Rats desert a sinking ship; lice flee a cooling corpse. It is no different with currency. As soon as it begins to sink, value heads for the nearest exit. There is, however, one significant difference. The rats occupied the ship, the lice were at home in the body, but value never inhered to our currency. This makes its fall all that easier. The truth is that our worthless fiat currency was one of the greatest scams ever to be foisted on the world.
It all started in another decade mired in another war. This time is was the 70s and Vietnam. For the first time in the twentieth century, the United States found itself saddled with a trade deficit.
Unfortunately, we were a signatory to the Bretton Woods Agreements which obligated us to keep our currency pegged to gold, i.e., every dollar represented real value. The problem was, we’d printed so much money just to keep up with the cost of losing the war in Vietnam, that we only had enough gold to cover twenty percent of the currency in issue.
Well, the solution to that problem was simplicity itself: Nixon simply unpegged the dollar from the value of gold. The liberated paper now represented whatever we could scam the world into thinking it was worth.
Without the albatross of gold hanging around its neck, the dollar soared. And as the dollar soared, the Dow Jones soared while assets bubbled.
One plus of a worthless currency is that it is much easier to go into debt. And go into debt we did. Between 1987 and 2005, public and private debt went from $10 trillion to $43 trillion. With all that debt, finance capitalism ruled.
Another advantage of a worthless currency is that is makes the economy look better than it actually is. Of course, this rosy picture is made rosier by the deftness with which our technicians cook the books. For example by excluding volatile commodities like food and fuel from the Consumer Price Index, you make inflation appear much lower than it really is.
There is but one danger in all this, and that is if some fool takes a look at the Dow and realizes it is being denominated in worthless dollars. Let’s say the Dow is sitting at 12,200. But, if we measured the Dow in Euros, it would drop to 7300.
Needless to say, that simply would not do.
Now you, Paulson and Bernanke are like tap dancers frantically tapping away in a burning theater, smiles frozen on your faces. Thank God reality is to you whatever you say it is. It deadens the pain.