Friday, August 29th, 2014 MST

The fiat dollar and the de-industrialization of America

Fiat DollarI 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.

4 Responses to “The fiat dollar and the de-industrialization of America”

  1. Stan

    Mr. Price has clearly stated the problems with fiat money, printed at will by the Federal Reserve, to not only lose jobs, but to devalue the dollar so that our bank accounts become worthless, where bad money follows the good. If we established the gold standard, or silver standard our balance of payments would benefit since the dollars flowing out would decrease, and our goods that we sell abroad would increase. The fear that gold would diminish is unfounded since the price of gold would be free to maintain its high value with the market. The dollar would eventually improve in value to balance the need for gold. Rather than fix the value of gold, let it freely vary with the market. The demand for gold would eventually be balanced by the rise in value of the dollar, thereby countries would not be hording gold as much.

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  2. Greg White

    I am a US citizen, but a resident of Querétaro, Mexico, since 1995, now retired. I’ve seen your article and previous articles about Hugo Salinas Price, and I confess I’m a little disappointed in the difference between (1) what he says is possible and (2) what he is actually doing, at least for trying to get some movement into silver at the local level.

    Yes, Sr. Salinas Price made his money with the Electra (appliance) stores throughout Mexico, and like the store less than a mile from where I live, many of the Electra stores have “banks” (or finance companies) right in the store. On several occasions I have gone to those banks to try to buy an ounce or two of silver, but they have never had any silver on hand. If they could order it, the cost would be more than that of a local coin shop.

    In a previous article several years ago, Mr. Salinas said he was working on a system within his stores/banks that would allow clients to deposit and hold (silver) money in the banks, but nothing has ever come of that either. Of course, I applaud the idea, and I am very optimistic that a change toward silver is inevitable. The problem is that change is not occurring quickly enough!

    I taught English composition at a university here in Querétaro for over 15 years, and many years ago, one of my students wrote this essay, “Why Mexico Should Adopt a Silver Monetary Standard.” The essay was not long after the major devaluation of ’95, and I recall a lot of discussion among my students about it.

    Thanks a lot for your newsletters.

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  3. Steve

    The problem now is that no politicians are willing and/or able to make any major changes, or even minor changes, because there’s always somebody who will be against it. Once someone attacks the change, the politicians back down for fear that it might affect their fund-raising or re-election chances. Thus, nothing major will change until some catastrophe makes change inevitable.

    Plus, most Americans are much more concerned about American Idol and ridiculous reality shows than they are about the dollar and its reserve currency status. In fact, I would venture to guess that 90% of Americans don’t even know that the dollar is the World’s reserve currency, or what that even means. Maybe they will learn what that means when the dollar loses that status. Scary.

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