The Coming Collapse of the Dollar: A Headline to Sell Stuff for Dollars
If you read the words "the coming collapse of the dollar," stop reading. You are wasting your time. You will soon be asked to spend your collapsing dollars.
This headline is used to sell things to a cadre of readers that I like to refer to as the "Depends Brigade." These people delight in reading scary stories about hyperinflation. They never analyze what the likelihood of such a scenario is: remote.
They read these scary stories in order to get excited. This is a form of entertainment. It is not a call to meaningful action. There is a disconnect between what these people read and what they do with their money. The old rule is a good one: follow the money. Follow the trail of their dollars into various investment avenues.
HYPERINFLATION IN THE STATE OF ISRAEL, 1984-85
The hyperinflation scenario has only operated one time in the last 50 years in any industrial Western country above the equator: the state of Israel. In the mid-1980's, that small nation did go through something like hyperinflation. Prices more than tripled in 1985.
As you can see from the chart, this hyperinflation did not last long. It never does. There is either a currency reform or else people shift to another currency.
Things ran smoothly in 1985. I was there. I held a conference there for my Remnant Review subscribers in 1985. This was right in the middle of the hyperinflation. Everything ran smoothly. There was no sign of a crisis. It was easy to get around Jerusalem. Stores were open. There were plenty of people in the shopping malls.
Then the central bank stopped inflating. They always do.
MISSING DEFINITIONS
What I find is that in none of these articles on the looming collapse of the dollar is there any precise definition of what a collapse entails.
Does it entail a collapse of the dollar's international value? This has not happened in the history of the United States of America under the 1788 Constitution. There have been ups and downs of the dollar's international value, but these fluctuations have not been permanent. The dollar has always been a desirable currency for foreigners to own. This is because American productivity has provided much-wanted goods and investments that foreigners are willing to purchase with their currencies. But they cannot purchase these goods, services, and investments with their currencies. They must first buy dollars. They have to open bank accounts in the United States. So, there is a transfer of ownership of digital dollars in American banks from American holders of dollars to foreign holders of dollars.
Anyone who argues that there is going to be a collapse of the value of the dollar is inescapably, but only implicitly and silently, arguing that American productivity is going to disintegrate internationally. Nobody will want to buy American goods and services. Nobody will want to buy American investments. There will be a complete collapse of the domestic American economy in which America becomes the equivalent of a Third World nation. These people really believe that America is going to turn into Zimbabwe. These people are idiots. Got it? Blithering idiots. Don't listen to anybody who argues that the dollar is going to collapse in value internationally.
Major currencies do not rise or fall significantly in value. Their central banks will not allow it. The definition of being a major economic power is that people can buy a nation's goods and services and invest in its markets. Any country that does not meet these qualifications is not a significant economic player in the world economy.
Therefore, what people are saying who predict a collapse of the dollar is that the United States of America is going to become a third-world country. The United States of America has a massive industrial base, low tariffs, and an $19 trillion economy. Yet we are expected to believe that the USA is going to become Zimbabwe.
This is such utter nonsense that I find it difficult to believe that anybody in his right mind could believe a word of it. It is preposterous. America has a tremendous entrepreneurial environment. It is the most entrepreneurial nation in history. This will not change overnight. It will not change in two generations. It is incredibly easy to set up a company here. You can set up a corporation in 20 minutes online. In most cases, you can get a license to run the company inside the city limits, although there may be some hassles. But these are not major hassles. You can set up a bank account for your company. It can own property. It can hire people. As long as it pays quarterly taxes, the IRS leaves it alone. Taxes on corporations are low.
Somebody who says that there will be a dollar collapse is implicitly saying that all of this is going to change, and soon. Well, it is not going to change soon. Americans are not going to let it change. They like being able to start businesses. Millions of them believe in starting businesses. They believe in the American dream of the self-made man. Somebody who predicts that there is going to be a hyper-inflationary collapse of the dollar is saying that this defining ethos of American history is going to be overturned by the Federal Reserve System. Again, this is so preposterous that it is hard to believe that anybody in his right mind could believe it.
THE SELF-INTERESTED FEDERAL RESERVE
The Federal Reserve System is run by salaried bureaucrats. The FED has a 94% invested retirement program that is not invested heavily in U.S Treasury IOU's. You can see for yourself here what investment options are available to Federal Reserve employees. Of the six options, only one is filled with Treasury securities.
Here is an assessment of the Federal Reserve's retirement portfolio by a free market think tank.
But here’s the reality: despite its stronger financial position, the Federal Reserve subjects itself to much stricter pension accounting and funding standards than do state and local governments.The Fed works under FASB (Federal Accounting Standards Board), not GASB, accounting guidelines. Under FASB rules, the Fed discounts it pension liabilities using “yields available on high-quality corporate bonds that would generate the cash flows necessary to pay the System Plan’s benefits when due,” which is how most economists think liability valuation should be done. For 2015, the Fed used a discount rate of 4.05%. Based on this discount rate, the Fed’s retirement plan had $13.27 billion in liabilities. Combined with the plan’s $12.5 billion in assets, this produces a funded ratio of 94 percent.
Economists know that hyperinflation is very bad for portfolios. Economists also know something else: hyperinflation cannot go on for more than a few years. If it does, the currency ceases to buy goods and services. At that point, the government can no longer buy goods and services with its worthless now-money. Then there is a currency reform. The classic example is Zimbabwe. It had the second-worst inflation in modern times after the Hungarian pengo in 1946. This ended overnight when the central bank shifted to a domestic standard based in the U.S. dollar and several other stable currencies.
The Federal Reserve System will not destroy the value of the dollar unless Congress nationalizes it and then forces it to hyperinflate. Anyone who predicts a collapse of the dollar who does not make this prediction solely on the basis of the nationalization of the FED should not be taken seriously.
Hyperinflation will not solve the fundamental problem, namely, the unfunded liabilities of the US government. The unfunded liabilities of the federal government are now in excess of $210 trillion present value. There is no way that three or four years of hyperinflation can wipe out these obligations. After the hyperinflation is over, and the dollar is revalued at a new rate by removing zeroes, Social Security, federal pension, and Medicare obligations will still be on the books. Hyperinflation cannot eliminate these long-term obligations of the federal government.
Why would the Federal Reserve adopt a monetary policy that would be destructive of the Fed's retirement portfolio, and which would in no way reduce the obligations of the federal government with respect to the unfunded liabilities? To ask the question is to answer it. So, from whence cometh this supposed collapse of the dollar?
I have an answer: from copywriters.
SELLING YOU FEAR TO BUY YOUR DOLLARS
The collapse-predictors sometimes invoke the scarecrow of hyperinflation in Germany in 1921 through 1923. But it never happened again in Germany. This was a one-time event, just as it was for Austria.
The people who predict a collapsing dollar never mention any of this. They don't talk about the Federal Reserve's retirement portfolio. They don't talk about the international value of major currencies, which fluctuate around a familiar range over decades. The Canadian dollar and the U.S. dollar exchange at about the same rate today as in 1985. The same is true of the dollar/pound exchange rate. The dollar/yen rate has not changed much since 1993. There are ups followed by downs, but there are no currency collapses. Central bankers in major nations follow similar policies. They do not allow their nations' currencies to rise too much (thereby reducing exports) or fall too much (thereby indicating second-world economic status).
People who predict a collapsing dollar sell subscriptions or else precious metal coins. If readers are sufficiently fearful, they may write checks. They will turn over some of their hard-earned dollars, which have never collapsed in value to zero except during the American Revolution. The "continental" dollar's collapse was a one-time event.
CONCLUSION
There could be price inflation in the United States at 10%. I do not call this hyperinflation. I can even imagine that price inflation might go to 20% briefly, although I doubt it. But above this, the Federal Reserve will put on the brakes, cause a recession, and start the game all over again.
Do not be scared by Depends-wetting stories of hyperinflation coming to America. It is not going to happen. If somebody tells you that it is going to happen, you can safely ignore him. He may know something about another topic, but he does not know anything about hyperinflation, Western industrial nations, and the Federal Reserve's pension plan.
For a list of the hyperinflations of the 20th century, see the table at the end of this article. Since 1924, no Western industrial nation above the equator is on this list. The man who prepared the table is Prof. Steve Hanke. A recent interview of Hanke by the Mises Institute's Jeff Deist is excellent. Pay close attention to Hanke's warning on entitlements: they are all bankrupt. They will not be paid (44:20).