A Hard Choice: Inflation Kills the Dollar; Deflation Kills the Government

[Photo caption/credits: Inflation or Deflation? (courtesy Google Images)]

“timmy” is one of this blog’s regular readers.  He recently posted the following comment on one of my previous blog entries:

“I’ve been hearing about the demise of the dollar for twenty years, as it continues to hit cyclical highs, with no end in immediate sight…. long term, sure, it must die. But not in the next year or three. There is no viable alternative– yet. Is gold saying inflation, as it continues multi-year declines…?? Wake up folks.”

I agree that the fiat dollar and the US economy have been amazingly resilient.  They’ve both defied fundamentals and reality for at least forty years.   In the 1990s, I was convinced that the whole system would collapse before A.D. 2000.  I was wrong.  Goes to show what I know.

Today, I look at the economic and monetary systems’ resilience with a sense of awe and resignation and ask, “Who is like unto the beast?”

But, beast or no beast, I remain convinced that the dollar’s goin’ down.  My prediction’s timing may be unreliable, but my notion of fundamentals still strike me as valid

•  My conviction that the dollar is destined to die is based on two premises;

1) Virtually every fiat currency dies within 40 to 70 years (statistically, the dollar is about due to die);

2) Since A.D. 1971, the fiat dollar has lost over 95% of its purchasing power.  The trend is obvious and undeniable.  If the trend continues and the dollar loses the remaining 5% of purchasing power, the dollar dies.

The fiat dollar’s long-term loss of purchasing power has seemed both inevitable and destined to destroy the dollar until after the price of gold peaked at $1900 in A.D. 2011 and then began falling back to current levels of $1,146.

Over the past four years, the dollar has revived.  The dollar “stepped back” from an inflationary oblivion and began to regain some of its former purchasing power.

But was that revival due to natural forces of supply and demand in the free market?  Or was the dollar’s recent revival caused by government and central bank manipulation of the prices of precious metals, commodities, stocks, bonds and interest rates?   Is the dollar stronger in itself, or stronger due to the “life support” provided by the federal government and Federal Reserve?

“timmy” asked, “Is gold saying inflation”?

I’m asking, “Is gold saying ‘deflation’—or is it saying ‘manipulation’?

If gold is saying “manipulation,” how much longer can the manipulation be sustained?  If the manipulation dies, can the dollar continue to survive or will it die, too?

 

•  The dollar’s been dying (losing purchasing power) for at least 44 years. It’s had a revival in the past 4 years, but that revival is artificial and a form or life support to prevent it from dying from the loss of its last 3 to 5% in former purchasing power.  Eventually, the “plug” must be pulled.  When it is, the dollar dies.

It could happen before the end of this year, but (as “timmy” says) it also might not happen for the next three years or so.  In either case, virtually everyone reading this comment will live long enough to see the fiat dollar’s demise.

And when that demise is officially announced, virtually everyone in the world will be shocked.    There’ll be no warning that the dollar will be terminated in six months or even six days.  The dollar will be here today, and gone tomorrow.   That “tomorrow” could be three years from now.  But it could also be three weeks from now.

If government is planning to announce the dollar’s demise, it will be one of the world’s best-kept secrets until it actually happens.  No one could know the date in advance, except a handful of the government’s most powerful men and women.

 

•  Government’s problem is that, while the dollar has gained purchasing power over the past four years, the resulting deflation has made everyone’s debts “bigger” since they must be repaid with “more expensive” dollars. The US gov-co is the biggest debtor in the world.  It admits to owing $18 trillion, but credible sources estimate that the national debt (including unfunded liabilities) is over $200 trillion.  In either case, the debt is too great to ever be repaid in full.

I see no way for the government to admit that it can’t pay the existing debts without also admitting that it’s bankrupt.  How long can the government refuse to admit that it’s already bankrupt?

The government’s national debt problem is aggravated by deflation.  As the dollar deflates and grows in terms of purchasing power, debtors (like the US gov-co) find it increasingly difficult to repay existing debts and increasingly difficult to borrow more currency.  If deflation is sufficiently persistent or large, debtors will be forced to admit they can’t pay their debts and file for bankruptcy.

If government wants to avoid admitting that it’s bankrupt, government can’t allow deflation to persist for long.

 

•  On the other hand, if government wants to sustain the illusion of repaying the national debt, it needs inflation to reduce the purchasing power of each dollar and makes it easier to “repay” existing debt with “cheaper” dollars.

Government’s problem is that it’s already used inflation to destroy 95% (or more) of the fiat dollar’s former purchasing power.  If government reinstates significant inflation, how long before the dollar will have lost 99.99% of its former purchasing power?  What happens when the world sees that the dollar is nearly worthless and becoming even more worthless, every day?

 

•  Government is facing a dilemma. It’s caught between the rock and the hard place.

The Rock:  If the government uses inflation to reduce the national debt, the dollar will lose the last 3 to 5% of its former purchasing power and presumably die.

The Hard Place:  If the government continues to cause deflation to strengthen the dollar and prevent its death as “world reserve currency,” the national debt will grow correspondingly larger and unpayable.  Eventually, deflation will force government to admit that it’s technically insolvent and legally bankrupt.

That dilemma appears to illustrate our immediate economic fate.  Government must either:

1) Inflate the dollar to make the national debt “manageable”—but if it does, the dollar dies; or,

2) Deflate the dollar enough to preserve its purchasing power and status as world reserve currency—but thereby push government, itself, towards having to admit it’s bankrupt.  I can’t see how the government could survive if it were forced to admit that it couldn’t pay the existing national debt.  A government admission that it’s bankrupt is an act of governmental suicide.

 

•  So what’ll it be, folks?

A deflating dollar and government bankruptcy?

Written by Alfred Adask
Full report at Adask’s Law

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