How the debt and dollar crisis is unavoidable. Part 1.

 50 YEAR ROAD TO FINANCIAL CRISIS

NO LONGER ABLE TO POSTPONE OR MANAGE

The United States now has a national debt of $37 trillion and is growing by the day.  While many now believe this has been talked about forever and the system is still functioning, they assume it can be maintained forever. This crisis has been in the works for over 50 years and all the opportunities to seriously address it have been postponed or managed by covering up with financial gimmicks.

The debate between Keynesian economics and the Austrian school of economics was conducted in the early part of the 20th. century, with the Keynesians winning out in most of the western countries. The Austrians were firm believers that money was an asset and the best store of of wealth was gold and silver. That if the money was secure, market forces would be able to minimize distortions and excesses in the economy. 

The Keynesians believed that the economy could be controlled and stabilized by raising and lower interest rates. Raising rates in periods of overstimulation or speculation and lowering them when the economy stagnated. They also believed that debt accumulated by the government in stimulating the government through deficit spending would be paid off in times of prosperity. 

While all this occured before my time, I did witness the debate in the 1960's and 70's about the idea of engaging in a practice of perpetual deficit spending, targeting a 2% annual inflation rate. The sound money advocates vehemently opposed this idea and the advocates sold the idea that gold and silver backed currency was an antiquated idea and could not allow growth in a modern economy.  While there never was a vote by anybody or a definitive moment of this change in monetary policy, it did happen. 

The results of this debate was already going on in that in the early 60's, the price of silver began to exceed the face value of the currency or coins. Some, my brother was one, who had a lower middleclass income, began picking up bags of silver at the bank and either hoarding them or as more wealthy often did, had then melted and refined, with a profit in paper currency. This led to the elimination of silver by the treasury in 1964. While silver was no longer minted by the treasury, it was still legal to be owned.

This was reminiscent of the executive order by President Roosevelt in 1933 for citizens to turn over their gold coins, under penalty of law, in exchange for a paper $20 currency. One year later, in 1934, He revalued gold at $35.00 an oz., thereby devaluing those paper $20 notes by 60%. The poor and uninformed turned in their gold and were instantly made poorer, while the more sophisticated hid their gold. It was illegal for citizens to own or trade gold until 1974 when it was again allowed by law, under Gerald Ford.

The last balanced budget of the U.S. government was in 1969, much of this had to do with new social programs passed in the late 60's and the Vietnam war. The U.S. has not had a balanced budget for 56 years. 

While citizens were not allowed to own gold, the government still respected their promise that paper dollars could be exchanged for gold at $35 an oz. by foreign governments. Foreign governments soon saw what was happening and began to exchange paper for real gold. This was stopped by Nixon in 1971 when he temporarily closed the gold window, it has never reopened.  He then revalued gold to $42. an oz, another default,  and it remains officially price at $42. an oz. when the market price is now over $3300 an oz.. Question, did gold up in value, or did the currency become less valuable? These developments ended any real connection of paper money having any real backing. In effect, money became a debt instrument of government, rather than asset in your control.

At the end of WW2 the U.S. was the only unscathed developed economy in the world. Many nations had changes of governments, devalued currencies and many were destitute. The U.S. dollar, backed by gold, was considered, " as good as gold" It became the preeminent store of value all around the world. Again, all that began to change in 1969. 

At the end of WW2, the U.S. was the manufacturing giant in the world, It had a world were materials and machinery were needed to rebuild the world and the U.S. was in a position to satisfy that demand. Little competition and growing demand at home and around the world. The best situation possibly in U.S. history.

At the same time as the U.S. began the policy of permanent deficit spending, the world was recovering from WW2. Japan and Germany were growing and soon began offering manufactured goods that were very competitive around the world, including the U.S.  Imports of quality cars, motorcycles, electronics and appliances began to compete with U.S. products, both at home and around the world.

Part 2 tomorrow.