this disaster becoming immediately obvious to most citizens. Americans have racked up the largest national debt, the largest budget deficits, the largest trade deficit, and the largest set of unpayable future obligations of any nation in history. We are selling our assets to foreigners (in cash, in sales of real estate and businesses, and in other ways) at a record pace to continue consuming at our present level.  

What could possibly go wrong?

http://mwhodges.home.att.net/reserves.htm  

Conclusion:  

Money is a critical tool for the division of labor and for civilization itself.  

The United States began wrecking its own money – the U.S. dollar – in 1913 when Woodrow Wilson signed off on the Federal Reserve. By 1933, enough damage had been done that FDR broke the highest law of the land by forbidding Americans to use gold as money (or even to possess more than $100 face value in the old gold coins). By 1971, the dollar could not even support the devalued $35/ounce rate that Washington maintained for foreign governments. Nixon completely severed the dollar's tie to gold on August 15 of that year, putting the United States on a pure fiat currency.  

These criminal actions by former presidents have never been corrected, nor has anyone (other than the American public) been made to pay for them.  

The destruction of money is a threat to both love and freedom; the death of a currency means poverty, hardship, and emotional pain for all but the most fortunate. Violence and even war are common side effects, as are political repression (including, in many cases, detention camps for dissenters and scapegoats) and other epic violations of human rights.  

America is heading down a very dark road, and most of the world is following the same path. Tumultuous times lie ahead.  

What to do?  

The most important action we can take on a social level is to spread the truth: that America 's rapidly growing financial problems have their root in government power itself and the desire of the ruling class to hijack America 's wealth and even its money supply. These goals were accomplished in 1913 with the one-two punch of the income tax and the Federal Reserve.  

What is the best way to educate Americans on the nature of the cancer eating away at their freedoms and prosperity? There is only one spokesperson for this truth who is actually getting enough national (and even worldwide) exposure to make a difference: Dr. Ron Paul and his presidential campaign. No one but Paul is telling the American public the truth about the Federal Reserve, and about most other crimes the U.S. government is committing at home and abroad – no one with the necessary (huge) national audience, at any rate.  

As a voluntaryist and abolitionist – as someone who agrees with Thoreau that "That government is best which governs not at all" – I believe we will only make our way to a healthy, voluntary society by first reclaiming our heritage of freedom and human rights within the flawed framework of our system of coercive government. We must learn anew to walk before we can run; we will need to reacquaint ourselves with the nature of freedom before we understand it well enough to move past the tyranny most Americans now see as "normal." History gives little support to the hope that a social-economic collapse, combined with blossoming tyranny and human rights horrors, will lead to a society with more love and freedom.  

I do not know if Paul's campaign will have enough impact, quickly enough, to help guide this country to a gentler road through our coming travails, but the possibility exists. I support Dr. Paul both with dollars and with activism, and I urge you to consider doing the same.  

DISCLAIMER: Please take everything you read about investments here – and elsewhere, if you have any sense at all – with a grain of salt. I am not a financial advisor and am only conveying my own opinions and pointing the reader to data I have encountered elsewhere. It is worth remembering that there are potential dangers and pitfalls for every investment class. Do your own research and come to your own conclusions. For actual investment advice, I use the Outstanding Investments newsletter (about $100/yr) which, despite its modest price, has done amazingly well for years; their website claims that "unbiased and meticulous industry watchdog Mark Hulbert just recently ranked our service, Outstanding Investments, as the #1 Performing Investment Letter of the Last FIVE YEARS." The returns from their recommended portfolio make that quite believable. I also recommend regular visits to 321gold.com, PrudentBear.com, Agora Financial (the people behind Outstanding Investments) and other "alternative" sources of news and commentary, as well as to more mainstream sources of information. If you are not familiar with basic economics, you can get started learning the basics here and here. To repeat the most important point: Every investment class has its dangers; do your own research and come to your own conclusions.  

- - Notes - -  

* Section 10 also authorizes the issue of "Letters of Marque and Reprisal," which could have been used to go after the 9/11 terrorists instead of launching wars against Afghanistan and Iraq . (Congressman Ron Paul introduced a bill to do exactly that, but his colleagues – and the press, and nearly everyone else – ignored the bill).  

** Another important factor in Hitler's rise to power was widespread emotional damage from cruel childrearing practices; see the writings of Alice Miller for details.

 

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Glen Allport's picture
Columns on STR: 104

Glen Allport co-authored The User's Guide to OS/2 from Compute! Books and is the author of The Paradise Paradigm: On Creating a World of Compassion, Freedom, and Prosperity. He maintains paradise-paradigm.net. This is one in a series of columns on the human condition.