Outside the Box

Is the US Monetary System on the Verge of Collapse?

John Mauldin

September 12, 2011

This week we take in a piece that is somewhat outside my own box. There are a number of people who feel strongly that the US (and world governments in general) cannot pull out of the downward spiral they are in, that monetary policy is fixed on printing ever more money, and that the problems of fiat currencies are now coming to the fore.

I was interviewed last week by David Galland and Doug Casey of Casey Research. Those of you familiar with them know they (and especially Doug) have a strong libertarian bent and a distrust of government. Not all that unusual, of course, except that they work at finding ways to invest based on their philosophy. That has meant a lot of gold and natural resources, plus new tech, which has worked at rather well overall.

In the interview, I was the “optimist.” By that I mean I was the guy who thinks the US government will do what is necessary to bring down the deficit beginning in 2013. David pointedly asked, “So you mean your ‘optimism’ is based on your faith that the US political leaders will do the right thing?” And the blunt answer is, “Yes, because not doing it would be a disaster, and I think, based on conversations with some of them, that they actually get that.”

Which is the case I outlined in my book, Endgame. But if I am wrong and we do not deal with the deficit in a controlled manner, then all bets are off. Sadly, the guys at Casey would be right. So, today’s Outside the Box is an op-ed from David Galland.

If you like it you can click on the link at the end and, for the exorbitant price of your email address, you can see the entire webinar (and my part in it), or sign up now at http://www.americandebtcrisis.com?ppref=JMD420ED0911A.

I think this week we’re going to be focused on Europe. I am getting ready for my trip there at the end of next week, so I am reading more about the situation there to prepare myself. But right now let’s focus on the US.

Your wondering where the time goes analyst,

John Mauldin, Editor
Outside the Box

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Is the US Monetary System on the Verge of Collapse?

By David Galland of Casey Research

Tune into CNBC or click onto any of the dozens of mainstream financial news sites, and you’ll find an endless array of opinions on the latest wiggle in equity, bond and commodities markets. As often as not, you'll find those opinions nestled side by side with authoritative analysis on the outlook for the economy, complete with the…

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David Anderson 26013

Nov. 12, 2011, 3:20 p.m.

If Clinton and Gingrich could give us years of balanced budgets and a serious effort to pay down federal debt, it can happen again. Significantly increase the velocity of money. Target specific areas for growth. While China is on an international shopping spree for productive farmland, the US of A is experiencing one of the worst droughts in modern times which severely limits the soil’s ability to recover.
  We have seen four debilitating floods in the upper Mississippi valley in less than twenty years.  Build an interstate irrigation system (piggy backed on the interstate highway system) to avoid the need to take private land, and, with a string-of-pearls system of reservoirs, provide a means of limiting flooding while improving our agricultural sector. Hybridize sugarcane for growing in cool climates (Brazil and sugarcane) because sugarcane is 40% sugar by weight but corn is only 5%( and the use of sugarcane does not cause food riots in third world countries, whereas building an ethanol industry with corn did).
  This economy has been brutal for under 30s. Scientists claim that we recognize approximately 3000 viruses, but estimate the existence of over 300,000 viruses. Develop a program that gives young people a basic training for entry level research labs and markedly increase the volume of raw data for PhD candidates to study. With three years of directed work, you would receive credit towards a certificate program.
  Give the wealthy more tax cuts and watch the velocity of money decrease as all that goes to more hedge funds. and not increased R and D. Invest in targeted training and basic research for the other 99% and watch the velocity of money accelerate.

Brian Ralph

Sep. 19, 2011, 4:54 p.m.

Gallard has missed the simplest control check on monetary value erosion through increasing money supply / “printing”: Inflation. Gallard sees rampant political spending by government. He ignores the concurrent public pressure imposed on government and central banking to control inflation. The simple mechanisms used to control inflation control money value erosion. But Gallard doesn’t want to see the whole world. Like too many, he comes out swinging with lots of data but reveals a strong bias against those who have made decisions and ignores the simple subtlety of much governance.

Gallard seems to believe there is an inherent value in gold. He seems to be believe that having something you can touch or hold is important to an economy. He lives in the past.

Like too many he has little faith in the value of faith and growth trends. The faith is that in a collective sense we continuously seek to prosper and grow_saving for that “rainy” day is not the dominant growth viewpoint/perspective. The foundations of rational expectations are ideas, personal and social values, work, ..._not fear and anxiety. Behind a modern economy is not a doomsday view of the world. The politics of the economy reflects the value of saving and investing. But we all must maintain the faith. We learn to navigate the rough passages to survive as well as use favorable winds and calm waters to our advantage.

Gallard should find some faith in that favorite US monetary expression: “In God We Trust”.

Jim Summers

Sep. 15, 2011, 6:18 p.m.

We are in a credit crisis, not a money crisis.  When there was a gold standard, a credit crisis caused economic collapse because there wasn’t enough gold to pay all the debt.  Debt had to shrink until people didn’t prefer gold any more.

It is not significantly different for fiat money systems.  Debt can shrink until people don’t prefer cash any more.  However, there is a second choice, because governments can create fiat money while they can’t create gold.  Inflation is an option for solving the credit crisis that is not available with gold; and it might be better than formal default.

Debasement of money or going off the gold standard is not the cause of crises; credit crises cause debasement of money and abandonment of gold standards.  Pretending otherwise just sets us up for the next credit crisis.

Bob Salsa

Sep. 15, 2011, 12:17 p.m.

Yawn, just another hysterical, deficit-dumb article based on complete ignorance of financing by a monetarily-sovereign nation like the US with a monopoly on issuing its own fiat currency. ALL historic cases of hyperinflation have had at least one of two conditions: either the central govt owed a significant amount of debt in foreign currency (see Weimer Republic, possible present day Greece) and/or the central govt lost the ability to tax its own economy’s production (usually accompanied by the central govt’s lost monopoly on sanctioned violence - see Zimbabwe). Neither if these conditions exist in the US and no credible forecaster has suggested that either will come about. Sure there is potential risk of harmful inflation from excessive govt spending, but there are tools available to manage those risks under a fiat currency - a reduction in expenditures is obvious but the major tool is tax increases that have the sole objective of destroying money supply and making the currency more dear (i.e bringing down prices). These tools are only necessary AT THE TIME inflation becomes a evident. A money issuer like the US does not “save” money now or for the future; through expenditure, it issues new money and through taxes it destroys money supply. When there is disinflation, if not the risk of deflation, and the economy is working well below its capacity with substantial unemployment and private sector deleveraging that is a critical time for the govt to inject monies through expenditure into the economy. When there is sustained generalize increases in prices, i.e. inflation, that is a time for the govt to cut back spending and/or increase taxes. Right now, people are paying the govt to hold their money for at least 10 years (i.e. REAL interest rates on 10-yr T-bills are negative), does that sound like the real concern right now or well into the future is inflation.  We are not on the gold or any other commodity-based standard, but our entire monetary policies and group-think still has us behaving as such.  If one really wants to â??get outside the box,â?  I would suggest readers look up Modern Monetary Theory and quite being mislead by these deficit-dumb articles that are keeping our great nation mired in, well, that bull stuff.

Matt Aizawa

Sep. 13, 2011, 10:33 p.m.

A Brief Timeline of US Monetary System Failures: That was interesting, but the writers fail to point out which items were failures and why. One could just as easily argue that all those events over the 100 year period brought about some of the best achievements in human history. And that makes their closing comment nothing but a leap of faith. Really? If the currencies are losing their value should not the cost of borrowing for the US and Germany be going up?  Why should the Japanese government’s borrowing cost be even lower?  Ah yes, the global capital markets are still ignorant…tomorrow the rates would sky rocket. Now how many hedge funds closed their doors on that one?

Gerald Ferguson

Sep. 13, 2011, 8:44 p.m.

Our WW2 debt was more as as % of GDP than now. Rest of world in bad shape, too. We came out OK. Even losers, Germany and Japan did well. Our Treasury sells bonds for dollars. Buys them back for dollars. Then some call it printing money, but it is all in the same dollars. Meanwhile we need more money printed to make up for what goes missing, for example, what we lose with a negative trade balance. If we don’t make up for missing dollars the economy shrinks, like with a balanced budget where the Government cannot have the extra money to fill what is lost. The rare times when our budget was balanced the economy shrank. Money is what the government will accept in paying taxes. Greece, Portugal, Ireland do not compare to USA, they have no control of the Euro. Where is the inflation from too much money?

John Seater

Sep. 13, 2011, 8:10 p.m.

This article is nonsense from beginning to end, confusing monetary policy, fiscal policy, and regulatory policy, along with misunderstanding major elements of those. I’m not about to spend time discussing everything wrong with the article. So consider just the first silly charge leveled against the government, that Nixon’s termination of convertibility led to increased spending financed by printing money. It most certainly did not. All you have to do is look at the history of money creation since then to see that seignorage has been a minuscule part of federal finance the whole time and did not change appreciably since before Nixon’s action.  There also is no necessary connection between the financial system and overborrowing by either the government or the public. The government’s debt and spending are *not* “mathematically impossible to solve.” Where did they dream up that one? Social Security, for example, can be fixed by changing indexing to cover only inflation and not include wage growth. Hardly impossible mathematically, though politically may be another story. Much federal spending can be cut or eliminated, though again there may be a serious political problem doing that. This article is a congeries of looney-tune foolishness that can’t even get several of the basic facts straight. Ignore it.

stephen nally

Sep. 13, 2011, 7:47 p.m.

Yawn…..
I guess people who have been under a rock for the last 40 years are unaware of the many inflationary and hyper inflationary episodes in that time including the USA in late 70’s. Everybody survived. It won’t be the end of the world. It won’t be monetary collapse. It will be inflation. Big deal. Drama queens.

Andreas Hartung

Sep. 13, 2011, 5 p.m.

very much along the lines of Detlev Schlichter’s forthcoming book “Paper Money Collapse”, or www.papermoneycollapse.com. All very compelling, yet noody knows how it will unfold….

Larry Brown

Sep. 13, 2011, 1:57 p.m.

God provided and answer to debt for His chosen people (the Israelites—the bloodline of Jesus Christ).  Every 50 years all debts were cancelled in the Jubilee.

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