Former congressman Ron Paul recently posted an interesting article on GoldSilverWords entitled, “Watch Out When People Start to Distrust our Money”. Paul offered several important insights, but, his central argument was that because the fiat dollar has no intrinsic value, whatever value it appears to have is based entirely on the people’s trust. So long as people continue to trust in the dollar, it will have value. If people lose that trust, the dollar’s value will diminish or even disappear.
According to Mr. Paul:
“Now we have that strange phenomenon of this unbelievable trust in the US Dollar. This could only happen because our country is (still) wealthy, but a lot of the wealth is superficial because it’s based on debt. So, the people are going to be really shocked when the hit finally comes because this system has existed for so long and longer than any paper currency before it.”
Mr. Paul’s reference to “unbelievable trust” in the US dollar implies that the world’s trust—though strong—is irrational.
Yes, the US appears to be wealthy—but that can’t be true since we’re the biggest debtor nation in the world.
More, how can an economy that treats debt (promises to pay) as a fundamental asset be regarded as anything other than irrational?
Yes, the current system of US fiat dollars has lasted longer than virtually any other previous fiat currency system. Some view that longevity as evidence that the fiat dollar is invincible. Other see it as evidence that the dollar’s end must be near.
“Right now there’s a lot of trust by foreign takers of our dollars, they keep taking them. And as long as they do that, we’re going to limp along and the bubble keeps getting bigger and bigger. . . . and the inevitable bust gets worse.
“Right now, they have no other place to go. They could go and beg Europe to print Euros, but they trust the dollar more. As long as they keep doing that, these insane policies will continue.”
Paul is right. No matter how irrational and groundless the world’s trust in the current fiat dollar may be, the fact remains that the world does trust the fiat dollar more than any other currency. Therefore, the intrinsically-worthless, fiat dollar not only has value but remains politically powerful—and the price of intrinsically-valuable gold remains vulnerable.
How much longer will the world continue to trust the dollar?
• Mr. Paul’s observations about the central relationship between trust and fiat currencies raise interesting implications.
For example, only a nation with a very strong economy, a very cohesive people, and a demonstrated capacity to be productive is likely to be trusted enough by both foreign countries and domestic citizens to have a fiat currency.
In the aftermath of WWII (when all other western nations were damaged or destroyed) what currency could the world trust other than the gold-backed dollar? Later, when the dollar became pure fiat, the reality remained that no other currency was as trusted as the fiat dollar.
But if a nation’s government is corrupt, economy falters and people are divided by unenforced immigration laws, people will increasingly distrust that nation’s ability to repay its debts with goods and services it may one day produce. Therefore, people will tend to demand real payments in gold and silver coin rather than fiat currency (IOUs).
Only a truly strong nation is likely to be able to create, impose and maintain a fiat currency. Weak nations can’t.
Insofar as this argument is valid, we could look back on American history and argue that our various attempts to impose a fiat currency reflected our growing national strength. Our fiat currency failures reflected our national weakness.
America’s one great success at issuing fiat currency (since A.D. 1971) has been based not only on American economic and military power, but also on the relative weakness and chaos seen in the rest of the world. So long as the world was relatively weak and we were relatively strong, our fiat dollars were trusted and relied on around the globe.
However, the great advantages to successfully issuing a fiat currency also require great obligations to respect and maintain that fiat currency. Inevitably, the hustlers, con-artists and self-promoters gain control of the fiat currency production system and start to cut deals and impose laws that are self-serving and irrational. These abuses tend to strengthen the government and/or special interests and thereby weaken the nation. The middle class starts to disappear. As the nation is increasingly weakened by too much debt and too few jobs, trust in the nation’s fiat currency begins to wane. When that trust is finally (or primarily) exhausted, the fiat currency fails.
• Given that the fiat dollar’s purchasing power has fallen about 97% in the just the past forty years, it’s obvious that trust in the dollar has also fallen—but not proportionally. In fact, as Mr. Paul indicated in his reference to people’s continuing “unbelievable trust” in the fiat dollar, once trust in a fiat currency is established, it’s difficult to dislodge.
For example, we’ve all seen images of people in A.D. 1921 Weimar Germany pushing wheelbarrows full of fiat currency to the grocery store to purchase a loaf of bread.
Q: Why didn’t the German people simply say “this is stupid” and stop taking or spending fiat currency?
A: Because they’d been conditioned to trust that currency and believe in that currency as if it were a religious faith. They were no more willing to give up their trust in fiat currency than Catholics are willing to give up their faith to become Protestants.
Look at Zimbabwe. Between A.D. 2008-2009, that country suffered an almost comical hyperinflation. Hyperinflation peaked at nearly 80 billion percent in November A.D. 2008. If you accepted a Zimbabwean fiat dollar at [12:00] noon, it was probably worth no more than a dime by [12:01]. And yet, the Zimbabwean people continued to trade in their hyper-inflated currency for most of another year.
Why? Because: 1) they’d come to trust that fiat currency; and 2) they had no other domestic currency to trust.
Zimbabwe has failed to create another domestic fiat currency. The Zimbabwean people no longer trust their government to produce another Zimbabwean fiat currency.
Solution? They use fiat US dollars—which are every bit as intrinsically-worthless as Zimbabwean fiat dollars. But, unlike the Zimbabwean fiat dollars, the US fiat dollar is still “unbelievably trusted”.
No matter how irrational that trust may be, so long as that trust remains, the fiat dollar will be a viable currency—in Zimbabwe and even in the US.
But, who long will that trust to remain?
The Love of Money
I’d bet that our trust in any fiat currency can continue almost indefinitely—unless there’s a default by the government or central bank that issues that fiat currency.
So long as the gov-co can continue to “spin” fiat currency “out of thin air” (or even out of a vacuum), and people maintain the illusion that they’re being paid when they receive fiat currency, they’ll merrily pay and receive the fiat currency. They might grumble that the wheelbarrows they need to haul their hyper-inflated currency to market are too small, but they’ll still trust their fiat currency.
Look at the United States. Our government has been technically bankrupt since at least A.D. 1971 when we stopped redeeming fiat dollars held by foreigners with gold. We haven’t actually “paid” any of our bills with gold or silver for over forty years. Instead, we’ve merely “discharged” our debts with worthless pieces of fiat currency.
Does anyone much care?
Does anyone even understand?
So long as the Federal Reserve can still spin trillions of fiat dollars into existence and the federal government can discharge its debts with intrinsically-worthless fiat dollars, the game goes on. Why? Because the people of the US and of the world continue to trust in fiat dollars more than they do in other currencies.
This “unbelievable trust” may be evidence of a Biblical warning: the love of money is the root of all evil. I.e., it’s not the money that causes evil. It’s the love of money that’s the “root” (or cause) of all evil.
When people cling to an intrinsically-worthless, fiat currency, is that devotion evidence of an “unbelievable trust”? Or an “unbelievable love”?
Even if our “affair” with fiat currency isn’t motivated by love and is only motivated by trust, we’re still caught in a relationship with a paper whore who’ll always deceive us, rob us, and lead us to personal, national or even global ruin.
And yet, we have “unbelievable trust” in that paper whore.
Written by: ALFRED ADASK – continue at ADASK’S LAW