Is the American Economy in an Inflation Death Spiral?
Markets work in cycles, and so do reserve currencies. The average duration of the last five reserve currencies is 94 years. The U.S. Dollar has been the official reserve currency for 79 years since the Bretton Woods agreement in 1944. The life cycle of reserve currencies follows a recognizable pattern of a massive boom followed by a gigantic bust.
The producing nation enjoys incredible wealth when a new currency becomes the primary reserve currency. The law of supply and demand rapidly increases the value of the currency. Every government and all the central banks want large quantities of that currency for international trade. The demand for that currency goes parabolic. The increased demand gives a license to print to fulfill the demand. For decades, the country will enjoy incredible privilege and a disproportionate amount of the world’s wealth.
However, this is the beginning of the end for that currency. As soon as the government begins printing to the demand, the currency becomes devalued, and the inflation cycle begins. Inevitably, the government will print more than it should. For the U.S., this was already a significant problem within twenty years in the mid-1960s.
Several nations became increasingly frustrated with the U.S. printing too many Dollars. France protested vehemently against the U.S. devaluing the currency by printing many new Dollars. At the time, the U.S. operated a gold window. Dollars could be traded back into gold. France and several other countries began selling their U.S. Dollar reserves for gold at the gold window at an alarming rate.
The U.S. gold supply was insufficient to cover the U.S. debts. President Richard Nixon closed the gold window in 1971, defaulting on U.S. debts and transforming the Dollar into a fiat currency. When the gold standard ended, the U.S. supercharged the money printer's motor and, to quote Mel Brooks’ movie Spaceballs, went to ludicrous speed. The U.S. government printed so much that the Dollar has lost 86% of its purchasing power since 1971.
The Dollar is following the devaluation path of the last five reserve currencies. The U.S. operates at a deficit, which means it uses debt to finance itself. Before 2008, the Federal Reserve was the buyer of last resort. However, bad policy and broken promises led nations to stop buying U.S. debt at previous rates. The Fed, formerly the buyer of last resort, became the primary buyer of U.S. debt to infuse the system with $trillions.
Printing to finance is a disastrous path. It quickly raises the cost of living faster than wages can keep up. The chart shows the accumulative change in wage growth and inflation since 1980. The blue line is wages, and the red line is inflation. The interpretation of the graph is that almost every year, inflation was higher than wage increases meaning purchasing power. Therefore, the quality of life has been consistently declining.
With each passing year, people lose more and more purchasing power. As they lose purchasing power, paying the bills becomes increasingly tricky. Then like clockwork, the people losing purchasing power look to the government for social assistance. The economic struggles create a constantly growing voting block supporting bigger government and social program politicians. Politicians promise the sun, moon, and stars to stay in power and finance all the social programs with printing and more significant deficits.
As the years continue and deficits grow, more people feel the sting of inflation and look to the government for assistance. In 2022, 59 million Americans (17.7% of the population) received government assistance.
In 1980, the number was 10.3 million or 4.5% of the population. As the government spent more on social programs, more people applied for benefits every year. It is strange logic to think the way to combat inflation is by creating more of it, but that is what government does.
Year after year, inflation snowballs, and the cycle repeats as more people struggle to pay their bills. Eventually, you get a year like 2021. Covid brought the world economy to a standstill. The government's response was full-blown socialism sending stimulus checks to almost everyone.
The massive infusion of newly created money pushed inflation to 40-year highs and put a giant crater between wages and inflation, which will only speed up the cycle of people applying for government assistance and dependence on politicians with socialist dispositions. The Congressional Budget Office recognizes this because the yearly deficit is expected to increase continually, and the national debt will be nearly $50 trillion by 2032.
Despite the fantasies of the ivory tower left-wing economists, a government can't print its way out of debt. History shows that, eventually, the bill will come due, and something valuable will be needed to settle the debt. Since there won't be anything to pay the debt, the debt holder usually wants a pound of flesh instead. War breaks out. On the other side of the war, the currency loses its status as the reserve currency. See the graphic at the top of this article.
The world has seen this performance many times before. 100% of all fiat currencies had failed when the governments tried to print their way out of debt. Babylon, Greece, and Rome were once the greatest empires on earth but devalued their currencies. They were conquered or collapsed shortly after that. America grew into an incredible empire and has behaved economically like the prior empires now living in history books. What do they say about people not knowing the past?
Many nations are again protesting the U.S. currency abuses. China posted a manifesto last week on its website calling for the world to abandon the Dollar as the primary reserve currency. The UAE and India are actively building mechanisms to trade in their local currencies instead of the Dollar. Iran is fully integrated into the Russian banking system. The BRICS openly state their objective is to overthrow the Dollar's international hegemony. There are multiple examples beyond these of nations recognizing the Dollar’s precarious situation and jumping ship.
As nations move away from the Dollar for international transactions, the need to hold Dollars in reserve decreases. The only place on earth legally required to take Dollars is the U.S., so governments and central banks will either buy American assets like stocks or land near military bases like the Chinese have been doing. The Dollars enter back into the U.S. economy. When the cash is circulating in the U.S. instead of sitting in a foreign vault, it creates more inflationary pressure in the U.S. economy, and the cycle accelerates again. The money creates more disparity between wages and inflation. Inflation makes paying the bills harder. People look to the government for assistance. Politics move farther left. The government prints more money. The Dollar loses value. Nations holding Dollars find Dollars less attractive and look for alternatives for transactions. Dollars are sent back to the U.S.
The selloff of U.S Dollar reserves is happening quickly. In 2022, China sold $173.2 billion, or 16.64% of its U.S. Treasuries. Japan sold $224.5 billion or 17.2% of its Treasuries. Israel sold $21.3 billion, or 30.8%. Of the 37 largest foreign holders of Treasuries, 18 were net sellers in 2022. It usually takes around 12-18 months for economies to feel the effects of these sell-offs. Another wave of inflation is heading to American shores before the Presidential election in 2024. Even though another round of inflation means more people will need governmental assistance and lean politically toward candidates supporting more social assistance funding spiraling the value of the Dollar down further.
Suppose you were on the Titanic and knew ahead of time that the ship would hit an iceberg. Would you wait patiently for your icy death, gleefully listening to the band play to the bottom of the ocean? Or, would you gather your loved ones and as many people who would listen to get on a lifeboat before the crash?
The Dollar is the Titanic sailing across the global economy. It has already hit some small icebergs and is taking on water. Most people don't care about getting into a lifeboat and want to hear the band. There are many more enormous icebergs in the ship's path, and the damage from the first iceberg has damaged the steering mechanisms.
You don’t have to go down with the ship. The band is okay, but they’re not worth dying to hear. There is a golden lifeboat you can use to get your finances to safety. It's called precious metals.
You will need a lifeboat if you don't want to go down with the ship.
Call the U.S. Gold Bureau today.