Jul 28 2008
Is the collapse of the dollar mere fiction, or could it become a reality?
I’m not trying to be alarmist here. There’s a difference between being alarmist, and warning of something that could happen if we continue on our current course. If someone warned the crew of the Titanic that an iceberg was up ahead and could be dangerous, would they be alarmist, or merely watchful? I’m also not saying that a collapse will happen…merely that I think it’s more possible than most of us would care to consider.
Gary North, a prolific economic writer has detailed why the collapse of the dollar is not only a possibility, but is actually becoming more of a threat each day. It’s a long article, but it’s really worth it.
http://www.lewrockwell.com/north/north642.html
One of the things he wrote about on the 26th of July was that when banks face dramatic loss of capital, they either find new investors, or they reduce their loans. When there are not many new investors because these investors have less with which to invest, these banks have no other option but to contract loans.
When banks lose capital, they must either find new investors, or else they must reduce their loans. When they reduce their loans, they refuse to roll over existing lines of credit to American corporations. This is the major threat to the system. It is not a threat of the bankruptcy of the banks; it is the threat of the reduction of lines of credit to American corporations – corporations that are dependent on these lines of credit.
And what do we find in this morning’s New York Times? An article entitled:
Worried Banks Sharply Reduce Business Loans
Mr. Gary North shows that it’s quite possible that the dollar may collapse. What he says is that there are failsafes built-in to the system. Most people will not lose their money. Those few investors that have invested over the $100,000 that is guaranteed by the FDIC will lose money over the $100,000, but said investors have likely taken steps to ensure that their deposits are guaranteed by multiple banks. They’ve spread around their wealth, so if they’ve got $600,000 in deposits, they’ll get $600,000 if they withdraw it all. The government will protect the nominal value of their deposits.
There is a difference between real and nominal dollars, though. Real dollars are dollars adjusted for inflation. When you talk about how much your average person earned in 1940 and in 2008, you must discuss it in real dollars in order to have any sort of meaningful comparison. Because what is a dollar, after all? What does it really represent? Ultimately, the dollar’s value fluctuates, and the only real meaning of a dollar represents what you can buy with it. Let’s say it’s 1914, and you have a dollar. In 1914, the value of a widget is $1, so you can buy one. Based on the rate of inflation, today, it would require $1.95 to buy the same widget. This is a small amount, I know. But let’s say your monthly grocery bill is $600 a month. The grocery bill for the same food in 1914 would only be $307.69. What will it be in the future?
The buying power of the dollar is the real value of your dollar. What is protected by the FDIC is the NOMINAL value…not the real value. So while you might get your deposits back, if the real value of the dollar, which is not guaranteed by anyone, collapses, you’ll not be able to buy much with your money. it’ll be worthless.
The buying power of your dollar WILL go down if the Federal Reserve has to bail out banks and investors for their bad economic decisions. When necessary, the Fed will create the money it needs out of thin air, and whenever that happens, the dollar is worth less and less. The amount of money you deposit is guaranteed, but that guarantee might just devalue that amount to practically nothing.
What can we do? Not much when it comes to our own economic decisions. You can withdraw all your money, but in the event of a systemic failure, your money will be worthless, so you’ll be holding essentially a fistful of nothing. About all we can do is elect people who have a CLUE about economic policy. Congress continues to bail out banks and investors when they’ve made poor economic decisions. This is a BAD thing, people. Yes, in the short run, it makes people feel better. What it also does, however, is eliminate percieved risk. Yes, folks, it actually encourages bad behavior. What gets rewarded, gets repeated. This is not the ultimate price we’ll pay for these bailouts, though. In their efforts to monetize these failing banks, the Fed will eventually run out of money to do so. When that happens, they’ll have no option but to begin creating money, and when that happens, the collapse of the dollar is at hand.
I have not explained this process well, I know. It’s a confusing set of terms and concepts, I know. But failure to understand where we’ve arrived is analogous to prolonging the problem. We need to become educated people. We need to understand why a choice between McCain and Obama is not a choice, really. We need to understand these things so that we can choose the best candidate. And when we DO understand these things, we will understand that we cannot choose the lesser of two evils any longer. We must choose a good candidate. And they are out there, people. Chuck Baldwin of the Constitution Party and Bob Barr of the Libertarian Party are two good candidates. If enough of us awaken from our apathy, and vote our conscience, then the “throwing away your vote” argument will no longer have any weight. Awake from your apathy and vote for the better candidate.
