Will The Dollar Standard Collapse? - The Diigo Meta page

• 25 Sep 09
  

  Bakari C

  economy politics

  • * Abandoning the gold standard in 1971 has resulted in large global trade imbalances and a massive buildup of foreign currency reserves
        * These trade imbalances and buildup of foreign reserves have resulted in frequent booms and busts since 1971
        * The Japanese bust of 1989, the Asian economic crisis of 1997, and the current US credit market collapse have resulted from the post-1971 paper money

    

    monetary system
        * Abandoning the gold standard has gradually resulted in a very overvalued US dollar, and that the dollar is headed for disaster
        *  “The dollar standard is inherently flawed and increasingly unstable. Its collapse will be the most important economic event of the 21st century.”
  • The problem is timing. Does the dollar collapse in 2009, or 2015? And is it a slow depreciation, or a sudden 50% fall? Those are tougher questions. Richard Duncan predicted the dollar’s demise in 2002. His error of timing discredited an otherwise brilliant book.
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  • • Duncan’s book discusses the implications of the large trade imbalances and buildup of foreign reserves that resulted from the new paper money system introduced in 1971. The book is lengthy and detailed and this email will not do it justice. But I’ll discuss some of my favorite topics from it.
      
    • Third, he discusses how the original Great Depression in the US was also the result of reserve buildups. During World War I, governments dropped the gold standard in order to print enough money to finance the wars. The result: huge trade imbalances resulted, leading to credit creation in the US. Specifically, the United States was the producing the goods that the Allies were using to fight the war. US gold reserves rose 64% from 1914 to 1917 as Europe exchanged its gold for American goods. The US also began accepting government debt from the Europeans.
    • Duncan has a fascinating chapter called “Global Recession: Why, When and How Hard”. When you pick up the book, turn to page 175. Written in 2002, the chapter is stunningly prophetic.
    • Then he writes: “the only option left to stimulate aggregate demand would be to drop paper money from helicopters. That too would fail, however, for who would accept paper dropped from helicopters in exchange for real goods and services? Hyperinflation would quickly set in. Economic transactions would then be conducted through barter rather than via the medium of a debased script. Eventually, a gold standard would re-emerge…
• 19 May 09
  

  Gary Edwards

  The Dollar Crisis
  
  Quick Synopsis:
  
      * Abandoning the gold standard in 1971 has resulted in large global trade imbalances and a massive buildup of foreign currency reserves
      * These trade imbalances and buildup of foreign reserves have resulted in frequent booms and busts since 1971
      * The Japanese bust of 1989, the Asian economic crisis of 1997, and the current US credit market collapse have resulted from the post-1971 paper money monetary system
      * Abandoning the gold standard has gradually resulted in a very overvalued US dollar, and that the dollar is headed for disaster
      *  “The dollar standard is inherently flawed and increasingly unstable. Its collapse will be the most important economic event of the 21st century.”

  financial-crisis obama-socialism inflation dollar-destruction

  • Before I begin, I’ll make a prediction, since I’m an investor and my job is to predict. I increasingly believe that the dollar will collapse, and its ramifications could be as violent as when the credit markets cracked in July 2007. Currency collapses are nothing new, just as the bursting of a credit market bubble was nothing new. A dollar collapse could very well lead to carnage in domestic asset markets, whether it be the stock market, bond market, etc. Also, US imports and the overvalued dollar are fueling many of the export-oriented economies abroad, so a dollar collapse could wreak havoc on foreign asset markets as well. And once it happens, we’re going to view the collapse of the dollar as an obvious event that we should have long seen coming. Just as we now view the subprime wreckage and bursting of the real estate bubble as an event we should have easily predicted.
    
    The problem is timing. Does the dollar collapse in 2009, or 2015? And is it a slow depreciation, or a sudden 50% fall? Those are tougher questions. Richard Duncan predicted the dollar’s demise in 2002. His error of timing discredited an otherwise brilliant book.
  • In a sentence, “The Dollar Crisis” is about how the world changed in 1971. That was when Richard Nixon dropped the gold standard (or its close cousin, the Bretton Woods international monetary system). Here’s the youtube video: Youtube Bretton Woods. The end of the gold standard ushered in a new era of large trade imbalances and the buildup of foreign currency reserves, and these trade imbalances and large foreign currency reserves have had significant impacts on the global economy that many people don’t realize. Huge trade imbalances and large foreign reserves didn’t really exist during the gold standard. During the gold standard, a country’s money supply was determined by the amount of gold it had. Banks’ reserves were either gold or indirectly tied to gold, and so the amount of money they could lend, and that the nation could print, was backed by the nation’s gold reserves. To see the implications of that sort of monetary system on trade imbalances, let’s take a hypothetical United States and China, where the US is buying lots of goods from China. The US gets goods; China gets dollars. China takes its excess dollars, gives them to the US, and gets gold in exchange. The US gold reserves would decline, causing credit contraction in the US. This would lead to recession; prices would adjust downwards; and falling prices would enhance the trade competitiveness of the US. The US would stop exporting so many goods from China as China’s costs of production begin rising relative to the United States’. The US would stop being a net importer; gold would flow back in; and equilibrium on the balance of payments would be re-established.
    
    Under the gold standard, trade imbalances were unsustainable and self-correcting.
    
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  • • Today, in the system of fiat money, that’s no longer the case.

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