Wednesday, June 29, 2011

The Doomed Dollar


“You can ignore reality, but you can’t ignore the consequences of ignoring reality.” -- Ayn Rand

What has not been said about the current economic situation? From pie-in-the-sky optimists to dire warnings from those who see an approaching apocalypse, we have prognosticators from all sides who claim one thing for certain: there will be significant changes in our way of life and these changes will be preceded by the devaluation of the American dollar.

A dollar collapse would be the single largest economic event in human history. It would be the first economic event that would influence every living person in the world. No denomination in human history has had as much influence upon the world as the dollar. It is the de facto world currency. While there have been other economic collapses in history, all pale in comparison to the dollar's predicted collapse. The reason is that the other historical currency crises were regional and there were other currencies available for people to switch to. The dollar's collapse, however, would be global and it would bring down not only the dollar but all other fiat currencies. Some economists even predict that the collapse of currencies would lead to the collapse of all paper assets.

Thanks to globalization, the dollar is the world’s reserve currency. It supports the global economy in matters pertaining to foreign trade, most importantly, in oil dollars. This money is recycled through London and New York where corporate and/or government forces take out huge shares through taxation, fees, and profit. The model is driven by the knowledge that a consistently growing economy matches an increasing population with ever more requirements for resources. As long as economies are growing, whether global or regional, it is reasoned, there will be enough (money, jobs, food, housing) to sustain people.

Barring a miracle, the cycle as described above will end with the inevitable collapse of the U.S. dollar. In order for our debt-based money to function we must increase the debt every year in excess of the debt as well as the interest accrued the year before or we will enter a deflationary spiral. When debt is created, money is created. When debt is paid off, money is destroyed. There is never enough to pay off the debt.

So, we can either default on the debt altogether or create more money (debt) to maintain the status quo a while longer. The problem is, we are approaching a compound interest moment when the debt exceeds the principal -- hyperinflation will be the result. That is the scenario where it will take a wheelbarrow of money to purchase a loaf of bread.

There are other options, if our leaders are bold enough. Beyond politics and Wall Street’s typical ways of doing business, debt forgiveness should be an option. And China and the other countries who hold America’s mortgage? Ask them to forgive our debts (similar to how we forgave theirs after the World Wars of the twentieth century) with the understanding that if they don’t, we will default in any case. What if there was a national day of debt forgiveness? Following a clearing of the books for every loan institution in the country, imagine the vigor of a re-start. Maybe even fix the rules while we’re stalled.

A friend once asked where was the best place to be in case of a nuclear attack? The answer is, it’s where you can say, “What was that?” The same holds true for surviving an economic collapse as well as the inevitable re-arranging of banking and government. I favor the notion that people will persevere as they always have -- through community connections and by the use of their wits.

So what to do in the meantime? Opt for a soft landing. Prepare as best you can and trust in whatever greater power you believe to protect you. Remember, people have been around a lot longer than either money or governments.