How Will The American Economy Die?

How Will The American Economy Die?
by Russell D. Longcore

First, the money goes.

The world economic system is built upon two things: (1) fractional reserve banking and (2) fiat money. There is not one nation on earth that has a commodity-based money and currency. Keynesian economics, taught in nearly every college Econ curriculum, is so ubiquitous…so ingrained…that it is like the dye colors in your shirt. No amount of washing gets the dye out.

Is there a banker on earth that does not use fractional reserve banking? Money is created out of thin air and pumped into the world economy. It would be impossible without fiat currency…the currency considered to be money because some government says that it is. When your currency is backed by “the full faith and credit of” your government, and nothing else, and your government goes broke…your currency is not far behind. In the regular world, issuing paper money with nothing behind it is called “Counterfeiting.”

The power in Washington is built on those two things above and add a third: the US Dollar is the world reserve currency. Being the world reserve currency was brought about back in the early 1970s when Nixon negotiated a deal with the House of Saud, in which Nixon guaranteed the Saudis that he would protect their kingdom from their neighbors if they agreed to (a) use only the US Dollar to settle oil payments, and (b) use their surpluses to buy US Treasury debt instruments. Over time, the Dollar became the currency all nations used to settle all kinds of commercial transactions. This reserve status gave the USA a tremendous advantage over all other nations. The blowback of unintended consequences is that many foreign nations own trillions of US Debt, and that gives those nations leverage over Washington. For a good look at who owns US Debt, CLICK HERE.

Right now, in real time, Washington is making plans to make war upon the nation of Iran. They are using the excuse that they must keep Iran from possessing nuclear weapons. The reality behind the scenes is that Iran started an oil bourse (a commodity exchange) on Kish Island in 2008, specifically to begin trading their own oil in currencies other than the US Dollar. That is a grave threat to the reserve currency status of the Dollar. Previously, Iraqi President Saddam Hussein announced that Iraq was going to begin accepting payments for oil in Euros, not Dollars. What happened to him? Muamar Gaddafi of Libya was buying enormous quantities of gold bullion with the intention of creating an African dinar, a gold-backed money for all of the African nations to use. Where is Gaddafi now?

“But so what?” you may ask.

The only thing that maintains the purchasing power of the Dollar is its world reserve status. You already know that the Dollar has no precious metals backing it. The Dollar only has the “full faith and credit of the United States” behind it. But Washington is many dozens of trillion dollars in debt. Some estimate that the US has over $100 Trillion of debt. Just a week ago, the United States current Federal budget debt limit reached $15 Trillion, and that is equal to the Gross Domestic Product (GDP) of the entire nation. So we owe more now than we take in annually.

Any action by any other nation that threatens the world reserve currency status of the US Dollar panics Washington. They must snuff it out by whatever means necessary. Even war.

But they cannot.

Iran has powerful friends around the globe. Just last week, Iran inked a deal with India to sell them oil for gold. Iran will do the same with China. Russia will pay with gold and rubles. And, because Iran sits on an ocean of oil, and many nations rely upon its oil for survival, Iran will defeat Washington and its allies who have set up embargoes against Iran.

The whole world does not have to forsake the Dollar all at once to send shock waves through Washington. But more and more nations are rejecting the terms of the DC/European embargo against Iran. On Thursday, Turkey announced that they would not participate in the embargo. Turkey is a very crucial ally to DC. One at a time, nations will find that they can do business around the world in their own currencies or in gold.

But here’s another unintended consequence, and a potential trigger for the collapse of the Dollar. As nation after nation decide they do not need the Dollar, they will do what they can to rid themselves of American currency and American debt. Nations around the globe have purchased US Treasuries. Now they will have no need for the bonds, and will want to sell them. Questions come up: Who will buy them? And what are they worth?

What happens when you offer bonds for sale and no one buys them? You have very expensive wallpaper or toilet paper. What happens when you CAN sell them, but at pennies on the Dollar? You take staggering losses.

One other problem is timing. In order to reclaim some value for US Treasuries, your nation’s bond traders must have perfect timing to offer enough bonds for sale but not so many that it triggers a bond market collapse. Then to find buyers at acceptable prices? It is not reasonable to believe that every nation will find buyers at all, at good prices and not create a bond market crash.

So, built into the global process of forsaking the US Dollar as the world reserve currency are the seeds of the Dollar’s collapse. Either the bond market collapses as nations get out of the Dollar, or getting out of the Dollar causes the value of the Dollar to collapse. Keep in mind that if the Dollar were as “good as gold,” no nation would want to jettison the Dollar.

Dear Readers, there is no third choice that prevents the collapse of the Dollar.

What Does Collapse Mean?

There can only be one meaning for the word “collapse.” Hyperinflation is that collapse. Think about it. Inflation is the loss of purchasing power. Inflation that occurs over decades is like death by a thousand cuts. Americans for the last 80-plus years are used to inflation and the loss of their purchasing power. In hyperinflation, what took perhaps 40 years to lose a certain amount of purchasing power can easily happen in 40 days…or even 40 hours. There will come a day soon here in America when the Dollar will not be accepted between buyers and sellers for even the simplest transactions. It happened in Zimbabwe. I presently own 160 Trillion in Reserve Bank of Zimbabwe currency, and I paid six dollars for it.

The American Dollar has purchasing power…value…now because the world uses it. And the nation with world reserve currency status that is inflating its money will continue to pay its debts with fiat currency, which is losing more and more value. Once an unknown number of nations stop…or even just slow down…using the Dollar for international trade, the value of the Dollar will evaporate. I say “unknown” because it’s not just the number of nations that is important. It is the economic might of the nations that stop using the Dollar. If the BRIC nations…Brazil, Russia, India and China…arguably the four strongest non-USA world economies...continue the process of weaning themselves off the Dollar, it will have drastic and sudden repercussions for the Dollar.

Also remember how this world turns. The business day in Berlin, Rome or Athens is six hours ahead of the American East Coast. A bond market collapse could start in a European bond market at 9:00 am in Berlin while it’s 3:00 am in New York. The Dollar could get hammered on foreign markets for six hours before the banks open in New York, or the New York Stock Exchange opens for business at 9:30 am. Americans will be completely defenseless against the collapse.

Washington’s Response

The politicians in DC will be powerless to stop the financial carnage because they cannot control the value of a currency that others refuse to use. The Federal Reserve may pump additional trillions of greenbacks into the American economy, but at some point, wheelbarrow loads of paper money won’t buy you a loaf of bread. This will cause the Federal bureaucracy to grind to a halt as Federal union employees refuse to work for worthless money. And how will Washington pay its military personnel? How will state governments pay their law enforcement officers and prison guards? Society will collapse at that time. It will be The End Of The World As We Know It.

You see, when the VALUE of the American Dollar ceases to exist, our bubble society will also cease to exist. This is why I hold the position that once the economic system in America fails, Washington will be entirely unable to stop secession. And that only the collapse of the Dollar will trigger the desire for secession.

Here is the mental picture I want you to form when thinking about the world economic system. Blowing soap bubbles. You dip a drinking straw into the bubble liquid and begin blowing on the dry end of the straw. Hundreds of bubbles of many sizes will form, expand and then pop. For a hundred years the world has experienced economic bubble after bubble…boom, bust, recession, depression, real estate, housing, tech stocks, mortgages but to name a few. But don’t miss this! When fractional reserve banking and fiat money run the world, ALL ECONOMIC ACTIVITY IS A BUBBLE that must eventually burst.

 

Shared vision .
To round it off , I would have liked him to talk to the effects secession would have on the rest of the world .
He makes it sound as though the US dies a death whilst others carry on just fine , because they have stopped trading in $US and have moved to a new reserve currency -- it matters not what it is roviding that they all move the same way and have agreement on its trade value by Sovereign State .
US secession will bring everyone else down through contagion , just as Greece has the ability , for other reasons , to bring the whole system crashing down, ----- because of leverage and institutional interlocking globally .

 

The world economy is built on trade in goods and services. The US is a steadily declining part of that equation and the $US is becoming less relevant to trade between other nations. However, this does not mean the $US is anywhere near collapsing any time soon.

Economies have grown for centuries with fractional reserve banking. The last time it did not exist was in the dark ages. Some believe it is the entire reason why economies can grow at all and point to the end of dark ages coinciding with the invention of fractional reserve banking as proof.

 

I dissagree....I think the USD is within a few short years of total collapse....if you look closley you will see that the move away from the dollar as reserve currency has already begun.....china trading with pacific rim countries usuing the yuan.....brazil, russia, china, and india all agreeing to do trade with each other using the euro........and russia and india agreeing to do trade using each others currency...its just a small step but this will only grow.....the writing is on the wall for the coming death of the dollar!

 

Those nations have a lot of Euros because they trade a lot with the EU, more than with the US for most of them. It is only practical. Also, reciprocal trade in each other's currency, like between Russia and India is more of an assurance that trade will be balanced than anything else. India will buy Russian weapons and raw materials but Russia will now be obliged to buy products from or invest India since it will be paid in Rupees. The Yuan is not freely convertible so not a lot of trade across SE Asia is in Yuan regardless of the agreements to trade in it.

When OPEC announces that it will take Euros or some other money for oil that will be the beginning of the end for the $US. But first, the big OPEC nations will need to figure out some way to get rid of their $USTrillions before they lose their value, a not so simple thing.

 

there are some OPEC nations that already accept currencies other than the USD......venezuela and iran come to mind.....as I said in my previous post....its just a small begining but none the less the move away from the dollar has begun!

 

It does not seem to me (I am a layman in economy, so please correct me if I am wrong) as if the world will do better than the US, I live in Brazil and the government is even more irresponsible than the US's, and I'm sure all the other Brics have the same problem. The ECB seems to be a little more cautious, but in the end it makes more bubbles. So, I do not think that swapping the dollar for euro or for any other fiat currencies will work for the other countries, once the dollar is gone, then we all go back to the gold standard (or start it all over again from 0? I don't know if this is even viable).

 

The US dollar is in serious trouble. The Federal Reserve cannot raise interest rates, and yet it cannot fight inflation without raising interest rates. It's either a major crash or hyperinflation and then crash. At this point, it's just a matter of time.

Fractional reserve banking is not the crux of the problem. The problem is fiat currencies and and the propensity of governments to monetize debt through their central banks as a form of money printing. In a stable monetary system, fractional reserve is discounted on the market to the true value of whatever bank notes are being issued. People will accept them according to the level of trust that they have in them. In a fiat system, people have no choice as they are required, by law, to contract in the fiat currency and accept it at face value. Bank owners in the US are *required* to use a fractional reserve system. In a stable system, some banks will use fractional reserve and pay a rate commensurate to the risks they take, and some banks will maintain 100% reserves against loans, and some banks will simply warehouse money for a fee. It is the choice of consumers to decide how much risk they want to take. The immorality of the fiat system is that it takes away choice from banking consumers and creates moral hazards by subsidizing the risks that banks take.

 

As a seasoned convert , I so enjoyed your Post that I am going to pay you the compliment of using Hayek's 'Theorem" as a Topic title -- not that the underbelly will have much to say about their imminent demise .

 

mexico is already considering a silver backed currency!

 

The Federal Reserve has no reason to raise interest rates. There is some speculative commodity price increases but that is not inflation.

Banks are not required to adopt fractional reserve by the Fed but by economic reality. No bank can gain deposits by charging depositors and no bank can make loans with 100% reserves. That is the economic reality of 100% reserve banking. There are a few small private banks in Switzerland that keep 100% reserves and they charge their depositors to keep money in them but they exist only because they can hide the money.

The moral hazard in fiat money occurs only when the amount of money in circulation does not reflect the needs of the economy. This can become apparent through two circumstances, general deflation and general inflation. The US economy, with sectors experiencing price deflation and others experiencing price inflation does not seem to be experiencing either inflation or deflation generally.

 

you are overlooking one .......when governments print money to repudiate debt as bernacke is doing now!

 

You seem to be implying that the US is trying to inflate its way out of debt. If that was the case prices would be rising faster in the US than in the rest of the world and the $US would be steadily losing value compared to other widely traded currencies.

This does not seem to be happening. The prices of oil and food, the most widely traded items have increased worldwide in every currency. In fact the increased price of these commodities in the US has generally been less than in other nations.

This implies that the value of the $US is not being inflated and that the simple economics of supply and demand are the drivers of prices in these commodities, especially when production and demand are looked at. Production is stagnant or declining and demand is increasing so prices will rise, simple economics 101.

 

They are inflating their way out of debt, they just aren't telling you. QE3 is probably already happening, they just won't admit it until the stock market starts to fall. We don't audit the Fed, we have no idea what they are really doing. The ONLY way out of the debt the US has is to inflate at a pretty high rate, otherwise, it can't be paid.

 

two things you are overlooking:

1) the US has the reserve currency so they are able to export their inflation as central banks around the world buy dollars to keep the dollar peg. Otherwise by now you would have a USD peso instead of USD dollar by now.

2) prices are rising.....its just that bernacke is lying about it......just look at university tuitions, property taxes, transit fares, utilities, insurance premiums , along with groceries and gasoline and tell me they are going up 2%

 

So chairman Bernanke and Obama are lying about economic growth?

Banks can gain deposits by charging depositors in an environment where depositors actually care about their money. Since what we refer to as "money" is simply debt-backed paper notes that are then "insured" by government if the bank fails, it makes sense that, in this environment, the cartelized banks must compete with each other within a narrow band. On the plus side, for them, government bails them out and makes bankers rich.

An economy doesn't have needs. It is not a thing that exists in reality. Can you break this into something less rhetorical?

Productivity gains mask the effects of inflation, as prices go down, like they should, where things become cheaper to make and services cheaper to provide.

 

So, some are keeping up with US inflation, and others are inflating more.

Production is stagnant?

 

Yes...the US dollar is near collapse. The rest of the world is not going to sit idly by and import our inflation. Where do you think all the dollars that have been printed/created are going? What do you think happens with rates at zero for going on 4 years? You do know if they raise rates what happens right? Do you know what happens if they don't? The game of kick the can down the road is just about over.......

 

Another Great Depression is about to happen, that much I can agree to. As an aside, I see the hostilities in Iran, along with Afghanistan, Pakistan, and Syria, causing World War III. It's like reading about history and seeing it unfold like it did before again.

 

I guess you use the term "many" because it sounds so much more impressive than TWO. China and Japan.

 

It goes:

Federal Reserve and intragovernmental debt
China
Other holdings (private buyers)
Japan
Pensions
Mutual Funds
State/Local Govts
UK
Banking institutions
Insurance companies
Oil exporters (yeah, those guys)
Brazil
Caribbean
Taiwan
Switzerland

Those are the top 15, according to CNBC. At least, back when slideshows were still considered acceptable.

 

I believe also several large canadian banks have over 100 billion in US bonds between them....the canadian government also has over 100 billion. There are also many european banks that hold US debt!

 

And only TWO of the 15 are nations with over a trillion, or "trillions" of dollars. Not sure of your point.

 

Any one of them could trigger a sell off.

 

Your point? They sell them to somebody else willing to buy them, and then someone else holds our debt. And they lose this influence you were all so worried about in the first place.