Friday, September 26, 2008

The Worthless American Dollar: Part One

From the 29 September 2008 Greater Niagara Newspapers

THE WORTHLESS AMERICAN DOLLAR: PART ONE
By Bob Confer

“They get our oil and they give us a worthless piece of paper.”

Those words were spoken nearly one year ago – and have been repeated in various ways ever since – by Iranian president Mahmoud Ahmadinejad. He was taking a shot at the US dollar when he delivered those controversial words at the end of a rare meeting of OPEC’s heads-of-state. Most Americans considered this to be meaningless anti-American drivel and the ranting of a madman. After all, Ahmadinejad is the man who denied the existence of the Holocaust and counted Christianity and Judaism among the World’s evils.

He may be a little crazy at times, but, alas, he was spot-on with his assessment of the American dollar. It is basically worthless, and matters are only getting worse. The death knell was first rung in 1971 when most economies abandoned the concept of the gold standard and turned to fiat money. The move towards a paper currency with no tangible backing whatsoever was a huge gamble, one, that in the hands of a welfare state (which America has become), will never pay off. To satisfy its over-expenditures, America has produced and will continue to produce reams of paper money, saturating the market with the stuff and making all existing dollars worth less if not worthless.

By increasing the supply of money used in a market that possesses only a limited supply of the goods and resources it is supposed to purchase, governments create inflation. It ends up taking more dollars to buy what could once be had at comparatively lower prices. This creates a significant decrease in an individual’s purchasing power because the labor market cannot adjust wages to meet reckless inflation because even though it would theoretically take more dollars to buy a worker’s services it really doesn’t because both sides of the labor market (the workers and the employers) perceive there to be an endless and highly-competitive supply of labor in a global marketplace. So, the consumer - the worker – always ends up being the loser in the government’s push to create money out of thin air. That’s why we’ve all lost significant amounts of our discretionary income in the past twelve months; we’re spending many more of our dollars to get the suddenly-expensive foods and fuels that we need.

You know an economy based in fiat money is on hard times - just as ours is - when inflation begins to spiral out of control, exceeding what is believed to be a stable (“acceptable”) inflation rate of 2% to 3%. The current rate of annual inflation is 5.4%, a number quite large and frightening, but still underreported. The government does not include food or fuel in its calculations, so the real inflation that is experienced by the consumer is estimated by maverick economists to be in the 9% to 12% range.

The short-term growth in the rate of inflation has spiked considerably in calendar year 2008 because the federal government has produced unprecedented amounts of greenbacks. Here is every event for which money that our federal government did not have was produced by it to meet its own excesses:

The newest bailout package: $700 billion

Refinancing of failed mortgages: $300 billion

Batch of new money pumped into international markets: $274 billion

Loans to banks in the Fed’s Term Auction Facility: $200 billion

The purchase of Fannie Mae and Freddie Mac: $200 billion

The economic stimulus package: $158 billion

Financial assistance to JP Morgan Chase: $116 billion

Loan to AIG: $85 billion

Grants to local communities to buy foreclosed homes: $4 billion

In total, all that social and corporate welfare accounts for $2.037 trillion in fake money let loose since May. You can add to that another $410 billion, the estimated federal deficit for 2008, which does not include any of the above. That brings the amount of fiat money produced this year to a staggering $2.447 trillion, money that never existed prior to this year, money that will be in our system forever.

Because of that, one can assume that the 5.4% inflation reported by the government, as painful as it has been, will be a cake walk to what we’re going to experience in 2009 and 2010. It’s definitely not a stretch to say that government-calculated inflation will be in excess of 10% in those years, meaning what we’re really going to feel may be 20% to 25%.

It’s scary when a nutcase like Ahmadinejad makes perfect sense.

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