Sleepless Economics

A man doesn’t reach the age of 51 without experiencing some sleepless nights.  Over the years I’ve had my share of them, of course, and for any number of reasons.  The reason that keeps me awake in recent months is one that I never before imagined.  This is because I never found myself fearing that our nation could face economic and societal collapse.  There was a time when I would have laughed at any such suggestion, but I’m no longer laughing.  This post is an explanation of why this is so.

I won’t pretend to have expertise in areas that I don’t understand.  But I do understand people, and I understand history.  I know that in my wallet right now I have a total of $32.00.  All that really means is that I have four pieces of paper known as “Federal Reserve Notes.”  One is marked “20,” another “10,” and two are marked “1.”  Each is clearly marked as “LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE” as demonstrated in the photo above.

Most citizens don’t reflect on what this means in practical terms.  There was a time when paper money could be redeemed for gold or silver.  This offered two points of satisfaction.  First, government was limited in its ability to print money.  It could print no more money than the total value of its holdings in precious elements.  Second, it offered a bit of confidence to those who used paper money.  Since it could be redeemed for something truly valuable, trust in printed paper remained solid.

Today the only solidity that backs the US dollar is the credit of our government.  That credit is increasingly declining.  There is talk of another credit-rating agency downgrading our national credit.  Yet our elected representatives on the federal level tell us we have to keep spending and going deeper into debt.

Paper money is only valuable as long as people are willing to recognize it as such.  In the days of gold and silver coinage, even if people lost faith in the government that minted the coins, there remained the inherent value of the precious metal used in the coins.  They could be traded as silver or as gold rather than as government-approved money.  We don’t have that luxury when it comes to pieces of paper in our wallets.

Besides the word of our government, what else is propping up our dollars these days?  Well, the faith of the people still gives it value.  That faith, however, is gradually slipping.  People who can afford it are buying gold.  Other precious metals are starting to rise in value for the same reason.  Even those who think the precious-metals bubble is bound to collapse have to admit that there’s a reason for the record-breaking increase in the value of gold.  Trust in the dollar is declining.

One other factor keeps the dollar strong.  It serves as the international currency for the oil trade.  It’s called the “petrodollar.”  As long as nations are buying and selling oil based on the dollar, the dollar is propped up as a necessary international monetary tool.  But what if those nations decide not to use the dollar because they no longer trust our credit?  Russia and China have already decided this very thing. 

What if this is a sign of things to come?  What if OPEC decides that the dollar can no longer be trusted?  Add to this possibility the political realities of the Muslim world and the growing need of Russia and China for oil, and one simply can’t dismiss the possibility that this could happen.

Even if our close allies in Canada continue to sell to us, and even if we convince our numbheaded politicians to increase drilling in the US, this would not prevent immediate economic difficulties for every portion of the country as transportation slowed (or halted) and grocery shelves became increasingly bare.  Without the ability to move goods and get personnel to and from work, our economy would come to a standstill.  Saddest of all is the fact that dead economies usually result in dead people.  That’s the basis for societal collapse.

Obviously, this is a personal expression of fear on my part.  But it’s not irrational fear because it’s based upon a very real possibility.  The leaders of our government, primarily as an effort to influence their voting constituencies, are spending money that we simply don’t have.  Oh, they are printing plenty of money–but when I say that “it’s money we don’t have,” it’s because that money is increasingly losing its value and its attraction.   That’s true here and abroad.  The evidence is clear about that.

It’s my sincere prayer that these fears of mine never come to pass.  Still, they keep me awake.  I can’t bring myself to write about the possible consequences to what I’ve already described if an economic collapse does come.  One thing that concerns me most is just how many solid, serious, mature people I know already expect that it’s too late to prevent what I’ve described, though we may debate the actual details about the trigger that will bring it about.

My first college degree years ago was in history, so I’ve always known that nations come and go.  Professors showed me that the US would no doubt one day face its own decline as the ebb and flow of history continued its advance.  What I didn’t consider was the possibility that I might actually be alive to see that decline.  I mourn the fact … and I worry that the decline has already begun.

This is not the stuff upon which to begin a good night’s sleep.  I might sleep a bit better if I believed these fears were keeping the President and the Members of Congress awake as well.  Based upon their continued irresponsible spending, I find that difficult to believe.


3 thoughts on “Sleepless Economics

  1. John, you’ve made this argument many times before – you and I have been down this path! I still remain unconvinced. For now, let me consider just one paragraph above:

    “Besides the word of our government, what else is propping up our dollars these days? Well, the faith of the people still gives it value. That faith, however, is gradually slipping. People who can afford it are buying gold. Other precious metals are starting to rise in value for the same reason. Even those who think the precious-metals bubble is bound to collapse have to admit that there’s a reason for the record-breaking increase in the value of gold. Trust in the dollar is declining.”

    I deny the last sentence. Now, by “losing faith in the dollar”, I will mean the belief that the US will not honor its debt. I don’t know of any country that actually “believes” that. I’m sure there are few people who believe that, but I think they’re idiots. As the US has never not honored its debt, and as we show no signs of not honoring it in at least the near future – we’re not going to default, like Greece – there’s no reason to worry. What I DO think is true is that people think that the value of the dollar will decline relative to other currencies. Big deal: currency speculation has been going on forever! And it’s not in complete decline: witness the recent gains against the Euro!

    Hence, people buying gold: because they think that it’s going to rise in value. Precisely the same reason that people buy stocks. It has nothing to do with “lost faith” in the dollar and everything to do with making a profit. Of course, there are the sleezy fear-mongers out there who are actively trying to drive up the price of gold. Bottom line: I think it’s far too simplistic to look at the rise in gold prices, or for that matter in commodity prices, and reason that it’s lost faith in the dollar. Look, if I thought that the dollar was going to go on a steady decline in value relative to other currencies, but I wasn’t sure *which* currency on which to bet, I’d probably put my money in gold as a sort of hedge – if I didn’t think that I could do much better by betting on real companies that make real products that real people are really buying.

    If you want a reason to think that faith in the dollar is still strong, consider that the US gov’t has no problem issuing more debt. Federal bond auctions go off without a hitch. In fact, in the recent past, people were apparently paying (at one point) NEGATIVE interest rates on short term bonds. That’s incredible!

    Likewise, Russia and China leaving the dollar – whatever that amounts to, as I’m not sure what you’re talking about there – can be read as an effort to increase their own prominence in the world and not as having doubts about the dollar. China wants to be the next U.S. That much is clear.

    I do wish we’d stop spending money and start paying down the federal debt. Looking at Washington, though, I don’t see either party prepared to do that. The only real (identifiable) group of people who are pushing for it is the tea party, but its views on welfare are morally unacceptable to me, so I can never support it.

    ~ Chris

  2. I am honored by the fact that my good friend Chris is reading, and offering a reply to my blog posts. I certainly hope that his optimism is right. My fears, however, are the product of conversations with bankers and merchants who deal every day with the dollars of our economy. My fears come from reading economists who know more than Chris and I put together when it comes to economic and monetary policy.

    Perhaps we could look at the possibility of economic collapse like a hurricane. Is it better to be prepared, even if it doesn’t happen?

  3. John, while naysayers continue in denial with their head in the sand, the U.S. national debt just crossed the auspicious line of being at 100% of GDP. Now, to those not paying attention, let’s remember that the countries currently in crisis, Greece and Italy, have national debts sitting around 115% to 120% of their respective GDPs. The consensus among most macro-economists is that a nation crosses a tipping “point of no return” somewhere in the area 115% to 120% of GDP, where they will be unable to make their debt payments and either must default or be bailed out. We are seeing this bourne out in Greece and Italy. Therefore, at our current rate of borrowing and spending, we have another three to four years before we reach this tipping point. Do you forsee Washington being able to reverse the trend anytime soon? I don’t. And, if the worst happens, who will be there to bail us out? No one, in my opinion. This is why I am buying silver, storing food, have built an arsenal and have a family defense plan.

    LIke you, for years I scoffed at the hillbilly “survivalists” who did precisely what I’m doing now. I scoff no longer. So, I suppose, even with an masters degree and a military retirement, I can join their ranks. Hee Haw.

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