Causation: Why the US Dollar

Will Drop to Zero Soon...

 

Root Cause: Expansion of the Money Supply

 

There is one solitary cause of inflation, hyperinflation, and ultimately, the dollar dropping to zero value.  That one cause is the deliberate expansion of the money supply by the Government of the United States and the Federal Reserve.

 

Austrian Economist Jim Cox wrote; "Inflation results from an increase in the money supply".  The traditional definition is "a rise in the general price level," but this is actually an effect, not the cause." 

 

The simple reason that an expanding money supply directly causes inflation is a matter of supply and demand.  When the supply of a currency increases relative to the supply of goods, the cost of goods priced in that currency will also increase; inflation.  Conversely, if the supply of money was to decrease, there would be less dollars competing for goods and services, so prices would have to fall; deflation.

 

The more fiat currency is created from thin air, the less it is worth relative to real goods and services. 

 

In the 90's we seen inflation impact the stock market, creating a bubble which is still yet to deflate.  In the new century we have seen a housing bubble created due to this same over supply of money.  And we are seeing it in the price increases of other goods as well.  The official Consumer Price Index (which excludes the price of housing and gas) shows a laughable 2% rate of inflation.  Any rational observer of the prices she pays for goods and services, knows that the government's official numbers are fabricated.  John Williams of Shadow Government Statistics estimates that the annual inflation rate in America is 10%.  That's more believable.

 

M3 is a measure of the money supply which includes; all physical currency, plus money in checking and savings accounts, money market accounts, and certificates of deposit.  The Federal Reserve Board stopped publishing figures for M3 in March of 2006.  One has to wonder if they were attempting to hide the exponential growth of the money supply and its likely implications; inflation and housing bubbles, then hyperinflation and multitudinous personal bankruptcies. 

 

M3 is estimated in this chart, (click to enlarge) to be more than 10 trillion dollars; a hideously large number for sure.  What has meaning though, is the upward curve on the chart.  It's obviously accelerating, expanding the money supply to ludicrous proportions, devaluing the dollars in your savings account, erasing your last pay increase, and stealing your life!

 

Inflation Does Steal Your Life

 

You see, when new money is created out of this air, it actually steals money from you, by destroying the value of the money you have.  Inflation (and hyperinflation) need to be spoken about in these terms.  They do steal your life.  It takes time (segments of life) to work to create something or do something which you can trade with others for money.  If you accept US Dollars (or any other fiat currency) as money, then you are gambling that this paper money will maintain it's value so that you can buy something of equal value from others, or save it for your future needs.  Inflation is the destruction of the value of money.  If inflation ends up wiping out the savings it took you ten years to accumulate, then it has effectively wiped out 10 years of your life.

 

Note: Among other good things, Congressman Ron Paul introduced H.R. 4892 which is an effort to make the federal government report it's creation of M3 again.

 

Note: Bud Conrad, of Casey Research wrote this on the subject: M3 Measure of Money Discontinued by the FED, its worth reading.

 

 

*All other Causes of D2Z are secondary...  I'll list them below, but note that they are actually causes of the root cause; the expanding money supply.

 

 

Two: US Government Debt

 

John Williams of Shadow Government Statistics does a fine job of sorting through the swindler's spin and documenting the truth about US Gov's indebtedness.  In 2006 the real U.S. shortfall (annual deficit) was $4.6 trillion!  As reported in this World Net Daily Article, Mr. Williams contends; "Taxing 100% of all wages, salaries, and corporate profits would not eliminate a deficit of this magnitude."  

 

Although the officially recognized debt of the Federal Government is 'only' 9 trillion, unfunded Social Security and Medicare obligations will mount on tens of trillions more in the near future.  General Motors, even Enron had to account for these types of obligations, so why doesn't the government?  Is it because investors would loose confidence if they knew the whole truth?  More on that later...

 

The amount of debt any entity (individual, corporation, or government) has, along with that entities ability to repay a debt, dictates that entities financial lifespan.  An entity with zero debt obviously has superior financial health than a heavily indebted entity.  In the market, lenders charge the lowest interest (cost of borrowing) to the healthiest entities.  This is what the credit rating is all about.  Eric Englund asks the rhetorical question; Should the US Government’s Sovereign Credit Rating be Downgraded to Junk?

   

The more debt that an entity has, the more risk they are to lenders, and thus, the higher the interest lenders will charge them when they go to borrow new funds.  Because there are so many governments with debt problems, the debt market has been described many times as a reverse beauty contest.  Buying bonds is like entering a voting booth, one has to pick the least ugly and go with that.

 

When foreign investors loose confidence that the U.S. Government will have the efficacy to repay it's debts, then they will either demand higher interest in exchange for the higher risk of default.  Or stop lending the US Gov money all together.  When this comes to pass, the US Gov will have two ideologically consistent choices for bringing in the funds it needs to fend off insolvency; taxation and monetization.

 

Taxation: If it can increase tax revenues high enough to service the interest on current debts, and fund ongoing state activities, then it can stave off insolvency.  However, the poor American taxpayer is already paying more than 50% of his income to various levels of government.  It will be hard to squeeze more out of the poor bastard, especially as we enter an economic depression.  Couple this with Laffer's Curve, a theory which explains how revenues can decrease when tax rates increase due to increased non-reporting, evasion, or a slowdown in economic activity caused by higher tax rates.  So I think that higher tax revenues are clearly out.

 

This leaves the US Gov with but one choice, if it does not want to default on its obligations, close down shop, and leave people in peace.  That one choice is to print money.  And with Ben 'Helicopter' Bernanke at the helm of the Federal Reserve, I think that that is just what they'll do.  Come hyperinflation...  come d2z...

 

 

Three: Unfunded Social Security and Medicare Obligations

 

The Federal Government has been promising voters social security and medical care for many years, because voters voted for it.  When the baby boomers begin to take the government up on their offer starting 2008, it will quickly bankrupt the system.  This is obvious, undeniable, and irreversible.

 

Individuals interested in being accountable for their own lives have long since been putting money away for their own retirement.  Only idiots (no offence if you've been one) are counting on the government.

 

The truth is, these obligations, besides being the flippant promises of politicians, are also unfunded obligations.  This means that there is no real money behind the promise, no account with your name on it that holds your entitlement payouts for the next 25 years.  No, that money does not exist yet. 

 

Furthermore, there were not enough people born behind the boomers to pay for the boomer's retirement.  Social Security and Medicare have the same inefficiencies inherent in all obese state bureaucracies, thus regurgitate far less money to the recipients than direct and volitional charity would.  But that's an idea whose time has not yet come...

 

Voters will want these obligations met.  Few will forgo their pension or pills, and just die with nobility, only because the next generation can not afford to keep them.  "Get to work, Sonny!" 

 

Although it would be best if these socialist programs were scrapped immediately, its a political decision, not a moral one.  And guess which bulging lump of the demographic will show up to vote?  Yes, the Boomers.  That's why hyperinflation is almost a certain outcome of the coming financial crisis.

 

Money will be printed, obligations will be met, kind of...  You'll be paid in US Dollars, not gold, not goods and services, just paper.  And that's all that they really promised you.  Just paper.  They did not promise you that it would have value.  And it don't! 

 

 

Four: War

 

The War in Iraq, as well as the 130 other nations where the US Government has troops, is breaking the US Government, and earning that institution justifiable ill will all over the world.  For economic and karmic ramifications, the US Government should withdraw the troops now.  In any event, the economic catastrophe, when it comes will bring the troops home soon regardless, as the bankrupt empire will not have the funds to fuel the tanks.

 

The financial cost of the Iraq War thus far has been 360 billion.  It has been financed through the printing press.  As Clint Eastwood depicted in Flags of Our Fathers, the US Government stumbled to the finish line in WWII, with printed fiat, almost bankrupting itself.  If an expansion is planned in Iran, Syria, or Saudi Arabia, the costs will likely prove to be too much. 

 

Five: The Electronic Stampede

 

The 'electronic stampede' is a term used to describe how modern globally linked traders can completely and swiftly demolish any national stock market or currency that for whatever reason becomes out of favor.  Remember the "Asian Economic Crisis' in 1999? Look for more of the same rapid, round the clock thumping.  Should the 'electronic stampede' begin on the USD, zero is the bottom, and the last one caught holding Greenbacks is the loser. 

 

Read On!