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The Dollar's Last Days

Friday, 13 June 2003 12:00 AM

Thirty years from now individuals may still be making purchases with ordinary debit cards. The object changing hands, however, probably won’t be dollars.

When the United States went off the gold standard in 1971, many of those who understood the move for what it was (a bankruptcy) predicted a currency collapse within the decade. The price of gold (the best alternative to worthless pieces of paper) skyrocketed and would have increased further, or at least sustained ’70s levels, but there was something those predicting immediate disaster overlooked: The largest segment of the U.S. population was moving into the prime of their working careers.

A succession of federal interest rate cuts fostered investment, creating demand for their skills. This expansion provided the federal government with the additional tax revenue it needed to manage its runaway debt, forestalling a collapse.

But now the same population approaches retirement, and the interest rate cuts that fostered growth in the 1990s have left the Federal Reserve unable to stimulate investment by the same means moving forward. More retirees, living longer and longer, mean more Social Security and Medicaid recipients. As a result of declining birthrates in the United States and most other industrialized nations, there will be fewer taxpayers to support them.

But instead of warning people that the government will not be able to provide for individuals when they are no longer able to work, politicians are now promising drug benefits as well, even while the government falls deeper and deeper into debt and, as demonstrated by a pitifully low – by some estimates negative – rate of savings, its revenue source is drying up.

When a company operates in the red it can try to stay afloat by increasing prices. But as prices increase, customers defect. There comes a point, therefore, when further price increases decrease revenue.

The same law applies to taxes. Taxes are costs for government services. Individuals and businesses that feel that taxes are too high may (if conditions permit) relocate to a place where the cost of government is less.

There comes a point for government, therefore, when further tax increases, by sending individuals and businesses overseas and underground, decrease tax revenue. (If it is true that the average American consumes more than he produces, this point may already have been reached.) For this reason, the federal government will not be able to increase revenue to fund Social Security and Medicaid by raising taxes.

The government will be able to continue Social Security and Medicaid and other programs only by printing ever-greater amounts of money. Here’s where things get complicated. Since the dollar, as a floating or fiat currency – a money with no intrinsic value – measures only the value of capital, as the supply is increased beyond increases in output (i.e., capital formation), its value decreases.

But legal tender law requires individuals to accept U.S. currency at face value. The depreciation, therefore, comes in the form of higher prices: More money increases demand for goods and services, which causes prices to increase.

The United States was plagued by rising prices in the 1970s.

This leads most to believe that the threat of rapidly increasing prices is no longer with us. In reality, the federal government never stopped expanding (i.e., debasing) the money supply. Much of the expansion was absorbed by real increases in capital. But most of it wasn’t.

Why, then, haven’t prices increased? The reason is because, although money expansion results in higher prices for goods and services, rising prices from money expansion can be masked and offset by falling prices from falling demand for consumer and capital goods and services and excess inventory

If the government continues to fund its activities and meet its financial obligations through money creation, prices will overcome any deflationary pressures and rise precipitously. People will begin to see and feel the steady fall in purchasing power. They will rush to exchange money for material goods, causing prices to skyrocket.

At some point people will refuse U.S. currency as payment for goods and services. At that point, the dollar, like every fiat currency to come before it, will be worthless.

The government may attempt to take over industry and seize wealth from businesses and individuals, and make it illegal to leave the country.

More likely, since America is still an armed nation, the government will accept a more limited role. It will either offer gold or silver currency, or money backed by gold and silver, or leave currency functions to the private sector. In an age when assets can be transferred electronically, a single unit of exchange may no longer be necessary. Gold and silver may be just two of many tradable commodities.

Individuals can prepare for a collapse by keeping as little wealth in U.S. currency as necessary, and transferring all wealth to material possessions and gold and silver gradually as events dictate.

Most importantly, individuals must attain firearms. As the collapse draws near, efforts to unarm the U.S. population will grow more strident. The federal government may share Adolf Hitler’s insight that “the most foolish mistake [rulers] can make is to allow subjected people to carry arms. History shows that all conquerors who have allowed their subjected people to carry arms have prepared their own fall.”

Whether the mixed economy in place today is replaced with a free-market economy or a fully controlled economy may depend upon the degree of resistance. The degree of violence will depend on how many people are able to defend their freedom and property.

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Thirty years from now individuals may still be making purchases with ordinary debit cards.The object changing hands, however, probably won't be dollars. When the United States went off the gold standard in 1971, many of those who understood the move for what it was (a...
Friday, 13 June 2003 12:00 AM
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