During the twentieth century, the U.S. survived the failure of three monetary exchange systems, each causing either war and/or economic calamity. For instance, World War I, the historic stock market crash of 1929 and the subsequent Great Depression, plus the massive inflation that followed the collapse of the Bretton Woods gold exchange system in 1971. The U.S. has operated on a fiat (paper money) monetary exchange system since the failure of the last gold system in the early 1970s.
However, the current monetary system, like its failed predecessors, is inherently flawed. The survival of the current fiat system is dependent on the cooperation of foreign nations, namely China and Japan, in lending the U.S. money in order to cover the nation's deficit spending. Without this aide, the monetary system is doomed to fail. In fact, during the mid-1990s, the system was on the verge of collapse when the U.S. and China joined together in a secret mutually symbiotic trade agreement. Since 1996, China and Japan provided the U.S. close to $1.8 trillion.
The new phony economy, commonly referred to as the "goldilocks" economy-'not too hot, not too cold, but just right'-was the result of a massive buying of dollars buy both China and Japan. There are three kinds of analysts in our nation: the clueless, those who profit from the current fiat system, and those who think our nation is benefiting from a free lunch. Too many of these free lunch thinkers revel in the thought, "Is it not wonderful? We buy Chinese and Japanese goods and we pay for them with our debt paper," despite the long-term consequences.
There are, however, short-term advantages that stem from the current U.S./China trade agreement. The massive buying of U.S. debt by the Chinese and Japanese allows U.S. interest rates to be held low. What's more, since these two nations provide almost half of everything we consume, it keeps inflation much lower than it would be otherwise.
Traditional price inflation is described as too many dollars chasing too few goods. Our non-binding relationship with China makes that type of inflation almost impossible due to the fact that, today, too many goods are chasing too few dollars. So, why have prices been soaring in certain sectors recently? And, why did gold achieve a new all-time high?
China does not send the U.S. homes, oil or commodities. It does, however, supply us with almost everything else. If U.S. price inflation was not kept in check, thus stimulating consumer spending, U.S. debt interest rates would be forced to rise to at least 7.5 to 8.0 percent. The scary part is that during a meeting of finance ministers in Germany earlier this year, China announced that it plans to diversify away from holding so many dollars. Meaning, they could sell our debt in the open market or use it to buy U.S. businesses or real estate.
A clue as to what dumping hundreds of billions of dollars worth of U.S. debt into the open market would mean to our economy and monetary system is best portrayed by the Federal Reserve's reaction to OPEC dumping $10.1 billion on the open market in 2005, thus causing the dollar to weaken. In order to prevent the dollar from weakening even further, the Federal Reserve raised U.S. interest rates so high that it brought on a serious correction in the housing and commodity markets. Our economy is now mired in the debris left over from that correction. This is tantamount to the debris left from the devastation caused by a hurricane, tornado, or even a tsunami in that the garbage must be towed away and the damage repaired before things can return to normal.
This is where the U.S. economy currently stands--clearing the debris left from the last correction. OPEC only sold $10.1 billion worth of our debt. Imagine what the selling of several hundred billions of dollars of debt would do to dollar value, not to mention, stocks, bonds and other investments. Unfortunately, our current economic quagmire came in the middle of the 2008 election year. Thus, nothing productive will be done until after the new president has been in office for several months. Meaning, until then, the fate of the American economy will be at the mercy of market forces. Put succinctly, the world is longing for a candid and trustworthy currency system; one that will not defraud the majority of the population. The success of the euro and the E.U. makes the prospect of a North American Currency Union a more promising alternative on an extremely short list of options.
It will also mean that little will be done about our failing monetary system. With everything considered, it will certainly be an extremely volatile and tumultuous time for investors. That is why it is important that you know that every cataclysmic stock market event in the past was the result of a monetary system collapse. Thus, only a fool would disregard the valuable lessons history provides. The U.S. has suffered through more than a hundred years of failed monetary systems and subsequent catastrophic market panics.
The current fiat monetary exchange system, the one that almost crashed in 1996, is spurious. The Chinese agreed to buy these phony dollars in exchange for dominion in U.S. domestic markets. Today, the Chinese government claims they are no longer able to continue this relationship that has lasted for the best part of 11 years.
How will the disbandment of the U.S./Chinese trade agreement affect your investments and the American standard of living? Moreover, what are the constitutional implications? Will the constitution have to be modified in order to adjust to these changes? Will the U.S. drop its borders and institute a North American currency union? Finally, what will the next market panic involve (will it be inflationary, a stock market crash, or a plunging dollar? All this and more will be discussed in the March 2007 newsletter. Coleman's radio show archives provide additional information regarding this subject and can be accessed at www.gemradio.net (search archives).
