-->Reprinted from NewsMax.com

The Dollar’s Last Days
Charles Stampul
Saturday, June 14, 2003

Thirty years from now individuals may still be making purchases with ordinary debit cards. The object changing hands, however, probably won’t be dollars.

When the United States went off the gold standard in 1971, many of those who understood the move for what it was (a bankruptcy) predicted a currency collapse within the decade. The price of gold (the best alternative to worthless pieces of paper) skyrocketed and would have increased further, or at least sustained ’70s levels, but there was something those predicting immediate disaster overlooked: The largest segment of the U.S. population was moving into the prime of their working careers.

A succession of federal interest rate cuts fostered investment, creating demand for their skills. This expansion provided the federal government with the additional tax revenue it needed to manage its runaway debt, forestalling a collapse. [1]

But now the same population approaches retirement, and the interest rate cuts that fostered growth in the 1990s have left the Federal Reserve unable to stimulate investment by the same means moving forward. More retirees, living longer and longer, mean more Social Security and Medicaid recipients. As a result of declining birthrates in the United States and most other industrialized nations, there will be fewer taxpayers to support them.

But instead of warning people that the government will not be able to provide for individuals when they are no longer able to work, politicians are now promising drug benefits as well, even while the government falls deeper and deeper into debt and, as demonstrated by a pitifully low - by some estimates negative - rate of savings, its revenue source is drying up.

When a company operates in the red it can try to stay afloat by increasing prices. But as prices increase, customers defect. There comes a point, therefore, when further price increases decrease revenue.

The same law applies to taxes. Taxes are costs for government services. Individuals and businesses that feel that taxes are too high may (if conditions permit) relocate to a place where the cost of government is less.

There comes a point for government, therefore, when further tax increases, by sending individuals and businesses overseas and underground, decrease tax revenue. (If it is true that the average American consumes more than he produces, this point may already have been reached.) For this reason, the federal government will not be able to increase revenue to fund Social Security and Medicaid by raising taxes.

The government will be able to continue Social Security and Medicaid and other programs only by printing ever-greater amounts of money. Here’s where things get complicated. Since the dollar, as a floating or fiat currency - a money with no intrinsic value - measures only the value of capital, as the supply is increased beyond increases in output (i.e., capital formation), its value decreases.

But legal tender law requires individuals to accept U.S. currency at face value. The depreciation, therefore, comes in the form of higher prices: More money increases demand for goods and services, which causes prices to increase. [2] When prices rise, money is worth more when it is received than it is when it is spent. So the more money a person has and the longer that person waits to spend it, the more that person will lose. [3]

The United States was plagued by rising prices in the 1970s. [4] Prices stabilized in the 1980s and 90s. [5] Today, there is concern that prices are falling.

This leads most to believe that the threat of rapidly increasing prices is no longer with us. In reality, the federal government never stopped expanding (i.e., debasing) the money supply. Much of the expansion was absorbed by real increases in capital. But most of it wasn’t.

Why, then, haven’t prices increased? The reason is because, although money expansion results in higher prices for goods and services, rising prices from money expansion can be masked and offset by falling prices from falling demand for consumer and capital goods and services and excess inventory [6]; productivity increases and greater competition [7]; increased demand for U.S. money resulting from international currency crises [8]; expatriation; interest rate cuts and other factors.

If the government continues to fund its activities and meet its financial obligations through money creation, prices will overcome any deflationary pressures and rise precipitously. People will begin to see and feel the steady fall in purchasing power. They will rush to exchange money for material goods, causing prices to skyrocket.

At some point people will refuse U.S. currency as payment for goods and services. At that point, the dollar, like every fiat currency to come before it, will be worthless. [9]

The government may attempt to take over industry and seize wealth from businesses and individuals, and make it illegal to leave the country. [10] But it will only succeed in such measures if individuals do not have a way to defend themselves against such encroachments.

More likely, since America is still an armed nation, the government will accept a more limited role. It will either offer gold or silver currency, or money backed by gold and silver, or leave currency functions to the private sector. In an age when assets can be transferred electronically, a single unit of exchange may no longer be necessary. Gold and silver may be just two of many tradable commodities.

Individuals can prepare for a collapse by keeping as little wealth in U.S. currency as necessary, and transferring all wealth to material possessions and gold and silver gradually as events dictate.

Most importantly, individuals must attain firearms. As the collapse draws near, efforts to unarm the U.S. population will grow more strident. The federal government may share Adolf Hitler’s insight that “the most foolish mistake [rulers] can make is to allow subjected people to carry arms. History shows that all conquerors who have allowed their subjected people to carry arms have prepared their own fall.”

Whether the mixed economy in place today is replaced with a free-market economy or a fully controlled economy may depend upon the degree of resistance. The degree of violence will depend on how many people are able to defend their freedom and property.

Charles Stampul has written pieces for The Detroit News editorial page, Ideas on Liberty and other publications. He is now at work on a novel called"Progress." Contact him at onprinciple@swissinfo.org


Notes

1. The budget surpluses forecasted during the 1990s were based on projections for the growth of the period to continue, and left future Social Security claims out of the equation. In reality, therefore, none of the national debt was eliminated. Return

2. Those who receive the new money (public and private sector loan recipients) bid up the cost of goods and services. Return

3. This presents a problem for those who don’t plan on working until the day they die. People want to save and invest money for retirement, but they won’t be able to buy as much with the money tomorrow as they would today. When people stop saving, the capital - which, through investment, fosters new technology and makes the economy grow - diminishes. Return

4. When foreign investors were unable to redeem U.S. dollars for gold and silver as a result of the 1971 repeal of the gold standard, they settled for U.S. real estate and commodities such as oil. This new demand for some goods, along with an increased supply of money, caused prices to rise. Return

5. Expanding markets in the 1980s and ’90s, aided by credit expansion, created more real estate and businesses for individuals to invest in, essentially increasing competition and slowing the rate of price growth. Return

6. Excess inventory and falling demand lower prices but stifle wage growth and increase unemployment. Return

7. Productivity increases and greater competition both lower prices and boost wages and therefore raise the standard of living, allowing the government to debase the currency with some impunity. Return

8. When a foreign currency collapses, people will put their wealth in U.S. dollars. This increases the demand and lowers the supply of dollars, without affecting demand for goods and services. Greater demand and lower supply increases the dollar’s value. But since dollars must trade at face value, the increase takes the form of lower prices: Less circulating money means lower demand for goods and services and lower prices. Return

9. It is not inevitable that a currency not redeemable in gold or silver will collapse. But if government-minted money is backed by gold or silver, the government cannot put itself in debt and take itself out of debt by printing more money. The currency, therefore, would retain its value. Return

10. Hyperinflation in Russia and Germany after World War I prepared the ground for Communism in one country and Nazism in the other. One hundred percent yearly inflation in Brazil in 1954 brought military government. Return

-->>Reprinted from NewsMax.com
>The Dollar’s Last Days
>Charles Stampul
>Saturday, June 14, 2003
>Thirty years from now individuals may still be making purchases with ordinary debit cards. The object changing hands, however, probably won’t be dollars.
>When the United States went off the gold standard in 1971, many of those who understood the move for what it was (a bankruptcy) predicted a currency collapse within the decade. The price of gold (the best alternative to worthless pieces of paper) skyrocketed and would have increased further, or at least sustained ’70s levels, but there was something those predicting immediate disaster overlooked: The largest segment of the U.S. population was moving into the prime of their working careers.
>A succession of federal interest rate cuts fostered investment, creating demand for their skills. This expansion provided the federal government with the additional tax revenue it needed to manage its runaway debt, forestalling a collapse. [1]
>But now the same population approaches retirement, and the interest rate cuts that fostered growth in the 1990s have left the Federal Reserve unable to stimulate investment by the same means moving forward. More retirees, living longer and longer, mean more Social Security and Medicaid recipients. As a result of declining birthrates in the United States and most other industrialized nations, there will be fewer taxpayers to support them.
>But instead of warning people that the government will not be able to provide for individuals when they are no longer able to work, politicians are now promising drug benefits as well, even while the government falls deeper and deeper into debt and, as demonstrated by a pitifully low - by some estimates negative - rate of savings, its revenue source is drying up.
>When a company operates in the red it can try to stay afloat by increasing prices. But as prices increase, customers defect. There comes a point, therefore, when further price increases decrease revenue.
>The same law applies to taxes. Taxes are costs for government services. Individuals and businesses that feel that taxes are too high may (if conditions permit) relocate to a place where the cost of government is less.
>There comes a point for government, therefore, when further tax increases, by sending individuals and businesses overseas and underground, decrease tax revenue. (If it is true that the average American consumes more than he produces, this point may already have been reached.) For this reason, the federal government will not be able to increase revenue to fund Social Security and Medicaid by raising taxes.
>The government will be able to continue Social Security and Medicaid and other programs only by printing ever-greater amounts of money. Here’s where things get complicated. Since the dollar, as a floating or fiat currency - a money with no intrinsic value - measures only the value of capital, as the supply is increased beyond increases in output (i.e., capital formation), its value decreases.
>But legal tender law requires individuals to accept U.S. currency at face value. The depreciation, therefore, comes in the form of higher prices: More money increases demand for goods and services, which causes prices to increase. [2] When prices rise, money is worth more when it is received than it is when it is spent. So the more money a person has and the longer that person waits to spend it, the more that person will lose. [3]
>The United States was plagued by rising prices in the 1970s. [4] Prices stabilized in the 1980s and 90s. [5] Today, there is concern that prices are falling.
>This leads most to believe that the threat of rapidly increasing prices is no longer with us. In reality, the federal government never stopped expanding (i.e., debasing) the money supply. Much of the expansion was absorbed by real increases in capital. But most of it wasn’t.
>Why, then, haven’t prices increased? The reason is because, although money expansion results in higher prices for goods and services, rising prices from money expansion can be masked and offset by falling prices from falling demand for consumer and capital goods and services and excess inventory [6]; productivity increases and greater competition [7]; increased demand for U.S. money resulting from international currency crises [8]; expatriation; interest rate cuts and other factors.
>If the government continues to fund its activities and meet its financial obligations through money creation, prices will overcome any deflationary pressures and rise precipitously. People will begin to see and feel the steady fall in purchasing power. They will rush to exchange money for material goods, causing prices to skyrocket.
>At some point people will refuse U.S. currency as payment for goods and services. At that point, the dollar, like every fiat currency to come before it, will be worthless. [9]
>The government may attempt to take over industry and seize wealth from businesses and individuals, and make it illegal to leave the country. [10] But it will only succeed in such measures if individuals do not have a way to defend themselves against such encroachments.
>More likely, since America is still an armed nation, the government will accept a more limited role. It will either offer gold or silver currency, or money backed by gold and silver, or leave currency functions to the private sector. In an age when assets can be transferred electronically, a single unit of exchange may no longer be necessary. Gold and silver may be just two of many tradable commodities.
>Individuals can prepare for a collapse by keeping as little wealth in U.S. currency as necessary, and transferring all wealth to material possessions and gold and silver gradually as events dictate.
>Most importantly, individuals must attain firearms. As the collapse draws near, efforts to unarm the U.S. population will grow more strident. The federal government may share Adolf Hitler’s insight that “the most foolish mistake [rulers] can make is to allow subjected people to carry arms. History shows that all conquerors who have allowed their subjected people to carry arms have prepared their own fall.”
>Whether the mixed economy in place today is replaced with a free-market economy or a fully controlled economy may depend upon the degree of resistance. The degree of violence will depend on how many people are able to defend their freedom and property.
>Charles Stampul has written pieces for The Detroit News editorial page, Ideas on Liberty and other publications. He is now at work on a novel called"Progress." Contact him at onprinciple@swissinfo.org
>
>Notes
>1. The budget surpluses forecasted during the 1990s were based on projections for the growth of the period to continue, and left future Social Security claims out of the equation. In reality, therefore, none of the national debt was eliminated. Return
>2. Those who receive the new money (public and private sector loan recipients) bid up the cost of goods and services. Return
>3. This presents a problem for those who don’t plan on working until the day they die. People want to save and invest money for retirement, but they won’t be able to buy as much with the money tomorrow as they would today. When people stop saving, the capital - which, through investment, fosters new technology and makes the economy grow - diminishes. Return
>4. When foreign investors were unable to redeem U.S. dollars for gold and silver as a result of the 1971 repeal of the gold standard, they settled for U.S. real estate and commodities such as oil. This new demand for some goods, along with an increased supply of money, caused prices to rise. Return
>5. Expanding markets in the 1980s and ’90s, aided by credit expansion, created more real estate and businesses for individuals to invest in, essentially increasing competition and slowing the rate of price growth. Return
>6. Excess inventory and falling demand lower prices but stifle wage growth and increase unemployment. Return
>7. Productivity increases and greater competition both lower prices and boost wages and therefore raise the standard of living, allowing the government to debase the currency with some impunity. Return
>8. When a foreign currency collapses, people will put their wealth in U.S. dollars. This increases the demand and lowers the supply of dollars, without affecting demand for goods and services. Greater demand and lower supply increases the dollar’s value. But since dollars must trade at face value, the increase takes the form of lower prices: Less circulating money means lower demand for goods and services and lower prices. Return
>9. It is not inevitable that a currency not redeemable in gold or silver will collapse. But if government-minted money is backed by gold or silver, the government cannot put itself in debt and take itself out of debt by printing more money. The currency, therefore, would retain its value. Return
>10. Hyperinflation in Russia and Germany after World War I prepared the ground for Communism in one country and Nazism in the other. One hundred percent yearly inflation in Brazil in 1954 brought military government. Return