The fiat dollar and the de-industrialization of America
I highly encourage you to read the latest interview with Hugo Salinas Price. Mr Price is a retired billionaire who made his fortune via a chain of appliance stores in Mexico. He is also a tireless advocate of sound money. His plan to reintroduce silver as a competing currency in Mexico would make it the most sought after money in the world bar none. It is well worth your time to understand the details of how he proposes to do this.
But what I really want to draw attention to is a point that Mr. Price frequently makes that you very rarely hear anywhere else – the fact that the limitless trade imbalances of the US and its subsequent de-industrialization and loss of quality jobs can be laid at the doorstep of the fiat dollar. Consider his point:
“I see no fundamental reason why silver cannot support international trade; it did at one time, and can do it again: it is a question of a natural rise in the price of silver to reflect the tremendous depreciation of paper currencies that has taken place through the years. But we must remember that international trade has to be self-liquidating: exports are collected in the form of imports, and imports are paid for with exports.
No amount of silver (or gold) would be sufficient to allow chronically UNBALANCED trade. So this brings with it, the revival of JOBS. Jobs growth has become so scarce in the West because all that the East exports can be paid with dollars or euros, whose supply is inexhaustible. Eastern exports have removed millions upon millions of Western jobs and hundreds of industries, because those incoming goods can be paid with unlimited amounts of fiat paper money. I cannot see how any Western industrial economy can survive in the long-term, under the paper money system. Europe is gravely affected by the loss of industries and jobs, and only a return to gold can bring them back.
Jobs will NOT return until TRADE IS BALANCED and trade will not be balanced until silver and/or gold is made the international means of payment – paper unacceptable.”
This is perhaps difficult to intuitively understand without some explanation. First consider a global trade system that works entirely on a barter system. Imports must equal exports. No country will give away its valuable goods without an equal value of goods in return – nor would any individual in a barter economy. This is easy to understand. Now let’s introduce money in the form of gold. Gold has value all over the world as a recognized store of value and as such a country would be willing to trade its goods all or in part for gold.
Since gold is sound money, meaning that new gold cannot be summoned into existence by a central banker, a trade imbalance offset by gold can only be a temporary condition. If a particular good, say an automobile, is cheaper to buy as an import than domestically produced, then many consumers will pursue this option resulting in a net outflow of gold from the country.
A decrease in a country’s gold supply is deflation by definition. The result is an increase in its value, most commonly observed as a general drop in prices. At some point this drop in prices will make the domestically produced automobiles more attractive to those in other countries, and they will begin to import more of them, thus reversing the trade imbalance along with the net flow of gold.
Gold as money in the settlement of international trade has a natural balancing effect. A fiat dollar produced by the Federal Reserve has no such property. Since dollars can be produced in unlimited quantities, trade imbalances can be maintained for as long as these dollars are accepted. Unfortunately, the net flow of manufacturing and good jobs from the West to the East can also be maintained for just as long. The Federal Government likes this arrangement as many of these dollars flooding the world have no where else to go but to come back the US to fund additional government debt.
In 1971, when the US government defaulted on its obligation to redeem dollars for gold with its trading partners, it set our fate into stone: A near endless de-industrialization, a loss of quality jobs, a massive rise in the size and power of government, bankruptcy, and ultimately the destruction of the dollar as the world’s reserve currency.