“WE HATE YOU GUYS”

The Second Great Depression?

Luo Ping, a Director-General at the China Regulatory Commission is quoted “Once you (U. S.) start issuing one trillion-two trillion … we know the dollar is going to depreciate, so we (China) hate you guys”. February 11, 2009

Washington is on track to inflate the U. S. money supply until the dollar becomes effectively worthless. This money printing is what Ping and all the U. S. creditors fear. The U. S. debt is mathematically impossible to repay. Some estimates of the debt and unfunded liabilities of the U. S. exceed 100 trillion dollars. The U. S. has only two choices, both equally unappealing and unavoidable, to resolve this crisis. One choice is to renege on the payment of the debt of the United States. The other is to deflate the value of the U. S. dollar and then pay the debts of the United States with near worthless currency. The United States government has chosen the latter, Quantitative Easing. QE is the Federal Reserve issuing infinite amounts of fiat currency.

In 1933 Franklin Roosevelt, by Executive Order, confiscated privately held gold and gold coins. After 1933, U. S. paper currency was no longer redeemable for gold. Silver was removed from U. S. coinage in the 1960s. Since 1933, when it became no longer possible to redeem U. S. currency for gold, the U. S. dollar lost over 90% of its purchasing power, whereas from 1776 to 1933 the U. S. gold or silver commodity-based money was remarkably stable in value. Today there is no widely used commodity-based currency in the world.

Today’s paper currency only has value because of government decree (fiat). The fiat currency (dollars) in use today is intrinsically worthless. At one time, the U. S. used a commodity-based currency, gold and silver coins, and even paper money that was redeemable for gold. Commodity money is an asset, it has inherent value while fiat currency is a government debt, backed by nothing but faith and trust, and therefore inherently worthless. The U. S. fiat currency is a debt based on the ‘Full Faith and Credit of the Federal Reserve”. Since the U. S. currency is a non-redeemable, intrinsically worthless paper currency (redeemable only for more paper), acceptance in commerce to settle debts is based solely on ‘confidence’.

This ‘confidence’ or ‘trust’ is that the U. S. government will be responsible with the issuance of the nation’s currency and not debase the dollar by printing infinite amounts. Regretfully, the advent of the computer has made the act of actually printing currency unnecessary. Thirteen keystrokes on a keyboard at the Federal Reserve can instantly create a trillion dollars of fiat currency ‘out-of-thin-air’.

When a government’s irresponsible financial actions cause the public to lose confidence in the government, the country’s fiat currency loses all value and reverts to its intrinsic value, or…zero. This is not theory. This is historical and economic fact. In thousands of years of monetary history, no fiat currency has ever survived the test of time. All have eventually been rendered worthless by the monetary debasement policies of their respective governments. No country has ever owed so much or debased a currency more than the U. S.

Since the Federal Government recently made the decision to print unlimited amounts of currency in an attempt to support the economy (Quantitative Easing II), hyper-inflation will be the ultimate outcome. The U. S. economy will arrive at hyper-inflation thru a combination of inflation (dollar debasement), deflation (reduction of the supply of money or credit), and stagflation (stagnant economy, rising unemployment, and inflation). Hyper-inflation will begin as confidence in our currency starts to wane and the dumping of the dollar begins in earnest. This collapse in value will continue at ‘internet’ speed as more and more investors and governments try to convert their depreciating dollar holdings into more stable assets. This ultimate outcome is not in question, only the timing.

Because of the policy of debasement of the U. S. dollar, for the first time in over 60 years, the world community is assembling alternate currencies to use in international trade. The Nordic Euro, Islamic Gold Dinar, and the International Monetary Fund’s SDRs (Special Drawing Rights) are being considered. Russia and China are discussing creating a commodity-backed currency to be used in international trade in place of the U. S. dollar. The necessity to create an alternate World Reserve Currency would have been unthinkable a few years ago. When a legitimate alternate to the U. S. dollar becomes available, the use and value of the dollar will plummet. One deleterious effect will be that the interest rate paid to finance the Federal debt will rise, thereby adding hundreds of billions to the current (already un-payable) 1.5 trillion dollar annual deficit.

In the United States Constitution, our Founding Fathers felt sound money was so important to freedom that the founders specified what would be Constitutional money. Only gold or silver coins are Constitutional money. The Federal Government may not issue paper money, a.k.a. Bills of Credit. The Coinage Act of 1792 specifies that the penalty is death for persons found guilty of debasement of the currency. Not imprisonment, DEATH, which clearly demonstrates how critical our founding fathers felt a sound currency was to our country’s strength and survival.

Laurence J. Kotlikoff, professor of economics at Boston University, summed up the economic condition of the United States very succinctly in a ‘Bloomberg’ opinion column this week: “Let’s get real. The U. S. is bankrupt.”

Bill Willkomm
August 12, 2010

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