Monday, October 12, 2009

Will monopoly money buy your food? Nope.

It is no longer ivory tower economists and alter-net fringe analysts who are concerned about the incredible irresponsibility of the Fed for continuing to churn out dollars with abandon. The "full faith and credit of the US" which is supposed to back American dollars consists of two things: 1) the government's ability to tax, and 2) the government's ability to borrow. Right now, the government has neither of these things, as tax revenues are dropping through the floor and foreign nations are no longer willing to buy Treasuries and other US securities.

In other words, your money is fast becoming worthless. In fact, it may already be.

This is not an article from the far corners of the alternet universe, or fringe anti-government writers, or wild non-conformers like myself. No, this article comes from MSN Money.

MSN Money Central
Your dollars are just Monopoly money
Since Nixon severed gold from the greenback in 1971, the dollar's comparative value has fallen 97%. Money printing today will only hasten the currency's destruction.
By Bill Fleckenstein

...I was recently thinking about what has transpired in this country in the past decade: first the equity bubble, then the real estate/credit bubble and the steady debasement of the dollar (where a trickle of trouble threatens to turn into a flood).

I have been struck by how few people seem to understand how all these events are related -- in that, at the root, they each have the irresponsible printing of money as the cause. (The sociological and psychological phenomena that go with that -- e.g., the regulators not doing their job -- are just part of the process.)

Each problem led to the next, and one year ago the financial system was bailed out at the risk of the country ultimately enduring a funding crisis.

One fact that strikes me is how few people seem to have been able to protect themselves from the first two (even though they were so obvious) and how so few will be able to save themselves from this third, huge problem.

In my own little world, I wrote until I was blue in the face about the risks inherent to each of those bubbles -- and others did, too -- but still only a small subset of folks avoided calamity.

Similarly, I have droned on forever about the weakness in the dollar and the necessity for folks to protect themselves via precious metals or some other idea. (I don't know what that idea is, or I would say, but there will turn out to have been other options.)

Let's face it. Dollars -- the things we call money -- are simply pieces of green paper. They are just a state of mind. They have no intrinsic value and are just wampum. Thus, they're not worth anything. Furthermore, all paper currencies historically have lost all of their value.

On the other hand, gold -- which has been in an eight-year bull market but still receives far more derision than praise -- has been money for literally thousands of years.

In fact, the green paper has lost 97% of its value compared with gold since President Richard Nixon closed "the gold window" in 1971. (He ended the promise that dollars could be exchanged for gold.)

...Federal Reserve money printing in the past year -- to create its own bailout from the problems it created, and to finance other government bailouts -- is the functional equivalent of the government saying that you can take the Monopoly game out of the closet, grab all the colored pieces of paper, put three or four zeros on the end of each bill, and then go out and spend it...

...we may not have inflation immediately. But it is not debatable what would happen to the purchasing power of your green pieces of paper when you think about the Monopoly example.

The likely outcome as we proceed down the road is liable to be more and more fear about what a dollar is actually worth (i.e., nothing). When Main Street psychology turns against the faith-based currency we call the dollar, it will be nearly impossible to get that genie back in the bottle. Of course, this is part and parcel of the funding crisis, though the dollar's meltdown could start before all of this dawns on Main Street, as it appears already to be dawning on America's creditors...

Which is why OPEC is making plans to ditch accepting payments in dollars, and China and other major G20 nations are calling for the dollar to be dropped as the world's reserve currency. It's why the Fed had to quietly begin buying Treasuries, because other countries are declining to buy them, and it's why, in part (peak oil being the other part) that the cost of imports continues to rise.

Other nations don't want to be caught with a big pile of dollars when the US defaults on its debt and the dollar is officially useless. Like the game "hot potato," nobody wants to be the one left with the toxic items in their portfolios. They are refusing to take on more dollar assets and dumping the ones they have, as quietly as possible. After all, they don't want panic selling of dollar assets by every other nation out there. Then they wouldn't be able to get ANY residual value out of their own dollar assets.

Therefore Fed is playing a giant game of chicken. As long as no one is willing to publicly and forcefully tip the boat, they can continue to try and monetize away the public debt. But this game can't last much longer. The Fed is making the bet that doing business with the US is so lucrative for other nations that they won't want to upset the playing board.

But that shows every sign of being a losing bet - and game theory results don't always match up to real world results because national goals, such as self-sufficiency, energy independence, and religious/ideologically motivated goals aren't part of the rarefied ivory-tower "rules" of the game. Like economists who can't seem to figure out that some people wouldn't take pork or shellfish home from the store even if they were practically free, their theories don't take non-monetary issues into account.

And even if China and other G2 countries lose money by refusing to buy T-bills and refusing to accept dollar payments, they may consider their own, non-monetary, goals to be worth the cost. The "money rules" economists at the Fed can't seem to grasp this, and are betting the farm on profit being the biggest motivator of all actions.

And in the end, they'll lose the farm, because profit from dollars in general and the good will of the US in particular are simply NOT the highest goals of many other nations, just as no possible discount on pork will ever convince an observant Jew or an observant Muslim to buy it.

For some people, money is a means, not an end. And until modern economists "get" that, we are being led by the blind, and will inevitably fall into the pit.

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