The debt ceiling deal agreement [is only going to exacerbate America’s financial and economic woes and accelerate the demise of the U.S.] Dollar Standard which is inherently flawed and increasingly unstable. Its demise is imminent. The only question is will it be death by fire—hyperinflation—or death by ice—deflation? [Let me explain how the collapse of the dollar could well unfold.] Words: 944
Richard Duncan presents below excerpts* taken from his book, The Dollar Crisis, Chapter 20: Bernankeism, which was written in December 2004 to remind his readers what is coming down the pike that much more assuredly as a result of the recent debt ceiling agreement.He could have written a new article but there was absolutely no need to do so as the following excerpts from his book read as though they were just written yesterday! Duncan’s comments are presented below by Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), in a further edited ([ ]), abridged (…) and reformatted manner for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Duncan’s chosen excerpts are as follows:
It is almost certain that policymakers will respond to the approaching crisis by applying the two great economic policy tools of the last century: Keynesianism and Monetarism. The abuse of those tools will prolong and exacerbate the death throes of the Dollar Standard.
The first recourse will be to employ more fiscal stimulus. With prices falling and in light of the extraordinary amount of paper money that has been created in recent years, interest rates will be very low and there will be little difficulty in paying interest on a much larger amount of government debt. It would not be surprising to see the U.S. budget deficit surpass $1 trillion by 2007 or 2008 if the U.S. current account deficit has come down significantly by that time.
If, at that point, the U.S. current account deficit has been reduced, foreign central banks would not have a sufficient inflow of dollars to finance such a large deterioration in the U.S. budget deficit, even assuming that Fannie and Freddie have ceased issuing any new, competing, debt of their own.
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The Fed, however, as Governor Bernanke explained, has already put considerable thought into how to deal with such a contingency and stands ready, in Bernanke’s opinion, to support “a broad-based tax cut” through “a program of open-market purchases to alleviate any tendency for interest rates to rise”.
How long could such “cooperation between the monetary and fiscal authorities” underpin the global economy? For quite a number of years most probably. Economic trends play themselves out over very long periods of time. Moreover, US policymakers will use every last tool at their disposal to prevent, or, at least, delay a global depression. An economic system underpinned by large-scale fiscal stimulus financed by central bank monetization of government debt could hardly be described as capitalism (perhaps the term Bernankeism would be appropriate) but, with any luck, it could stave off disaster for a considerable length of time.
Nevertheless, despite the best efforts of policymakers to keep the Dollar Standard alive and to stave off the depression that would most probably follow its collapse, ultimately, one of the following scenarios is likely to overwhelm even Bernankeism.
- A protectionist backlash against free trade, resulting in a trade war similar to that which occurred during the Great Depression.
- A US asset price bubble (as interest rates fall toward zero), that drives property prices so high that they can’t be financed even at very low interest rates. This is similar to what occurred in Japan at the end of the 1980s.
- A meltdown of the $200 trillion derivatives market. $200 trillion is roughly six times global GDP.
- A loss of nerve by policy makers that deters them from undertaking ever more unorthodox economic policies, resulting in a “deer in the headlights” kind of policy freeze.
- A decline in interest rates to 0% or very near 0% as in Japan at present.
Any one of the first four scenarios could undermine the Dollar Standard, but the final scenario, where interest rates fall very near 0%, would certainly deal it a fatal blow. From that point, the only option left to stimulate aggregate demand would be to drop paper money from helicopters. That too would fail, however, for who would accept paper dropped from helicopters in exchange for real goods and services?
Hyperinflation would quickly set in. Economic transactions would then be conducted through barter rather than via the medium of a debased script.
A gold standard would eventually re-emerge.
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- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above