History is a vast early warning system.

—Norman Cousins

People have been fighting over the value of money since… forever. The whole basis for money itself—currency as a means of commerce—is based on tangible value. In other words, money is not the greenbacks we carry around; it is supposed to be the gold or other metal backing it up. The dollar is a promissory note. Check what it says at the top of the bill itself: “Federal Reserve Note.”

Today, the American dollars in circulation are just a bunch of IOUs. That would be fine if the gold reserves were sitting in Fort Knox to back up those IOUs … but they are not. The Fed just keeps printing more and more money, and it will eventually catch up with us. The day will come when we will have to pay off those IOUs, not only domestically but to foreign investors too.

History has shown that money—not counterfeit, but official money printed by the government—has been known to lose value and become virtually worthless. Examples include Russian rubles from pre‐Revolution days, 50‐million marks from 1920s Germany, and Cuban pesos from pre‐Castro days. In all of these cases, jarring political and economic change destroyed currency values—suddenly, completely, and permanently.

What kinds of events could do the same thing to the US dollar, and what can you do today to position yourself strategically? The potential fall of the dollar is good news if you know what steps to take today. We're not as insulated as many Americans believe. In the 1930s, 20% of all US banks went broke, and 15% of life savings went up in smoke. After the emergency measures put into effect by President Franklin D. Roosevelt through the Emergency Banking Relief Act of 1933, confidence was restored with another piece of legislation: the 1933 Glass‐Steagall Act. This bill created the Federal Deposit Insurance Corporation (FDIC), insuring all US bank deposits against loss.

The severity of the growing situation had been seen well in advance. The financial newspaper Barron's, established in 1921, editorialized in 1933:

Since early December, Washington had known that a major banking and financial crisis was probably inevitable. It was merely a question of where the first break would come and the manner of its coming.¹

Two weeks earlier, the same column cautioned its readers that when the dollar begins to lose value, this leads to a series of “flights”—from property into bank deposits, then from deposits into currency, and finally from currency into gold.²

We can apply these astute observations from 1933 to today's currency situation. The government, anticipating a flight from currency into gold, had already made hoarding gold or even owning it illegal. The second step—insuring accounts in federal banks—helped to calm down the mood. By preventing the panic, these actions enabled the currency to be stabilized. But in those times, we were still on the gold standard. The currency in circulation was, in fact, backed by something. Remember, that riverboat gambler who keeps asking for ever‐higher markers will eventually run out of credit. At some point the casino boss will realize that the gambler's ability to repay is questionable. Maybe those markers are just a heap of IOUs that can never be cashed in.

In the 1930s, the causes of the Great Depression were complex but related to a series of obvious abuses in monetary, financial, and banking policies. History has simplified the issue by blaming the Depression on the stock market crash. The stock market crash, one of many symptoms of policies run amok, has lessons for modern times. The unbridled printing of money—expansion of the IOU economy—is good news for those who recognize the potential for gold.

We hear experts on TV and in the print media shrugging off the deficit problems. “Our economy is strong and getting stronger” is the mantra of those with a vested interest in keeping dollars flowing: Wall Street brokers and analysts, for example. But we cannot ignore the facts. The federal deficit is growing by more than $40 billion per month. It is not realistic to point to this economy and say it's doing just fine.

Gold is the beneficiary of reckless monetary policies and the political expedience of the War on Terror, the Financial Panic of '08, and the COVID‐19 pandemic lockdowns. But there's more to the story.

The average value of an ounce of gold over the first two decades of the twenty‐first century has been a relatively consistent story. From the 1999 low of $253, the gold price went on a decade‐long tear. By February 2012, in the post‐Panic of ′08 bailout period, gold topped out $2,308—a decade long gain of 882%.

Over the ensuing decade it never dropped below $1,300 only to retest the 2012 high in the middle of the COVID pandemic lockdowns. In August of 2020, gold was back at $2,250. (See Figure 7.1.)

The cause of this change in gold's price may be attributed to the political response to the attack on the World Trade Center, the mortgaged‐back securities, and the debacle of government pandemic policies. It reflects equally on the Fed's monetary policies and debt‐based economic recovery. During the same period that gold prices have begun to rise, we should also take a look at the trend in money in circulation. We have to look at the price movement as an overreaction to the whole gold‐to‐currency relationship.

The sheer amount of US dollars is troubling for the dollar itself, but—again—great news for gold. Remember what the world economic and political situation was like in the early 1970s: a weakening dollar, easy money, and international unrest. Sound familiar? We're back in the same combination of circumstances that were present when gold prices went from $35 to more than $850 per ounce in 1980. Since 1995, the value of currency in circulation has nearly doubled (up 95.7%); by 2006, the “phony money” pumped into the economy reached $783.5 billion. The Fed's policy sounds like a replay of that popular milk commercial: “Need money? We'll print more.”

The numbers prove that gold is going to be the investment of the future. World mining in gold averages 80 million ounces per year, but demand has been running at 110 million ounces. So if central banks want to hold the value of gold steady, at least 30 million ounces per year must be sold into the market. This creates a squeeze. As the dollar weakens, central banks will want to increase their holdings in gold bullion, not sell it off. This is why gold's price has started to rise and must continue to rise into the future. As long as that demand grows—and it will rise as the dollar's value continues falling—the price of gold simply has to reflect the forces of supply and demand.

But, you might ask, why do central banks want to hold down the value of gold? We have to recognize how this whole money game works. Most world currencies are off the gold standard, following the US example. So as gold's value rises, it competes with each country's currency. Of course, the trend toward weakening currencies and the continuing demand for gold mean that the growth in gold's value could continue strongly for many years to come.

SMOKE AND MIRRORS

When the United States removed its currency from the gold standard, it seemed to make economic sense at the time. President Nixon saw this as the solution to a range of economic problems and, combined with wage and price freezes, printing as much money as desired looked like a good idea. Unfortunately, most of the world's currencies followed suit. The world economy now runs primarily on a fiat money system.

Fiat money is so‐called because it is not backed by any tangible asset such as gold, silver, or even seashells. The issuing government has decreed by fiat that “this money is a legal exchange medium, and it is worth what we say.” So, lacking a gold backing or backing of some other precious metal, what gives the currency value? Is there a special reserve somewhere? No. Some economists have tried to explain away the problems of fiat money by pointing to the vast wealth of the United States in terms of productivity, natural resources, and land. But even if those assets are counted, they're not liquid. They're not part of the system of exchange. We have to deal with the fact that fiat money holds its value only as long as the people using that money continue to believe it has value—and as long as they continue to find people who will accept the currency in exchange for goods and services. The value of fiat money relies on confidence and expectation. So as we continue to increase twin deficit bubbles and as long as consumer debt keeps rising, our fiat money will eventually lose value. Gold, in comparison, has tangible value based on real market forces of supply and demand.

The short‐term effect of converting from the gold standard to fiat money has been widespread prosperity. So the overall impression is that US monetary policy has created and sustained this prosperity. Why abandon the dollar when times are so good?

This is where the great monetary trap is found. If we study the many economic bubbles in effect today, we know we eventually have to face up to the excesses and that a big correction will occur. That means the dollar will fall, and gold's value will rise as a direct result.

The sad lesson of economic history will be that when the gold standard is abandoned and governments can print too much money, they will. That tendency is a disaster for any economic system because excess money in circulation (too much debt, in other words) only encourages consumer behavior mirroring that policy. Thus, we find ourselves in record‐high levels of credit card debt, refinanced mortgages, and personal bankruptcies—all connected to that supposed prosperity based on printing far too much currency: the fiat system.

We can see where this overprinting will lead. As debt grows relative to GDP, we would expect to see positive signs elsewhere, such as growth in new jobs. But like a Tiananmen Square Rolex watch deal, the value simply isn't there. There is some job growth, but in reality, there is also a decline in earnings. High‐paying manufacturing jobs have been replaced and exceeded by low‐paying retail and health care sector jobs, so even if more people are at work, real earnings are down. Instead of simply measuring the number of jobs, an honest tracking system would also compare average wages and salaries in those jobs. Then we would be able to see what is really going on—more low‐paying jobs being created, replacing high‐paying jobs being lost.

THE NEW ROMAN EMPIRE

In 20 BC, the Roman Emperor Augustus began printing money faster than gold production, even though he'd ordered gold mines to produce 24 hours per day in the outlying regions of the Empire. Future emperors followed the pattern, spending nonstop. Nero reduced the currency's value intentionally in order to continue spending, and ever‐larger trade deficits resulted between Rome and its colonies and trading partners. Of course, these policies were part of the larger gradual decline of the Roman Empire.

History provides many examples along these lines. About 1,100 years ago, China issued paper money but eventually abandoned the practice because excessive currency in circulation caused inflation. When Spain found gold in Mexico in the sixteenth century, it became the world's richest nation. The Spanish used the gold to buy, buy, buy, and to expand their military influence. But the wars eventually used up their wealth, so Spain began issuing debt to pay the bills, leading of course to loss of its economic and military power. The French went through a similar period in the eighteenth century, printing way too much paper money and suffering unbelievable levels of inflation as a consequence.

President Abraham Lincoln authorized the use of paper currency with the Legal Tender Act. The result, once again, was runaway inflation. The debt financed the Civil War, but it created a widespread disdain for the practice, at least until 1913 when the Federal Reserve was created.

In the twentieth century, we saw many examples of monetary disasters. In Germany during the 1920s, war reparations destroyed the economy and large amounts of paper money were printed in an attempt to pay reparations (paying imposed debt with new debt). Of course, it didn't achieve anything but massive devaluation. In 1934, the United States joined the trend. Roosevelt set the value of gold at $35 per ounce in an attempt to end the Great Depression. And we know that, years later, Presidents Nixon and Ford completed the cycle of removal from the gold standard once and for all.

The effect has been worldwide, and it only makes the case for investing in gold more compelling. We see repeatedly from history that when countries are on the gold standard, they thrive—and when they go off the gold standard, that move leads to trouble. The problems seem to appear after 30 years. So if we count from the Nixon decision of 1971 to go off the gold standard, we should have seen problems soon after 2001. It was in 2002, in fact, when the value of gold started its current rise. So the 30 years of prosperity after removal of the gold standard have come to an end.

FIAT MONEY SYSTEMS OF THE PAST

A short trek along the dusty crossroads of history is all it takes to see that time and again when countries go off the gold standard, trouble ensues. The gold standard forces spending discipline on politicians, despots, demagogues, and democrats. When a country is on the gold standard, it has to live within its means. But when it goes off the gold standard and begins using fiat money, the sky's the limit.

That's when the trouble begins.

As long as a government—any government—is able to print money indefinitely, you can bet that it will. A government cannot be trusted to control its spending ways any more than a college freshman with dad's unlimited credit card during spring break. If the temptation is put out there, governments are going to go too far. Unfortunately, even the best economic experts can only identify when the printing of money has gone too far by one yardstick: when the system implodes. By then it's too late to prevent the damage.

Let's review some ill‐fated historical examples.

The Roman Empire—In 20 BC, Augustus ordered Gallic mines to operate around the clock to fund ever‐growing infrastructure costs. Even so, the Empire continued printing money beyond its reserves, causing inflation. The trend was followed by subsequent emperors until 64 AD, when the infamous Nero cut back on the amount of silver in coins. Poor monetary policy coupled with abuses among the elite led to the eventual fall of the entire Empire.

China, Ninth Century AD—A new innovation, paper money, came into being. It was described as “flying money” because a breeze could blow it out of a holder's hand. Originally meant as a temporary fix for a copper shortage, the paper money system got out of control. As one might predict, it was all too easy to just keep printing, which led to uncontrolled inflation. As bad an idea as it was, Marco Polo took some paper money back with him to Europe, where few people believed his tall tales of Chinese paper money. He described how seriously the Chinese took their paper money when he wrote:

All these pieces of paper are issued with as much solemnity and authority as if they were pure gold or silver; and on every piece a variety of officials, whose duty it is, have to write their names, and to put their seals. And when all is duly prepared, the chief officer deputed by the Khan smears the Seal entrusted to him with vermilion, and impresses it on the paper, so that the form of the Seal remains printed upon it in red: the Money is then authentic. Anyone forging it would be punished with death.³

A few hundred years later, the Europeans were ready to take a shot at making their own solemn version of paper money.

Spain, Fifteenth Century—Spain grew to become the richest country in the world, based primarily on gold discoveries in Mexico. Spain, a country of contradictions, enjoyed growing wealth while running the infamous Spanish Inquisition, one of its darker moments. In 1481, Ferdinand and Isabella appointed the notorious inquisitor Tomás de Torquemada to run the show. So the availability of wealth led to colonial adventurism, social cruelty, and eventually excessive debt and national bankruptcy.

France, Eighteenth Century—John Law tried to revolutionize money and the way it was used. He said, “My secret is to make gold out of paper.”⁴ This early Western experiment with paper money has formed the basis of today's widespread currency systems. France, suffering from the abuses of the court of Louis XIV, had a nearly worthless coinage system. The king, during the last 14 years of his rule, spent two billion livres above tax collections. Law's idea to fix the problem was to create notes (paper money) to facilitate trade. By 1717, Law had put an elaborate Ponzi scheme into play. He promised riches to anyone who invested in his private bank. The government granted him exclusive rights to control the currency, print money, control sea trade, and administer revenues from tobacco, salt, and the exaggerated riches of France's newest colony, Louisiana. Speculation accelerated and, by 1720, the scheme began falling apart. Before it was over, the paper money lost 90% of its face value. Law died in 1729 and an epitaph was published that year in France: “Here lies that celebrated Scotsman, that peerless mathematician who, by the rules of algebra, sent France to the poorhouse.”⁵

United States, Eighteenth Century—By 1764, the United States was plagued by a volume of worthless notes. Issued during the French and Indian War, these notes brought about a widespread economic recession. Britain declared that the Colonies were no longer allowed to issue drafts or paper money. During the Revolutionary War, Congress authorized paper money to be printed. This so‐called continental money was supposed to be backed by gold and silver, and each state promised to provide a share of bullion reserves as collateral. But it never happened and, predictably, continental money was printed with no backing. Making matters worse, the British subverted the effort by counterfeiting their own version of the bills. The money became worthless, and by 1780, anything of little value was described as being “not worth a continental.”⁶ Finally, in 1781, continentals could be redeemed for newly issued Treasury notes. The new superintendent of finance, Robert Morris, issued these, and they became known as “Morris notes.” They were redeemable in hard currency at a date noted on the bills, but, lacking any real reserves, these notes also declined in value.⁷

France, Eighteenth Century, Part II—France had been deceived by John Law and his currency magic but didn't learn from the lesson. By 1791, France was ready to try paper currency again. The government, in anti‐aristocracy mode, confiscated property and other assets from the wealthy in exchange for assignats, notes that paid interest, operating like land mortgage notes. Far from solving the problem of economic disparity among the classes, the extreme measures only made matters worse. Within four years, inflation had risen by 13,000%. Few instruments have declined to zero value as quickly as the assignats. In a foreword to a book on the historical implications of French monetary policy, John Mackay described France's attempts at a fiat money system as

the most gigantic attempt ever made in the history of the world by a government to create an inconvertible paper currency, and to maintain its circulation at various levels of value. It also records what is perhaps the greatest of all government efforts … to enact and enforce a legal limit of commodity prices. Every fetter that could hinder the will or thwart the wisdom of democracy had been shattered… . But the attempts failed. They left behind them a legacy of moral and material desolation and woe.⁸

Argentina, Nineteenth and Twentieth Centuries—Perhaps learning from the mistakes of the Europeans, Argentina went on the gold standard in 1853. For the next century, the economy thrived. In 1943, Juan Peron's coup destroyed the country's system, and the gold reserves disappeared, to be replaced by paper money. This began a downward‐spiraling economy that has only recently begun to recover.

United States, Nineteenth Century—During the Civil War, President Lincoln authorized issuance of paper money to help finance the war effort. The resulting inflation caused a public sentiment against paper money that lasted until 1913, when the Federal Reserve System was devised.

Germany, Twentieth Century—In 1923, the so‐called Weimar Republic—a post–World War I temporary government—had to deal with repressive war reparations. It began printing massive amounts of paper money to make payments, to the extent that the currency became completely worthless. The devastation paved the way for the Nazi movement of the late 1920s and early 1930s, and directly to World War II.

United States, Twentieth Century—The United States has removed itself from the gold standard in the most recent switch to a fiat money system. This took place in three phases. First, in 1934, President Roosevelt declared that an ounce of gold was to be valued at $35, up from its previous level of $20.67. The hope was that this change would end the Depression. Second, the Bretton Woods system agreed upon in 1944 (explained at the beginning of this book) achieved worldwide agreement to peg currencies to gold. But in practice, the US dollar became an international currency and other countries pegged their currencies to the dollar. Bretton Woods also opened the door to widespread use of debt (i.e., printing of additional currency above gold reserves) to facilitate international trade. Third, in 1971, President Nixon ended convertibility of dollars to gold. The United States had already been printing paper money far above reserve levels; this removal from the gold standard destroyed the Bretton Woods Agreement, creating a worldwide gold drain.

THE GREAT DOLLAR STANDARD ERA

The fiat money system in effect in the United States today makes this point. It may be interesting to note that today many economists fear that a return to the gold standard or institution of an international monetary system could actually trigger a depression—a collapse of the financial economy. One author made an attempt to tie the Great Depression to England's attempt to return to the gold standard in the 1920s.⁹ However, most historians would agree that trying to go back to the gold standard was not actually the cause of the worldwide depression. The cause was more likely out‐of‐control credit resulting from suspension of the gold standard. The global economy was in trouble at least a full decade prior to England's change in monetary policy.

However, the book made a good point: It is no simple matter to revert to a more sensible standard. Consequences are inevitable. It would not be easy for the major currencies to return to an organized Bretton Woods Agreement type of system. Growth has occurred at such an accelerated pace that an attempt to return to the gold standard in one move would not work. This does not mean that the fiat money system can succeed. To the contrary, no such system has in the past.

No fiat money system has ever succeeded. History has shown time and again that eventually excessive government spending makes paper money worthless. Today, the common belief among US economists and the Federal Reserve is that consumption is the fix‐all. The fact that consumption is taking place with borrowed money does not seem to matter. So consumer debt, national budget deficits, and trade gaps have become a sort of norm, whereas in the past all of these economic trends were viewed as early warning signs of a weakening currency.

An argument against the gold standard is based on gold's rarity. We cannot expect any economic expansion as long as we are held back by a commodity in limited supply, the argument goes. However, the argument is flawed.

Supply and demand alter the value of every commodity in an efficient economic system. As demand increases for a unit of exchange (i.e., gold), the price rises. This is an efficient system. Demand pushes the price up, and supply pushes the price down. When paper money is in use, the whole efficiency of the economic system goes out the window. As long as the government can print more money, it can continue to expand a consumption base in spite of any supply and demand, and in spite of the limited supply of gold itself.

Eventually, though, all of that printed money exceeds its own life cycle. It becomes worthless, as we have seen time and again—in Rome, China, Spain, France, Germany, and now the United States.

Perhaps a paper money system pegged specifically to commodity reserves would give the currency the stability it needs and rein in government spending. We don't pretend to know the solution to a runaway fiat regime. But experience tells us that governments have less discipline than a hungry fat man at an all‐you‐can‐eat buffet. They are simply going to print, print, print, until the system fails. Is this a matter of weak character or simply human nature? Some, like Clif Droke, have argued that governments “must be composed of men of the highest moral standing, and ideally should be Christian in composition.”¹⁰ Who is going to decide what constitutes the highest morals, and what track record gives Christians a monopoly on integrity?

The monetary system is evolving before our very eyes. Never before in human history has the reserve currency of the world been so burdened with debt. And never has the transfer of one international currency to another been peaceful. Is the euro likely to supplant the dollar as international money?¹¹ Perhaps it will be the Chinese yuan.

During debate on the Bretton Woods Agreement, John Maynard Keynes hinted at the desirability of a world central banking system and a world currency. We have not had such a system since the sixth century, when the Roman coin the solidus (originally minted by Emperor Constantine) was “accepted everywhere from end to end of the earth.”¹² The solidus was respected for centuries, while it also competed with the dinar in the Moslem world. Both coins held their value for good reason: The metallic content of these coins remained consistent over time, and robust economic activity spread their use throughout the known world.

Both coins lost value in about the nineteenth century, and for the same reason: reduction of metallic weight. In an effort to stretch currency values, rulers reduced weight, causing debasement and, eventually, loss of trust in the market. The introduction of inferior‐grade coins further accelerated the debasement of the traditional solidus and dinar.¹³

The next go‐round of worldwide coinage occurred in the thirteenth century. In Italy, the genoin (introduced in Genoa) and the florin (from Florence) became true world currencies during a period of expanding international trade. Two hundred years later, the system expanded with introduction of the ducato in Venice.¹⁴

These coins held steady in value until the fifteenth century, when silver mining in several European countries changed valuation of metals. It is interesting to note that debasement of these currencies was not accompanied by inflation. This was due to the fact that as money supplies grew, so did real output and production. By today's standards, it was a minuscule economy, but the model made the point concerning valuation of currency‐based monetary systems and their relationship with production and consumption.

The characteristics that made older international monetary systems stable included high unitary value; intrinsic stability; and strong economic trade, production, and balance of consumption.¹⁵ A fourth attribute is widespread acceptance of a currency as a means of acceptable monetary value.

In comparison to modern fiat money systems, these attributes become significant. We can judge the actual health of a monetary system by comparing its attributes to these older international systems. An argument made by US economists and the chairman of the Federal Reserve is that the United States does, indeed, enjoy all of those attributes in its monetary system. But the various consumption bubbles that control the US economy belie this opinion. In fact, we may be on the verge of seeing the dollar being replaced gradually by another medium, perhaps the euro. The study of history has shown:

A series of international monies has existed historically, each occupying center stage sometimes for several centuries and eventually being replaced by the next. The only exception is the dollar, which is the current international money and, therefore, has not been replaced… . The euro area is large enough in terms of trade to be a serious competitor to the dollar as an international money.¹⁶

“The solution, ultimately, to the problem of governmental abuse of its printing presses is to establish a modern‐day international currency.” I wrote those words before Bitcoin came out of anyone's mouth. We're still looking for that solution. But is there a solution at all? Won't it always be this way. Perhaps, like all things, the best approach to the greenback boogie is moderation, though that requires a complex understanding of the cycles which we are going through. I come from a long line of thinkers who believe that economic science is important and that we will ultimately be able to deal with the incredible highs and lows of money itself. The issue is always application.

The US dollar has served as a de facto international currency for many years, and arguments are being made in support of the euro taking its place. However, true reform would require that an international currency have the backing and stability of gold reserves. The fiat system has never worked, and today's fiat money will not work permanently, either.

CRYPTO EVANGELISM

On December, 13, 2022, Samuel Bankman‐Fried (SBF), the founder of the cryptocurrency exchange FTX, was arrested in the Bahamas for wire fraud, money laundering, and a host of other charges that one journalist calculated could total a sentence, if convicted on all counts, of 612,000 years in prison. The sentencing potential is as unbelievable as the cryptocurrency bubble itself.

When we began writing Demise of the Dollar in 2005… even when we updated and revised the book in 2008… cryptocurrencies were a gleam in someone's eye. We've had many editors write countless words praising the idea that Bitcoin, as the brand‐label and proxy for crypto currencies, could stand against the fiat currency system we've been writing about.

The introduction of all new technologies, in this case block chain, which is the technology behind Bitcoin and other cryptos, is subject to fraud, abuse, and fantasy. It's too early in this book to find out what's going to come out of the SBF trial… or his connection to the greatest quarterback in NFL history, Tom Brady, or his then soon to be ex‐wife, supermodel, Giselle Bundchen.

As of this writing, SBF is sitting in a dank prison cell in the Bahamas. His lawyers are allegedly making the argument that he needs to be extradited to the United States because the prison conditions, even Riker's Island, are safer and “they don't trust the Bahamian government.”¹⁷

The story of FTX and its sister company, Alameda Research, run by Sam Bankman‐Fried's girlfriend Carolina Allison, is just beginning to unfold. The Scottish economic historian Niall Ferguson likened it to the massive fraud uncovered during the Mississippi Scheme in the early 1700s, with Bankman‐Fried playing the role of John Law.¹⁸ (We addressed John Law in our book Financial Reckoning Day, which we'll be updating early in 2023.)

The whole crypto episode, including its most famous component Bitcoin, is only a decade and a half old, which makes it both new and interesting. Many of its ardent evangelists believe it is the policy‐free alternative to paper money and government control. And it begs the following question.¹⁹

WHAT IS MONEY, ANYWAY?

It is a store of value.

Perhaps a paper money system pegged specifically to commodity reserves would give the currency the stability it needs and rein in government spending. But we don't really know. Since 1971, we rely on “the full faith and credit” of the US government, as we have explained. We rely on press conferences and the “minutes” from the meetings held by the Federal Reserve governors to determine what the dollar is “worth.”

We need stable money to give entrepreneurs, innovators, and business leaders the guidance for how and when to invest. A fiat currency system is subject to central banks. So, by extension, business is dependent on the policy determined at the Fed. For someone like me trying to run a publishing company, it's annoying. We spend a lot of time trying to interpret signals from the Fed. As do homeowners and parents trying to pay for ever rising tuition payments.

THE TWILIGHT OF THE GREAT DOLLAR STANDARD ERA

American consumers face the specter of losing value in their retirement savings, finding out they cannot live on a fixed income, and suffering from chronic hyperinflation. These changes are unavoidable. Today, the problem is compounded because the US dollar's value is falling. It all involves productivity changes in the United States. We have not competed with the manufacturing economies in other countries, and that is why our credit (i.e., our dollar) is suffering.

Any number of things could create a sudden, wrenching drop in the dollar's value. Consider the following three possibilities:

1. Foreign countries drop their US dollar reserves. We depend on foreign investment in our currency to bolster its value or, at least, to slow down its fall. When that thinly held balance changes, our dollar loses its spending power. In February 2005, South Korea announced that it will stop holding US dollars and bonds in its reserves—but that was only the beginning. In an odd twist of financial fate, on the same day that the Canadian loonie²⁰ achieved parity with the US dollar, Saudi Arabia refused to adjust rates in lockstep with the Federal Reserve. Keeping its interest rate unchanged may signal Saudi Arabia's desire to break its dollar peg. Iran, Iraq, and Kuwait have already dumped the dollar; will the Saudis be next? At a November 2007 meeting of the Organization of Petroleum Exporting Countries's 13‐member cartel, Iranian President Mahmoud Ahmadinejad, whose country already receives payment for 85% of its oil exports in nondollar currencies, urged other countries to follow suit and “designate a single hard currency aside from the US dollar … to form the basis of our oil trade.” “The empire of the dollar has to end,” chimed in Venezuela's Hugo Chavez; his state oil company changed its dollar investments to euros at his order—er, request.

   Rumors are circulating that the Bank of Korea, after selling off $100 million worth of US bonds in August 2007, is getting ready to sell $1 billion more, and if Washington forces trade sanctions, China, which threatened recently to cash in $900 billion of US bonds, will probably follow suit. In Russia, Vladimir Putin's dream of a stock market to trade the country's natural resources in rubles is not so far‐fetched; in 2005, Russia, the world's second‐largest exporter of oil, followed South Korea's lead and ended the dollar peg. And once again, Sudan is hinting that it will impose trade or financial sanctions against companies that do business with the United States—only this time, the words just might have teeth.

   As other countries follow suit, the dollar—and your spending power—drops. What does this mean? You will need more dollars to buy things than it takes today.

2. Oil prices increase catastrophically. We—and our real inflation rate—are at the mercy of Middle East oil. In 2005, we couldn't imagine what would happen if the price of oil were to double—or triple, but that's exactly what has happened in 2007 as oil kept flirting with $100‐a‐barrel prices. Our vulnerability is not imaginary. For example, if terrorists were to contaminate large reserves with nuclear radiation, the supply of oil would drop, and prices would rise. We are all aware of our vulnerability and dependence on oil, but we don't like to think about it. Rising oil prices affect not only what you pay at the pump, but many other prices as well: nonautomotive modes of travel, the cost of utilities, and local tax rates, for example. It all adds up to unquestioned “pain at the pump” for American consumers. By September 2007, gasoline averaged $2.78 a gallon—double 2002's price. “Pain at the pump” leads to “pain in the pocketbook,” as consumers know. You're not seeing double in the checkout line at the grocery store—costs really are double. There was a 5.6% increase in 2007, compared with 2.1% for all of 2006.
3. The double whammy of trade and budget deficits. We're living beyond our means. It's as simple as that, and something is going to give. The federal budget deficit—annual government spending that is higher than tax revenues—adds to the national debt at a dizzying rate, making our future interest burden higher and higher every day. Our trade deficit—bringing more things in from foreign countries than we sell to the same countries—has turned us into a nation of spendaholics. We've given up making things to sell elsewhere, closed the store, and gone shopping. But we're not spending money we have; we're borrowing money to spend it. In 2006, the trade and budget deficits doubled the deficits of 2001. Any head of a family knows that this cannot go on forever without the whole thing falling apart—and yet, that is precisely what we are doing on a national scale.

Even as the US economy overheats, political leaders get out their fiddles. They point to economic indicators to prove that the economy is strong and getting stronger. The message would be valuable … if only it were true.

Politicians like to measure the economy with esoteric indicators. For example, we are told that consumer confidence is up. Well, confidence is all well and good, but what if it isn't accurate? Yankee optimism has achieved a lot in the past 200 years, but it alone is not going to prevent the current dollar crisis from getting worse and worse.

Does this mean that the United States is finished? No, but it does mean that our long history of economic power and wealth is being eroded from within. For example, look at how the reality has affected you in recent years. For most people, the real state of our economy is measured in one way: jobs. Sure, the number of jobs rises every month, but the complete truth is not as reassuring. We are losing high‐paying jobs in manufacturing and replacing them with low‐paying jobs in health care, retail, and other menial job markets. Our mantra of “Yankee ingenuity can accomplish anything” is gradually being replaced with a new mantra: “Would you like fries with that?”

As manufacturing jobs continue to move to China and India, and elsewhere around the globe, you would think we'd tighten our belts. But instead, we increase our debt to spend more.

Few people, even those who consider themselves to be savvy about finance, really understand things like the trade deficit, national debt, gross domestic product, inflation, economic indicators, and the like.

The truth (one few investors want to hear) is that your local member of Congress is often just as illiterate about economics as most of us are, but the difference is that he or she has the power and position to make decisions that affect you. And he or she may be making the wrong decisions. You, like many other Americans, may have put aside income every month in a variety of retirement plans, long‐term investments, and savings, in the belief that this is going to provide security in your old age. What are they going to be worth when you retire? Given the current state of things, you could find out that your retirement accounts are going to be worth next to nothing.

This is not the time to rush out and buy more stocks, for example, or to load up on new bargains in the property market. Quite the opposite. The subprime mess isn't over. Foreclosures keep growing. In December of 2007, we stopped believing the forecasts from the National Association of REALTORS® (NAR), which declared a market rebound in early 2008. When the NAR revised their 2007 sales forecast for existing homes the ninth consecutive month and, by our count, the tenth time that year, we officially called B.S. Making a 2007 forecast in the middle of December is lame enough. But when it's your tenth revision in 12 months, it's not even fair to call it a forecast.

So where should you invest? Read on. We provide you with the specifics about what's really going on with the dollar and our economy, how foreign countries ultimately control our economic fate, and how our leaders are deceiving us by telling us that we're in good shape. Finally, we offer strategies you can employ today to not only protect your financial freedom but to prosper in a dollar demise.

FROM KNOW‐HOW TO NOWHERE

Back to Triffin's paradox. The first thing to realize about a deficit in foreign trade is that, by definition, it reflects an excess of domestic spending over domestic output. But such spending excess is actually caused by overly liberal credit at home, and not really by cheaper goods produced elsewhere.

Just as shaky is the second argument, ascribing the trade gap to higher US economic growth. Asian countries, in particular China, have much higher rates of economic growth than the United States. Yet they all run a chronic trade surplus, which is caused by high savings rates. This is the crucial variable concerning trade surplus or trade deficit.

The diversion of US domestic spending to foreign producers is, in effect, a loss of revenue for businesses and consumers in the United States. Is this important? Yes. The loss in 2021 was a heart‐stopping $845 billion.²¹ This is America's income and profit killer, and it can't be fixed with more credit and more consumption. This serious drag of the growing trade gap on US domestic incomes and profits would have bred slower economic growth, if not recession, long ago. This has so far been delayed by the Fed's extreme monetary looseness, creating artificial domestic demand growth through credit expansion.

The need for ever‐greater credit and debt creation just to offset the income losses caused by the trade gap is one of our big problems. An equally big problem is a distortion of the numbers. We are officially in great shape, but the numbers don't support this belief. Personal consumption in the past few years has increased real GDP at the expense of savings, while business investment has grown only moderately.

This can only end badly. Normally, tight money forces consumers and businesses to unwind their excesses during recessions. But in the latest round, the Fed's loose monetary stance has stepped up consumers' spending excesses. Our weight trainer is feeding us Big Macs. If we were to measure economic health by credit expansion, the United States has the worst inflation in history. And still our experts are puzzled by a soaring import surplus.

The problem here is that American policy makers and economists fail to understand the significance of the damage that is being caused by monetary excess and the growing trade gap. The trade gap is hailed as a sign of superior economic growth, while the hyperinflation in stock and house prices is hailed as wealth creation.

Until the late 1960s, total international reserves of central banks hovered below $100 billion. At the end of 2003, they exceeded $3 trillion, of which two‐thirds was held in dollars. And starting in 2001, the rapid buildup exploded. Foreign reserves now are estimated at $5.6 trillion—but reserves don't include sovereign wealth funds (SWFs), government‐owned or ‐controlled funds, which add another $1.5 trillion to $2.7 trillion. A steep jump in these reserves, an increase of $907 billion, occurred in the years 2000–2002, when Asian central banks, with China and Japan as the main buyers, bought virtually the whole amount. And despite global ups and downs, these two countries are still buying.

And who said economists don't have a sense of humor? In early 2006, before leaving the White House Council of Economic Advisers and joining the Fed as its new chairman, Ben Bernanke suggested that the growing US trade deficit—a bubble the size of 6% of our GDP—was not really a deficit but a “savings glut,” caused by excessive saving in Asia and Europe. So we can conveniently blame our growing US trade deficit on the rest of the world, which saves too much. It's their fault for selling us stuff and then putting all the cash they earn back in the US of A.

It was widely assumed that rising stock and house prices would keep American consumers both willing and able to spend, spend, spend their way to wealth—indefinitely. But that assumption radically changed in 2007, when the housing bubble finally burst.

Also alarming is the transfer of US net worth to interests overseas, which endangers US economic and political health. Case in point: Warren Buffett, who kept his vast fortune invested at home for more than 70 years, decided in 2002 to invest in foreign currencies for the first time. Buffett and the management of Berkshire Hathaway believe the dollar is going to continue its decline. We should not need confirmation such as this to recognize the inevitable, but it bolsters the argument that the dollar is, in fact, in serious trouble, and that this trouble is likely to continue. In addition to debt problems at home, Buffett made his decision based at least partially on the ever‐growing trade deficit. In his most recent letter to Berkshire Hathaway shareholders, Buffett warned:

As our US trade problems worsen, the probability that the dollar will weaken over time continues to be high. I fervently believe in real trade—the more the better for both us and the world. We had about $1.44 trillion of this honest‐to‐God trade in 2006. But the US also had $.76 trillion of pseudo‐trade last year—imports for which we exchanged no goods or services

Making these purchases that weren't reciprocated by sales, the US necessarily transferred ownership of its assets or IOUs to the rest of the world. Like a very wealthy but self‐indulgent family, we peeled off a bit of what we owned in order to consume more than we produced.²²

Buffett has been especially concerned about the transfer of wealth to outside interests. He notes:

These transfers will have consequences, however. Already the prediction I made last year about one fall‐out from our spending binge has come true: The “investment income” account of our country—positive in every previous year since 1915—turned negative in 2006. Foreigners now earn more on their US investments than we do on our investments abroad. In effect, we've used up our bank account and turned to our credit card. And, like everyone who gets in hock, the US will now experience “reverse compounding” as we pay ever‐increasing amounts of interest on interest.²³