What’s the deadliest factor for a currency? Is it inflation? Deflation? Stagflation – or maybe civil war or high unemployment?
None of the above – although all of those factors can certainly weigh in.
Because the real enemy of every paper currency – or even real money like gold or silver – is a lack of confidence.
If you don’t believe that the dollar will buy a dozen eggs tomorrow or next week, you’ll gladly exchange it for something – anything – that you perceive as having value.
When this lack of confidence happens, it usually happens en masse, all at once, very quickly. That’s because most people place irrational faith into currency systems for a long period of time. When that faith becomes shaken by some event, it’s typically not something that develops over time gradually – it’s quick.
When you change your mind about the soundness of your currency, you’re not likely to act slowly or with great care. You’re likely to dump that currency asap.
That currency becomes something you will only take as a last resort, and you’ll gladly rid yourself of as quickly as possible.
Now, it almost doesn’t matter what causes that lack of confidence. It could be inflation or deflation. It could be unemployment or war.
Like an ailing patient, it’s not bacteria or a virus that kills. It’s pneumonia. Lack of confidence is like water on the lung.
So that’s how the dollar will go. People will disregard it as a currency because they will lose all faith in its ability to be a good store of value. Anything can be a medium of exchange, of course, and even in its death throes, Weimar Austrians still used Marks. Zimbabweans still traded Zimbabwe dollars during their hyperinflation.
Notice I’m not saying “if.”
It’s not an if/when scenario. It’s a when scenario. The dollar will fail. No ifs about it.
And we’re on that path right now towards confidence destruction. All of the goofy, cute and ultimately futile efforts that central bankers use to “fix” the world’s debt problems actually only serve to undermine the faith people have in the dollar and the euro.
Confidence is easily destroyed. It’s tough to get it back. The only reason people have been fooled into being confident in the dollar is because the dollar was tied inextricably to gold for so long that people actually confused the two.
The period of the greatest ascendency in this country just happened to occur at the same time that the dollar and gold were practically one in the same.
Since 1971, when President Richard Nixon cut all ties between the dollar and gold, this country has done nothing but slowly spiral downwards in global standings. Innovation, employment, average pay, education, growth – it’s all gone downhill since Nixon severed the dollar free of gold.
What will be the main catalyst that will ultimately put the dollar on the fast track to complete destruction?
I don’t know. But past is prologue. If we want to make an educated guess about what might happen in the future, we have to look to the past.
In 1971, Richard Nixon gave a speech that effectively ended the dollar’s convertibility to gold. The speech is amazing if for no other reason that Nixon doesn’t mention the word gold once.
I expect a similar speech from an American leader to mark the middle of the end for the dollar. Here’s an excerpt from Nixon’s speech that actually sounds like it could come from President Barack Obama today…
“In the past 7 years, there has been an average of one international monetary crisis every year. Now who gains from these crises? Not the workingman; not the investor; not the real producers of wealth. The gainers are the international money speculators. Because they thrive on crises, they help to create them.
In recent weeks, the speculators have been waging an all-out war on the American dollar. The strength of a nation’s currency is based on the strength of that nation’s economy – and the American economy is by far the strongest in the world. Accordingly, I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators.”
So, our leadership will institute similar capital controls in an effort to “protect” us from evil speculators and enemies of the state. This act will at first appear to be a benevolent gesture to stop the baddies – but it will inevitably cause a total rebellion from the dollar as the true nature of capital controls become clear.
Anyway, that’s why I own physical gold…