Richard Karn, of Emerging Trends Report, was kind enough to provide us with this exclusive overview of he and his group's most recent thoughts on the past, present, and future of the vaunted/maligned US dollar and the elaborate context within which it manages to remain the world's reserve currency, as well as the world's fiat monetary system.
As usual, Richard's exhaustive research yields a perspective that is insightful and profound, free of rhetoric, and hype-less.
Here are a range of thoughts regarding the fiat dollar, the majority of which I will be incorporating into the presentation as time allows:
- the world had the chance to end dollar hegemony when it discovered that the US was not honoring the Bretton Woods Agreement, but for political, security or economic reasons, chose not to;
- Gresham's Law (bad money drives out good money) insures no country today could operate a sound currency based on the gold standard or some variation thereof;
- whether subverted or suborned, all countries today administer fiat currency regimes, rendering those currencies but derivatives of the US dollar and their politicians and central bankers guilty of defrauding their citizens for power and profit;
- the cost of a fiat currency franchise is the purchase of US Treasury instruments, which amounts to essentially an imperial tax or tribute, and whichr has reached unprecedented levels today;
- reserve currency status has little to do with comparative value and everything to do with how readily it is traded globally, and that is determined as well as maintained by military dominance;
- as was amply demonstrated in 2008-9, during an economic crisis, fiat currency regimes weaken from the periphery (or historically the frontier) toward the center, and the role of the reserve currency is simply to ensure continuity of the global financial system;
- behind the empty rhetoric today, calls for a new currency amount to but posturing and a cheap power grab during a time of perceived dollar weakness because no one is offering a 'backed' currency which might be easily monitored, only a new fiat currency over which the proponents will have a greater say;
- recognizing that there is no legitimate challenge to the fiat dollar on the horizon provides observers with a filter with which they can tune out the 'white noise' in order to focus on what is being done, not said;
- market commentators today are so eager to write off the dollar and to promote communist China as the future of capitalism that they are overlooking the simple fact that in the aftermath of the global financial crisis all currencies are being inflated today, not just the dollar, which will someday result in a tremendous loss of purchasing power by their citizens--'confiscation by inflation' on a global basis;
- long term this is supportive of commodity prices, but as events have demonstrated, short term anything is possible;
- the world will buy more, not less, Treasury debt: the cost of a fiat dollar failure would be a universal loathing of fiat currencies, with all of the unpleasant consequences for politicians and central bankers;
- in conjunction with the dollar replacing the yen as the currency of choice in the carry trades, the increased velocity and volume of 'hot money' chasing speculative return in a largely negative real interest rate environment globally means there will be both increased volatility as well as increased likelihood of a dislocating event;
- the increasingly desperate measures, the myriad deceptions, the the back-room deals and outright frauds that are being exposed on a near-daily basis, with the guilty parties going unpunished, virtually guarantees the global financial crisis is not over, merely awaiting the right spark.
- the key enabling attributes for the successful administration of a fiat currency regime are co-operation between the financial sector and the government, endless promotion of their management prowess and regular deflection, taking advantage of varying perspectives regarding time and value, and credibility;
- so-called "end-of-the-world" financial crises and resultant taxpayer-funded bailouts are far more common than most people realize, with each being larger and more lucrative for the financial sector than the previous (think of Wall Street receiving record bonuses less than a year after precipitating the crisis);
- over the last 30 years and numerous bubble cycles, cumulative credit debt has ballooned while capital has been so badly misallocated that we are at, or fast approaching, a point at which there is not sufficient real income generated any longer to service the outstanding debt;
- in 1965, each dollar borrowed produced 93 cents of GDP growth; in 2008 a borrowed dollar produced but 18 cents of GDP growth, and predictions regarding the servicing of debt are so horrendous that it is thought that by 2015 borrowing money will have no net effect on the economy;
- should American consumers increase their savings rate and reduce household debt to 1980 levels, it would constitute as much as a 2.5% reduction in global GDP;
- the US government is using the financial crisis to further expand its power and bureaucratic reach into Americans' lives;
- too much government is one of the problems: civilian workers outnumber government workers about 5 to 1, but it requires the tax receipts from roughly 14 average wage earners to pay the salary of an average government employee;
- the more financial resources that are consumed by government, which produces very little of value to the real economy, the less there is available to the real economy--out where real things are manufactured and real, sustainable income is generated;
- in contrast to what is generally accepted, financial sector credit growth precedes the expansion of the monetary base, and banks are not lending, they are hoarding;
- without money reaching those most in need of it, small businesses and individuals, recovery is impossible;
- government stimulus programs have historically proven to be of at best marginal benefit to an economy, but tax cuts, incentives and payroll subsidies to businesses have been shown to have a 'multiplier effect' of nearly three times the funds committed;
- interventionist policies implemented in the administration of the the fiat dollar regime amount to more of the same policies that landed us in this fix, only harder
- however, the interventionists are running out of options: we can count but six available to the administration over the near to intermediate term, which is the subject of the next webinar, with the most terrifying not being a full-blown depression but the wholesale March Toward Marxism under the largely fabricated aegis of the need to control the emissions of carbon dioxide--by everyone and everything.
Tomorrow, we will feature Chapter 2 from Richard Karn's book, Credit and Credibility.