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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Rob R

Sep. 13, 2011, 1:16 p.m.

The Libertarian argument sounds great when there is no one to point out its flaws.

But why believe an idealogy that doesn’t understand fiat?  First, if you can print it out of thin air, how can it possibly be called “debt”.  If you were able to start a legal counterfeiting operation in your garage, and you started it up, would you call those new notes “obligations” or “debts” or would you simply call it “money”?  Wrap your head around that and try again with this “imminent default” nonsense.  The US isn’t printing debt, it is print money.  The Chinese aren’t buying our “debt” they are depositing their US dollars into a saving account via treasuries.

“....the point that the mountain of debt…. is fast reaching the point of collapsing…”  Really?  When is that point?  Answer - only when all that money is sloshing around in the system.  And since we are destroying money FAR faster than we are creating it via private sector debt deleveraging, we are light years from an inflationary “event”.  Look at Japan - they are still destroying money in the private sector, and creating is publically, so their so-called “debt” is through the roof.  But Gov “debt” isn’t debt, it is money that was created (and then destroyed in deleveraging).  The US also isn’t printing money fast enough to keep up with the private sector’s money destruction.  If we were, we would have much higher GDP.  Where is Japan’s GDP?  Why are they still deflating when their Gov is creating so much money (or debt as you so wrongly cal it)?

The imaginary “debt” needs to be called “money” because the libertarians can’t even formulate a coherent argument until they understand what is really happening.

Lastly - the inflationary event that they are worried about already happened - it was the nasdaq bubble and the RE bubble.  It is now deleveraging.  How on earth can we have hyperinflation in that environment?  Where is all of that “debt” or money created by the US and Japanese governements?  Do you have it?  Are wel all stting on piles of cash?  65% of the US doesn’t even have $1,000 in savings.  The money is gone, and the so-called “debt” of the US Gov is merely a bunch of past numbers owed to no one other then themselves.  Default on that if you like - and start again.  Warren Buffet and everyone else holding fiat will still be rich.  And if you don’t believe me, please send me all of your worthless fiat - I’ll give you my house, my gold, my car - whatever you want - your stuff is worthless, right?  So give it all to me.

Donal PHILBY

Sep. 13, 2011, 12:49 p.m.

Again, another discussion about the symptoms and not the problem.  Lots of money has been created that represents no productive result and the money is stored in a few pockets of the already obscenely wealth, not circulating in a way that serves the economy in general.  Assets and wages go down, assisting the wealthy to scoop up assets.  Once the efficient transfer of assets slows down, money will be dribbled into the economy and it will begin to run again, more slowly, but enough that the game can begin again.

Colin Martin

Sep. 13, 2011, 12:04 p.m.

I think this article misses one very important aspect of the USD demise, and that is Nixon tied the USD to oil via OPEC, and the US has fought (Iraq?) to ensure oil is sold in USD.  This is no longer the case, with Iran, and Venezuela selling oil in other currencies, and with oil producers being courted by China.  In addition, the Chinese have been pushing for a new independant global reserve currency (what Keynes wanted and referred to as the BANCOR during Bretton-Woods discussions) based on the SDR and a commodities basket.  The only thing that is keeping the USD afloat at this point is liquidity, global commerce needs a currency that is plentiful.  That said, the BRIC nations have moved away from the USD, China is reducing is USD holdings along with many others, so how long have we got left?  When will the USD based vendor financing for our imports stop? When will they want payment in their own currency or gold or another commodity (grain)?

RICHARD LOWE

Sep. 13, 2011, 11:41 a.m.

So you have traveled the world as I have, run your own business as I have, raised children as I have, invested successfully as I have, done a little bit of good for this world as I have, and know a lot of smart people as I do.

What are the solutions to our world problems? All I ever see you discussing are the problems. To me one of the major problems is the greed associated with unfettered socialism! We all pull our pants on the same way and what makes one person so much better that they can pay themselves millions per year while figuring out how they can stop paying employees millions per year?

I just returned from my garden pulling out the weeds for fall clean up and was overwhelmed at their success in comparison to what I planted and want ed to grow. I found this to be an comparison to our world.

What do people of the world need and how can all of us in unison allow them to achieve what they need without being GREEDY! Why should the woman who was fired from Yahoo after 3 years be paid $10 million dollars? The board is robbing the shareholders and the do not even care. In fact I would say that almost every major corporation in this country is robbing the shareholders!!!

We need to handcuff the corporations and spread the wealth allowing everyone to work and ear a living wage. Not give it away make every living soul who is capable earn it.

This is what you should be writing about! Come up with answers to our world crisis. It certainly;y is not religion as so many portray!

scott mcferran

Sep. 13, 2011, 11:09 a.m.

As I understand it, whatever money I possess is an asset to me only because it is a liability to someone else. Money is created by debt. Destroy debt, destroy money. Create debt, create money. If we paid off the national debt money would cease to exist, except for whatever currency is in circulation (printed bank notes/minted coins). The national debt was never meant, nor intended to be, paid off. The national debt represents our money supply. It has increased recently in the last few years to replace the money destroyed by the credit crisis. I’m not saying I agree with these concepts. In fact quite the opposite. It just is what it is (for now). What I’ve just described is just the tip of the iceberg in terms of understanding. As I said at the start, this is just my understanding. I may be wrong, but I don’t think I am entirely wrong. I may be oversimplifying, but only to make my point clear. When the term “fiat currency” is mentioned as a problem, it should be considered along side “fractional reserve banking” or you only have half the story. These things are indeed worth studying.

Craig Cheatum

Sep. 13, 2011, 9:41 a.m.

It looks like we have been funding (with borrowed money) the economic development of other countries through our so-called free market economic policies.  The foreign debt vs export divergence could probably be explained by our trade deficit and borrowed money to invade other countries.  The primary beneficiaries of our trade deficit policies appear to be China (cheaper products) and the Middle East (reliance on foreign oil).  Both of these can be reversed.  We can strengthen our free trade agreements to reflect fair trade.  There is potential to reduce our dependence on foreign oil by 100%.  Only a very small part can be covered by domestic production since the US has only 2-3% of world reserves.  Alternative energy research (original and practicle) should be emphasized.  One promising development might be the Celanese process to make ethanol from coal.  Another might be the roll-out of LNG stations (since we have abundant coal).  Flying J and Clean Energy are installing 150 stops along the interstates over the next year or so to service big rigs.  To stimulate action the ideas for Mauldin in the Endgame might work—where fuel taxes are raised 30 cents per year (at a rate of 2.5 cents per month) until we no longer import foreign oil. 

We have 144 military bases in 70 countries that are supposed to protect and guarantee our economic and foreign policy interests.  It doesn’t seem to be very effective, since we spend half of our federal revenues (under current conditions) and just seem to be digging a deeper hole by spending more borrowed money and exports continue to lag potential.

Somebody said we can’t borrow our way to prosperity and we can’t borrow our way to security.

Craig Cheatum

christopher conway

Sep. 13, 2011, 8:28 a.m.

What name do you give to elected officials who consider their careers and political parties more important than the well-being of the electorate?

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