The Dollar's Death Spiral

The ownership of physical gold was banned in 1933 by President Theodore Roosevelt. Eleven years later at the end of WWII allied powers were finally victorious in the creation of an international monetary treaty in Bretton Woods New Hampshire. In 1944, the Bretton Woods Agreement was born where it was agreed upon to use the dollar as if it were gold by backing the dollar with real gold at 10% using a pegged value of $35.00 per ounce. The U.S. dollar also became the world's reserve currency, allowing other central banks to hold and borrow dollars which backed their own local currencies.

The U.S. dollar then could be redeemed only by central banks and in effect was a scheme for various currencies to conceal fixed exchange rates among each other and gold. There was however one big problem to the price fixing of different assets. Assets need to be relative to each other, however when one of the assets becomes undervalued it is then horded while the overvalued asset is quickly discarded. Later it was discovered that when the US government fixed the price of gold for the Bretton Woods system at $35.00 per ounce, the price was too low. Thus central banks increasingly redeemed their dollars back for gold.

The problems with central bank redemption's became so severe, that in 1971 President Richard Nixon was forced to do something to stop it. So he closed the gold window by defaulting on the gold obligations of the U.S. Government. Becoming effective immediately, gold was completely out of the monetary system. Now and forever forward, plunging the world into the dollar system. Now the U.S. dollar was backed by nothing, thus turning the world's reserve currency into fiat currency. One of the after effects however, allowed for exchange rates for the various paper currencies to float against each other.

The after effect of the floating exchange rates created other problems, one being to steal people's money by siphoning off their savings. The word "floating" is deceitful, as there is no desire for, or system in place, for central banks to ratchet up the value of their respective currencies. A government system that involves a floating currency is also a system that is capable of either slow or fast currency debasement. So in effect we now have all governments "in a race to debase" by a single currency dropping in relation to others, or sometimes, other currencies falling in relation to it. This is extremely destructive.

Sadly currency devaluation also creates other after effects such as reduced investments and reduced growth. Savings are simply not possible when the instrument saved is in un-redeemable paper. Saving begins with the wage earner, who puts away a percentage of his or her earned wages while consuming less than he or she produces. Thus stockpiling its value until such a time the person is ready for retirement.

Along the way it can also be beneficial to loan out some of the savings through investing with the intent of increasing the quantity of money at the end. However loaning out some of the savings is not necessarily essential for this concept to work. The important point is that the value be carried over time. Gold and silver will achieve this, while fiat currency savings instruments will not. The encouraging value in hording gold and silver is that they attain positive values. Fiat currency only produces negative values through debt and debasement while in the end fiat currency will default to zero.

Personal savings using fiat money is distorted into speculation. Citizens are forced from one asset bubble to another. During investment bubbles it always ends up with the blind investor in the rearview, while those who managed to be at the front, end up receiving the wealth transfer that the asset bubble produced. In America, investors who purchased homes between 2004 and 2008 were caught up in the middle of the housing bubble.

Many of these investors have not yet recovered, while those investors saving dollars in bank accounts during the same time will not have lost as much value to date. However these "savers" are not out of the woods yet. Once the markets finally wake up to the fact that their cash deposits were in actuality, backed by mortgages on houses worth from 25 to 50 percent less than the real value of their mortgages, these savers will considerably lose more.

The absolute best way to protect your assets from the dollar's debasement without having to be an expert in markets, finance or investment is through ownership of physical gold and silver. Think of it as both a savings account and insurance policy for the future, with no counter-party risk. Your assets will be protected regardless of any economic uncertainty, including severe deflation or the destruction of paper money through hyperinflation.

Tom Genot -

at 7:50 PM
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