Monday, March 1, 2010

Beaches of Gold

Have you noticed? The world's most calamitous financial/monetary event may have started just recently. The Fed Reserve, in conjunction with the U.S. Treasury, has been flooding the market with our fiat dollars for some time now... and China has stopped "buying" U.S. debt. [That last bit is Government-speak for: China has stopped loaning us money.] Most likely the only thing that prevented a run on the dollar (for now) is the fact that Japan took up China's slack relative to the buck.

Price inflation in this country has been edging up slowly for the last two months, despite the Fed's Keynesian efforts to keep it down. Grocery prices are the most obvious indicators of that. The primary cause of price inflation is inflation of the money supply, which causes the value of each dollar to decrease. Here's a simple way to understand it: ask yourself, if beaches were made of grains of gold rather than grains of sand, how much would one ounce of gold be worth? Generally speaking, anytime the quantity of some item is increased in a trading system, the value of each unit of that item decreases. That's just as true for fiat dollars as it is for ounces of gold.

U.S. fiat dollars have been increasing (on a net basis) for decades. That's why it takes so many more of them to buy the same item as compared to ten or twenty years ago. I remember buying a pair of Levi blue jeans for $3.95 in 1962. Now they're about $35. The U.S. dollar today is worth about four cents as compared to its value in 1913, the year of the passing of the Fed Reserve Act.

Keynesian economists believe that Government "spending" of fiat money in ever larger amounts can go on virtually forever without any negative impacts on our money or economy. Common sense tells us that continual devaluing of the dollar by essentially printing it out of thin air is bound to have a negative impact sooner or later. The only reason the dollar now has any value at all is because it is the world's reserve currency. But, for how much longer?

As soon as China, Japan, the Saudis, European countries, and others figure out how to dump dollars without taking a horrendous loss, the ongoing Keynesian game will be over. Oil, for example, will be traded with some other form of money; then the inflation of prices here will begin in earnest. Some predict it will be hyperinflation, and the collapse of our economy. I don't think so...not the last part anyway.

We very well may have significant price inflation relatively soon, perhaps even hyperinflation; however, that doesn't necessarily mean our economy will collapse. If sand (the dollar) doesn't work as a medium of exchange, eventually we'll agree to use something else. In the meantime, perhaps different regions will have different forms of "money", and/or we'll barter to a large degree. [Even countries can barter if need be.] One thing is fairly certain: the fiat dollar is on its way out. Don't believe the likes of Ben Bernanke; he was totally wrong regarding his predictions about the housing bubble and, most recently, the overall financial crisis. The Keynesians have been playing their game for over sixty years, but it's about to end. When it does end, our economy is in for a rough transition; but I don't believe that it will collapse.