Debasing the Dollar

As we all know, the dollar is a fiat currency.  It is unsupported by any commodity.  In fact, it has no intrinsic value beyond that of the paper itself.  It is only because the federal government can demand that taxes be paid with the fiat currency, and can compel citizens to accept that currency in payment of debts, that the fiat currency is able to have some apparent value.

The Federal Reserve, acting as a quasi-governmental central bank, is charged with the responsibility of keeping the dollar stable.  Because the dollar is a mere piece of paper, which can be printed in unlimited quanitites, its value is not stabilized by any natural scarcity (as in the case of gold, for example).  It is only by carefully policing and regulating the money supply that economies based upon fiat currencies have any chance of functioning (at least on a temporary basis).  It is absolutely essential, so long as we have a currency whose value is substantially make-believe, that the Fed discharge its responsibility with the integrity of the currency in mind, rather than whatever other political or economic exigencies it may confront.

It is equally important that the federal government protect the integrity of the dollar, by not incurring significant debt.  When the government borrows more money than it has, it signals that it may have to repay those debts by monetizing them–essentially by printing more money in the future and by inflating the currency.

Imprudent management of the money supply by the Federal Reserve, and imprudent borrowing by the federal government, can debase or destroy the value of the dollar, undermining the confidence that alone supports it.

So how are our central bankers and political leaders doing when it comes to discharging their responsibility to protect the dollar?

Abysmally.

Thanks to a series of ill-advised interest rate cuts that flooded the economy with cheap credit, and a profligate federal government that has amassed a debt of over $9 trillion, the dollar has fallen by 37 percent against the euro since January 2000, with nearly two-thirds of that decline occurring since January 2006. The dollar has fallen 31 percent against the Canadian dollar, and 17 percent against the British pound, over that same period.  It has plunged against the Australian dollar, the Brazilian real, and nearly every other currency on the planet.  Through manipulations of CPI methodology the government has been able to conceal true inflation, but as every citizen who pays for food, gasoline, health care or education expenses knows, inflation is rampant.  As if that weren’t enough, the Fed has artificially depressed interest rates, so that returns on savings are less than even the announced inflation rate.  Thus savers actually lose  money by saving.  In this way the Fed discourages saving, and incents borrowing, spending and speculation. (Which is a principal reason that the US has a negative savings rate and is overwhelmed with private and public debt).

As we all know, the price of oil has skyrocketed.  But as the chart below shows, the price is virtually unchanged over the last eight years, if measured in gold.  In other words, if we were paying for the oil with gold, rather than debased dollars, it wouldn’t cost any more today than it did in 2000.  And if we were paying in euros (something we may well have to do in the near future) the cost would be equivalent to about $86/barrel, compared to the $138 or so we’re paying now.

I’ll have a lot more to say about this in the future, but the upshot is that we must DEMAND that our government faithfully discharge its responsibilty to protect the value of our currency and that it stop robbing us of our savings and our incomes.  We must not permit politicians to ignore these crucial monetary issues.  And we must educate ourselves, and not remain content to delegate decision-making on these matters to a unelected secretive organization like the Federal Reserve.