The Austrian Theory of Money and Credit explains the boom-bust cycle that plagues fiat monetary systems. When Nixon took the country off the gold standard in 1971, Austrian Theory predicted the outcome: the monetary crisis we are experiencing today. In short, the gold standard checks credit expansion. When Nixon decoupled the dollar from gold, he opened the door to unending and limitless credit expansion. Because the dollar functions as the world's reserve currency, and because so many other fiat currencies were inflated at a greater rate than the dollar, the value of the dollar has remained relatively strong, although it has lost purchasing power regularly since 1971.
However, the moment of truth is fast approaching. The Fed has flooded the world with dollars. The purchasing power of the dollar has fallen drastically relative to other currencies. Federal spending and debt have exacerbated the decline. Now the US finds itself between a rock and a hard place. The dollar funded welfare state cannot be sustained further. Dollar debt is not longer attractive to world buyers. In order to make dollar debt attractive, interest rates must rise. Rising interest rates are supressed by the Fed in the vain hope that further injection of new dollars will somehow "stimulate" consumer spending which is thought to be the driving force of prosperity. The federal government's deficit spending is out of control and, if interest rates were allowed to rise, the government's bankruptcy would be imminent. As it is, technical bankruptcy only awaits a false step from Washington spendthrifts.
These are dire times. The chickens are coming home to roost. Politicians are slowly but surely realizing that the jig is up. Yet, they don't know what to do.
There is not much they can do other than cut government spending and re-institute the gold standard, perhaps in concert with selling off government assets like land. Of course, this medicine is unpalatable both to politicians who either do not fully understand the gravity of the situation or are hopelessly wedded to the progressive socialist ideology, and to a large majority of the public which is addicted to government subsidies like junkies to heroin.
Chaos will soon descend upon the land. What will follow the ultimate financial reckoning is anybody's guess. The only certainty is that it will be ugly.
1 comment:
Recently we had a piece titled "Bernanke Has Us Between a Rock and a Hard Place" that pretty much takes the same line as you.
Simply, "The Fed will soon have to choose between persistent high inflation and worsening the budget deficit with higher interest payments."
Of course, Bernanke never ceases to amaze me. Today he responded to a Senators question about the Euro by saying that the present problems of Europe are mostly political.
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