"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Wednesday, March 9, 2011

Don't Discount the US or the Dollar Just Yet - Repost

I have noticed that there are a lot of new readers to this blog.  We are also seeing a lot of doom and gloom in the media regarding the US Dollar's future.  With those two things in mind, I am reposting an article I wrote last November regarding one possible fate of the US Dollar.  I think we need to separate the fact that the US Dollar represents two things: 1) It represents the strength and power of both the US Military and Economy, and 2) in its current form, it represents the fiat model the world uses for trade.  In my view we need two think about these two factors individually when analyzing the future of the US Dollar.

Also keep in mind that China, Russia, and other nations are scrambling to increase their gold reserves for a reason.

Here is the article:

In 2004, writing for the New York Times Magazine, Ron Suskind interviewed amongst others, an aide to then George Bush's administration. The article covered Bush's handling of world affairs, and the US's role in the world. There is an interesting quote in that article that conveys, to me, the reality of a superpower. And even though the early 2000s were emerging "war years" for the US in Iraq and Afghanistan, there is a quote in that article that also applies, in my view, to all US Presidential Administrations and their actions, which covers the economic sphere as well. 

Ron Suskind was speaking to this aide about how solutions are promulgated - through the "judicious study of discernable reality." To which this Presidential aide elaborated:

''That's not the way the world really works anymore,'' he continued. ''We're an empire now, and when we act, we create our own reality. And while you're studying that reality -- judiciously, as you will -- we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors . . . and you, all of you, will be left to just study what we do.''


So why do I bring this up? I want to make a point clear. Although my blog is titled fiat collapse, and I write about the US Dollar paper standard's inevitable collapse, I am not discounting the US or the Dollar. Notice, I say "paper" dollar. That is, the debt based system that was begun under Nixon when the gold window of convertibility was shut. So yes, I believe that debt based fiat money is on its last legs, but that doesn't mean the US Dollar disappears. It can transform and so, my views are still open on the US's future role in the world. I will not underestimate the US - not yet. But I also believe that American banks have cost the US dearly, in both power and national security - but all is not lost - as I said, not yet. The US has something up its sleeve that can't be ignored. Gold.

Writing for the Gerson Lehrman Group, George Anastasiadis comments in his summary:

"The U.S. message at the G20 is the following: if we do not act together to rebalance the world economy, the US will act unilaterally to rescue its economy. This will entail a change in the rules of the global game as the U.S. will try to impose its will via the printing press by inflating the rest of the world or forcing their currencies to appreciate relative to the dollar."


I agree with the above comment on the US acting unilaterally, though I disagree with the success of quantitative easing ("QE"). I think the US's QE is plan "A," but there is also a plan "B," in my view.

So what is this plan "B"? Gold, in my opinion, is plan "B." The US has by far, the largest gold reserves of any other nation. And it doesn't just end there. The US, acting as custodian, also stores many other nations' gold. Under the Bretton Woods system, as many may already know, the US Dollar was converted to gold. But that didn't mean it also went across the Atlantic either. More often, all that transpired was a book entry. The gold went to another nation's balance sheet, while it sat in a vault in the US.

According to Jim Rickards, the US has over 6,000 tons of gold stored in custody for other nations. This makes the US the "Saudi Arabia" of gold. In a recent interview at King World News, Rickards has stated the following:

"In a way, the Fed can afford to trash the paper dollar, or at least experiment and risk trashing the paper dollar because if the dollar collapses we can go back to gold pretty quickly."

"We have the world over a barrel; the US wins either way... we have a plan 'B' and the rest of the world does not." 


In 1933, then President Franklin Roosevelt signed executive order 6102, "forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates." The US purchased gold, from its citizens, at $20.67 an ounce. It then proceeded to devlaue the dollar against gold. The US can do the same thing with its custodial gold. It can write a check to say, Germany, and then devalue the dollar against gold. I have speculated how the gold bubble would end in the past - and I covered this type of "sovereign revaluation of gold" scenario in my post: Gold Will Be A Bubble Until It Isn't.

I want to note that much of this custodial gold is Europe's. Thus, for those that follow FOFOA's blog, it makes me wonder if the Euro-Gold connection is really that solid? Isn't possession 9/10ths of the law? Overall, Rickards still believes that most US policymakers are not thinking about gold and so we'll stumble into it in a "chaotic way."

About a month after that Rickards interview Robert Zoellick, President of the World Bank, started a gold debate, which I covered in my post The Gold Standard Debate Unleashed. This article in the Financial Times sure enough created quite the buzz of academic thinking on the gold standard. Most main stream economists are trained in the Keynesian school and thus furiously disagree with gold. But what they miss, what they ignore, is the quote I posted above. Let's look at it again:

''That's not the way the world really works anymore,'' he continued. ''We're an empire now, and when we act, we create our own reality. And while you're studying that reality -- judiciously, as you will -- we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors . . . and you, all of you, will be left to just study what we do.''

To me, this quote hits the nail on the head. It not only describes journalists and analysts, but economists as well. It basically states: let the eggheads debate all they want, when push comes to shove, when national security is at stake, we act in our own interests, and everyone else reacts. Now that's Realpolitik. And for those that may have missed it, James Grant wrote an article on the gold standard in the NY Times yesterday. The article is titled: How to Make the Dollar Sound Again.


Dave Narby said...

I have been saying for years the only thing propping up the dollar was the presence of the US military all around the world.

"Fiat" means quite literally , "by decree"... "Use it, or else.".

One thing that Suskind and his ilk fail to recognize is that history, rather than falling and rising with the "Great Man" or empire, actually rises and falls with generations. Instead of studying their history at their ivory league universities, they should have read The Fourth Turning and been studying Generational Dynamics http://www.generationaldynamics.com/ww2010.htm

I personally think that Xenakis (of the GD link above) is too pessimistic, but I have also been accused of being Candide reincarnated.

...In all seriousness though, I do expect things to be quite a bit better once all this is behind us, and I expect that to happen a lot faster than most expect, due to the increased flow and quality of information in the 21st century.

Great work Misthos!

Misthos said...

Hey, what's up Dave.

Thanks for the link. I have to admit, the Fourth Turning, and Kondratieff offer very compelling explanations.

To be frank, a period of accelerated change is what scares the crap out of me. We live in a highly complex world of just in time supply chain distribution. People don't realize the complexity involved in fueling gas stations, or stocking supermarket shelves. Every day things we rely on travel far and wide before they get to us for use. A major war, an oil shock, or a severe financial crisis could turn many people's lives upside down overnight.

I don't see a soft landing or smooth transition. But I do hope you're right that things will be better afterwards.

boatman said...

to some extent, it will take a different administration in washington tho......they have done little in 'our best interest' or even what they deem/dream it to be.

my opinion.

Don Levit said...

I believe the full faith and credit of the U.S. will be determined by average people, like us, not the economic elites.
As far as the credit part goes, according to fiat currency theory, the U.S. can never go broke.
That doesn't mean that our faith won't be eroded.
80% of Americans live paycheck to paut are they financially prosperous?
The same thinking would apply to the U.S. Government.
Although we are a fiat currency, faith depends on the interconnected web of people.
And, if the middle class continues to weaken, why wouldn't their faith weaken as well, not only individually but collectively, which is all the government is, a collection of individuals.
Don Levit