A Hard Choice: Inflation Kills the Dollar; Deflation Kills the Government

Inflation or Deflation?
[courtesy Google Images]

“I’ve been hearing about the demise of the dollar for twenty years, as it continues to hit cyclical highs, with no end in immediate sight…. long term, sure, it must die. But not in the next year or three. There is no viable alternative– yet. Is gold saying inflation, as it continues multi-year declines…?? Wake up folks.”

I agree that the fiat dollar and the US economy have been amazingly resilient.  They’ve both defied fundamentals and reality for at least forty years.   In the 1990s, I was convinced that the whole system would collapse before A.D. 2000.  I was wrong.  Goes to show what I know.

Today, I look at the economic and monetary systems’ resilience with a sense of awe and resignation and ask, “Who is like unto the beast?”

But, beast or no beast, I remain convinced that the dollar’s goin’ down.  My prediction’s timing may be unreliable, but my notion of fundamentals still strike me as valid

•  My conviction that the dollar is destined to die is based on two premises;

1) Virtually every fiat currency dies within 40 to 70 years (statistically, the dollar is about due to die);

2) Since A.D. 1971, the fiat dollar has lost over 95% of its purchasing power.  The trend is obvious and undeniable.  If the trend continues and the dollar loses the remaining 5% of purchasing power, the dollar dies.

The fiat dollar’s long-term loss of purchasing power has seemed both inevitable and destined to destroy the dollar until after the price of gold peaked at $1900 in A.D. 2011 and then began falling back to current levels of $1,146.

Over the past four years, the dollar has revived.  The dollar “stepped back” from an inflationary oblivion and began to regain some of its former purchasing power.

But was that revival due to natural forces of supply and demand in the free market?  Or was the dollar’s recent revival caused by government and central bank manipulation of the prices of precious metals, commodities, stocks, bonds and interest rates?   Is the dollar stronger in itself, or stronger due to the “life support” provided by the federal government and Federal Reserve?

“timmy” asked, “Is gold saying inflation”?

I’m asking, “Is gold saying ‘deflation’—or is it saying ‘manipulation’?

If gold is saying “manipulation,” how much longer can the manipulation be sustained?  If the manipulation dies, can the dollar continue to survive or will it die, too?

•  The dollar’s been dying (losing purchasing power) for at least 44 years. It’s had a revival in the past 4 years, but that revival is artificial and a form or life support to prevent it from dying from the loss of its last 3 to 5% in former purchasing power.  Eventually, the “plug” must be pulled.  When it is, the dollar dies.

It could happen before the end of this year, but (as “timmy” says) it also might not happen for the next three years or so.  In either case, virtually everyone reading this comment will live long enough to see the fiat dollar’s demise.

And when that demise is officially announced, virtually everyone in the world will be shocked.   There’ll be no warning that the dollar will be terminated in six months or even six days.  The dollar will be here today, and gone tomorrow.   That “tomorrow” could be three years from now.  But it could also be three weeks from now.

If government is planning to announce the dollar’s demise, it will be one of the world’s best-kept secrets until it actually happens.  No one could know the date in advance, except a handful of the government’s most powerful men and women.

•  Government’s problem is that, while the dollar has gained purchasing power over the past four years, the resulting deflation has made everyone’s debts “bigger” since they must be repaid with “more expensive” dollars. The US gov-co is the biggest debtor in the world.  It admits to owing $18 trillion, but credible sources estimate that the national debt (including unfunded liabilities) is over $200 trillion.  In either case, the debt is too great to ever be repaid in full.

I see no way for the government to admit that it can’t pay the existing debts without also admitting that it’s bankrupt.  How long can the government refuse to admit that it’s already bankrupt?

The government’s national debt problem is aggravated by deflation.  As the dollar deflates and grows in terms of purchasing power, debtors (like the US gov-co) find it increasingly difficult to repay existing debts and increasingly difficult to borrow more currency.  If deflation is sufficiently persistent or large, debtors will be forced to admit they can’t pay their debts and file for bankruptcy.

If government wants to avoid admitting that it’s bankrupt, government can’t allow deflation to persist for long.

•  On the other hand, if government wants to sustain the illusion of repaying the national debt, it needs inflation to reduce the purchasing power of each dollar and makes it easier to “repay” existing debt with “cheaper” dollars.

Government’s problem is that it’s already used inflation to destroy 95% (or more) of the fiat dollar’s former purchasing power.  If government reinstates significant inflation, how long before the dollar will have lost 99.99% of its former purchasing power?  What happens when the world sees that the dollar is nearly worthless and becoming even more worthless, every day?

•  Government is facing a dilemma. It’s caught between the rock and the hard place.

The Rock:  If the government uses inflation to reduce the national debt, the dollar will lose the last 3 to 5% of its former purchasing power and presumably die.

The Hard Place:  If the government continues to cause deflation to strengthen the dollar and prevent its death as “world reserve currency,” the national debt will grow correspondingly larger and unpayable.  Eventually, deflation will force government to admit that it’s technically insolvent and legally bankrupt.

That dilemma appears to illustrate our immediate economic fate.  Government must either:

1) Inflate the dollar to make the national debt “manageable”—but if it does, the dollar dies; or,

2) Deflate the dollar enough to preserve its purchasing power and status as world reserve currency—but thereby push government, itself, towards having to admit it’s bankrupt.  I can’t see how the government could survive if it were forced to admit that it couldn’t pay the existing national debt.  A government admission that it’s bankrupt is an act of governmental suicide.

•  So what’ll it be, folks?

A deflating dollar and government bankruptcy?

Or an inflating dollar that allows us the illusion of repaying the national debt, but inevitably consumes the last 3 to 5% of the dollar’s purchasing power and thereby kills the dollar?

Government is darned if it does, and darned if it don’t.

Somethin’s gotta give.  Somethin’s gotta go.

Either the government expires in bankruptcy or the dollar expires in worthlessness.

In fact, if either scenario takes place, the other might soon follow.

Given this dilemma, you can see why the Federal Reserve continues to do nothing about interest rates.  If it does something, we’re screwed.  But, if it does nothing, we’re also screwed.

But the answer to this dilemma might be seen in the answer to a simple question:  Which does government value more—the survival of the fiat dollar or the survival of government, itself?

The answer to that question isn’t absolutely clear.  But, odds are, if the choice is between the dollar dying in inflation and government dying in bankruptcy, and if the government gets to make that choice, the government will opt for self-preservation and allow the dollar to die.

That conclusion implies that if the current episode of deflation can be controlled, it should be short-lived and inflation (if it can still be controlled) should soon after be restored.  This is not to say that the dollar will soon perish.  Sufficient inflation to finish off the fiat dollar might take one to three years.  Still, a sudden dollar demise is at least possible.

If the US government has to choose between its own survival and the dollar’s survival, it will choose to dump the dollar.

But whether a choice is made or simply stumbled into, it appears to me that we must have either inflation or deflation.  If we have deflation, the government must die in bankruptcy.  If we have inflation, the dollar must die.  As the Highlander might say, “In the end, there can be only one.”

The process of discovering which “one” will survive will be chaotic and frightening.  You’d do well to prepare for trouble because I don’t see any way to escape this dilemma without pain.

P.S.

•  On Thursday, September 24^th, Janet Yellen, Federal Reserve Chair, attempted to deliver an hour-long speech. She couldn’t quite complete the speech due to some sort of internal, medical problem that affected her ability to concentrate and complete her thoughts.

Some thought she might’ve suffered a minor stroke.  Others thought it was just a dizzy spell.  She was helped off the stage, saw a doctor and reportedly went on with her appointments for the rest of the day.  Whatever her problem was, it does not appear to have been serious.

I wonder if Mrs. Yellen’s problem was induced by stress.

•  The next day, on Friday, September 25^th, Congressman John Boehner surprised everyone by announcing his resignation from the both the office of Congressman and office of Speaker of the House of Representatives. His resignation will be effective by the end of October.

•  Congressman Boehner’s decision to resign seems every bit as surprising as Janet Yellen’s inability to finish her speech.

There’s at least a thin chance that both “surprises” were induced by stress.

So, I wonder—could it be that both events were triggered by the same stress?  Did we just see two of the most powerful, influential and knowledgeable people in the US government seeming to succumb to the same source of stress in two consecutive days?

Odds are, these two “surprises” were unrelated.  Their temporal proximity is almost certainly coincidental.

But, having a suspicious mind, I can’t help wondering if Boehner and Yellen both “know something big is about to happen”.  Could that “secret knowledge” induce so much stress that even pros like Boehner and Yellen would succumb?

Probably not.  Truly, the odds are that my suspicions are mistaken.

Still, I’ll be watching to see if any more particularly powerful men or women in government do something so surprising in the next month or two that they also seem motivated by enormous, but secret, stress.

P.S.P.S.

Boehner will go by the end of October.

Implication:  If Boehner really does know that “something big is about to happen” and he doesn’t want to be in Congress when it takes place, he presumably expects that “something big” to happen after his resignation becomes effective.

Maybe November, December—maybe first quarter of next year?