Dollar dot com, is the story of the most famous currency in world history. Some of you may be old enough to remember the statements: Good as Gold, or "Sound as a Dollar." These were references to the stability and integrity of the almighty US Dollar. Alas, those days are long gone and it is much more than a pity. It most likely will turn out to be the greatest financial debacle in all of recorded history. In this essay, it will be attempted as always to first get the reader to think, and secondly to question the very basis of their belief system.
Most of the readers on this web site will be able to read rapidly past the first several paragraphs because it is subject matter well understood by most here. However, the foundation must be established because my purpose in not to educate or arouse this readership, rather my aim is to write and essay of such substance that it will be sent around the internet to those that at this time do not understand what is happening but have an eerie feeling that all is not right with the world, and in particular the financial system. The purpose of the title is so some will be intrigued by the title enough to read this entire dissertation.
Perhaps a good place to start is to give the reader a little human interest. It first became very clear to my logic based training that for man to prosper and establish a process of mutual benefit certain facts had to be acknowledged. Notice, I stated acknowledged not established. In other words, it must be acknowledged that in order to build a house or factory, travel the speed limit, or purchase meat by the pound, all parties involved needed to acknowledge the fact that a constant is involved. A foot remains a foot whether the house was built in 1910 or 2001. Miles per hour remain the same whether riding a horse or driving a Lexus. And a pound of hamburger is identical in weight to a pound of butter.
It is important to note that at one time a dollar equaled a dollar! Yes believe it or not, at one time a dollar was a constant. Then a funny thing happened on the way to reality. The international monetary agreements of the 1920's, provided that a nation could count the holdings of redeemable foreign currencies as monetary reserve assets. This meant that such currencies could be used in international payments in place of gold and for sometime was considered "As good as Gold." France decided that if one were as good as the other why not go for reality and take the gold. What happened next is well known, the gold window was closed in August 1971. Mr. Nixon was given the advise, the dollar reserves (read gold) were being drained at a rate unacceptable to the United States. The U. S. could find a way to expand the money supply but not increase the supply of gold at the same rate. Slam shut the gold window and away we go into financial waters tested many times before. The Lessons of Paper Money are legion. China, the French Assignats, Weimar Germany, Italy post WWII, Brazil, Argentina, and on and on. Now however the paper money game was for much bigger stakes. Since the dollar was revered to be as good as gold until that August day, many Foreign banks held dollars as reserves. Now for the first time in world history the reserve currency was backed by the Full Faith and Credit of the Government. In other words, the governments ability to borrow and faith that enough people would never catch on to the ultimate result of a fiat money system run by a private corporation.
Since that time the dollar has experienced a good roller coaster ride, at times being beat up in the currency market and at times being the King of the currency market. The most difficult aspect is the extreme price volatility it introduces into markets. Look only as far as the stock market, talk about volatility. The inflation of the past several years poured into the equity market. Hence the inflation was verified as real in stock prices. Just as the buyers of many dotcoms learned that putting faith in something without intrinsic value can lead to disaster, the lesson will become all to clear again. Putting ones faith in governments ability to manage the money supply properly over time, will lead to a dollar dot com!
Before continuing, let me address some common arguments. What good is gold, you can not eat it! It is admitted, paper money does have the advantage here, it can be eaten and with the proper amount of seasoning might even taste as good as some of those energy bars.
So, now it is time to think, do you really believe that a valueless money is better than a value based money? The Federal Reserve has been pumping up the money supply and lowering interest rates for some time now. Much of the "new" money will initially go toward cleaning up balance sheets on both a corporate and personal level. This will be in place of the consumption, we are told the economy needs.
In our modern age, many people have come to think that the health of the economy is government's responsibility. So, any decline in the market, loss of jobs or purchasing power will also be blamed on the government, making it even more unpopular. There is a very small percentage of the world's population that understand personal responsibility even in monetary affairs. In fact most of these people are outside of the U. S. Even to this day money is determined by the totality of the individual choices of people making exchanges.
"The concept of money as a creature of Law and the State is clearly untenable. It is not justified by a single phenomenon of the market. To ascribe to the State the power of dictating the laws of exchange, is to ignore the fundamental problems of money-using society...State declarations of legal tender affect only those monetary obligations that have already been contracted. But commerce is free to choose between retaining its old medium of exchange or creating a new one for itself." 1
This is not to ignore the Bond market and the fact it dwarfs the Stock Market. Most "money" is based upon contract and incurs debt. Remember the contract that a dollar was a constant weight of precious metal was broken a long time ago. Some will feel that the government obligations are above reproach and therefore this type of thinking is more Doom and Gloom. In order to prove my point, let me digress to the Social Security system for a moment, anyone depending upon this Government obligation had better study the facts. All should read what treasury Secretary Paul O'Neill had to say about this Trust Fund..(See what is in it)
Currently, many investors are concerned as to the Inflation vs. Deflation debate. The most important information that can be provided is the same in either case. Check your contract, who is responsible to pay back the money? A government, state, corporation, individual, or foreigner? In all cases it is as if pouring from the empty into the void. In all cases something that is a concept is exchanged for something of value. Consider that in either an inflation or deflation there are defaults. In a hyperinflation the debtor defaults on the lender by paying back the loan in "worthless" money. In a deflation, the debtor is unable to earn enough money to pay back the loan. This is not true of every case of course, some loan will be paid back in full. However, it is food for thought. A major Creditor ( U.S. Government) recently announced the assassination of the Long Bond. Upon this announcement the Bonds value rose ( fall in yield).
Very recently, a massive decline in the Bond market (and a reciprocal rise in yield) took place. The Bond market is telling us something important here. The Bond traders are worried about inflationary potential. If we see a recovery in the economy, with the huge monetary stimulus recently pushed into the market, it could be inflationary.
The outrageous growing trade deficit is increasing at compound rates. Foreigners have been funding U.S. consumption for years. Foreign asset holdings are worth US$9 trillion dollars. The massive U.S. trade deficit holds the key to the stability of the World's financial system.
How would you cope with a sudden reversal in the fortunes of the dollar?
The most recent warning has come from the International Monetary Fund. In a recent report, it says that 'the widening of the U.S. current account deficit could shake investors faith in the economy triggering a withdrawal of investment that could endanger global markets. So if enough investors sold their Bonds, it might begin financial shocks that could be felt by institutions and markets.
The forecasts are there. But they get little publicity and few investors pay attention. It's unfortunate, because it will prove once again, when you can lie about money, you can lie about anything.
The Social Security Fraud by Sheldon
Richman, September 2001 Treasury Secretary Paul O'Neill upset some people recently simply by telling the truth. He had the temerity to say that the Social Security Trust Fund has no tangible assets. It's empty.
(1) Ludwig von Mises, The Theory of Money and Credit (pp. 69, 71)
November 21, 2001
Mr. Morgan publishes a private newsletter for serious precious metals investors. He hosts the web site: Silver-Investor.com. He has been a private economist for over two decades his background in engineering , with an advanced degree in Economics/Finance. He has been interviewed on Don McAlvany's radio talk show, Financial Sense Newshour, Hard Money Watch, and appeared on television. Mr. Morgan was published in Global Investor regarding ten rules of silver investing. Currently, he is writing a book on silver.
David Morgan (Silver-Investor.com) is a widely recognized analyst in the precious metals industry; he consults for hedge funds, high net-worth investors, mining companies, depositories and bullion dealers. He is the publisher of The Morgan Report on precious metals, the author of Get the Skinny on Silver Investing, and a featured speaker at investment conferences in North America, Europe and Asia. You can receive a free 30 day trial subscription here http://www.silver-investor.com/joinfreelist.html