Say goodbye to the dollar

07/25/2013

Outside there are birds chirping, trees whispering, kids laughing and people walking and driving—pretty much like normal. It looks like it did in the 1960’s, except now we have computers, iPhones and the national seashore. So what is it that provokes this Chicken Little to declare that the sky is about to fall?

In the 1960’s, money worked because the economy grew. People bought Treasury bonds, reasonably confident that the economy would grow at a rate roughly equal to the bonds’ coupon dividends. The growth allowed governments and corporations to spend and promise to repay their debt later. It greased the wheels of the economy and provided investment incentives for all industries. It provided jobs and a thriving middle class. 

In the 70’s we experienced our first encounter with peak oil, and as a result, our economy could have begun to decline. It didn’t, at least not to the degree one might have expected, because of a fundamental change: the dollar was taken off the gold standard and became a debt-backed “fiat” currency. 

Our monetary system, now dependent on perpetual exponential growth, will inevitably blow up in hyperinflation or bankruptcy. To avoid such a catastrophe, our military has enforced the status of the U.S. dollar as the world’s reserve currency. We have expanded our empire, forcing other countries to sell us their natural resources in exchange for mere pieces of paper. Then we began experiencing runaway inflation.  

In order to appease investors and prevent monetary collapse, in 1982 the Federal Reserve raised interest rates to around 20 percent. Our economy took a hit, but the alternative, hyperinflation, would have destroyed it completely. The economy was able to weather the high interest rates because it wasn’t over-leveraged, as it is now. And the U.S. retained the world’s reserve currency, so it could run a perpetual trade deficit and continue growing with the help of other countries’ natural and labor resources.

Interest rates have steadily declined to virtually nothing since 1982. Today our hollowed-out economy increasingly depends on credit and consumerism. We still use our military to enforce the trade deficit in order to maintain G.D.P. growth at all costs. 

Now the world is facing peaks in oil extraction and production. We may have a couple more decades to exploit coal and gas, but they too will peak. The global economy can no longer grow, and “renewable” energy cannot replace fossil fuels in quantity and quality. 

Correspondingly, our monetary system is ceasing to function. As interest rates cannot sink any lower, and as government debt spirals out of control, we see that our financial system is beyond insolvent. Interest rates rising to 5 or 7 percent will surely destroy us; there is just too much astronomical debt. 

The only way we could return to a 7 percent interest rate would be if our monetary system were to collapse and we were to acquire a new one, flushing away all debt. In other words, we would all lose our savings, because on the other end of every dollar or bond saved is a debt that cannot be repaid. I know our grandchildren will be too smart to spend their lives working down our generation’s
excesses.

Without a doubt, our paper assets, which presume to represent real wealth, will become worthless. The economy cannot possibly grow enough to service all existing debt. The media’s daily talk about whether total global oil production or the stock markets are up or down—by miniscule amounts—is a huge distraction. We are near the end of the greatest Ponzi scheme in the history of the world. It’s impossible to predict exactly when it will crash, but there is little doubt that it will crash. 

We are also up against powerful forces that will do whatever it takes to preserve business as usual as long as possible. The banksters are pulling one rabbit after another out of their hats in efforts to delay the crisis. But they cannot violate the laws of physics and they are running out of rabbits. All they’re doing is further inflating the Ponzi scheme. This approach will surely serve to worsen the inevitable collapse, because with each passing year we are consuming and destroying more and more natural resources. 

To me, the silver lining could be that a global economic collapse might actually prevent a far worse ecological collapse. Environmental damage hurts all future generations and is already threatening species, including our own, everywhere. Isn’t it time that we all began planning for a new era of local living, with an economic system that values nature more than an obsolete currency?

 

Bernie Stephan, an Inverness resident, is the Radical Realtor at Eco Realty and co-host with Bing Gong of KWMR’s Post Carbon Radio.