MOSCOW, June 18, 2012 – The other day I received an e-mail that contained an interesting question:
Question: What do you think about the coming Greece pull out from the euro? Will the effects be deflationary or inflationary? While in the short term it appears that central banks are ready to print more money, I’m getting concerned that we could be facing another depression where cash will be king and commodity values suffer greatly.
Answer: I would first correct the question’s underlying assumption. It is not an issue of whether we could be facing another depression at some point in the future: We are already in a depression. In the United States real unemployment is above 15 percent. The little growth we have seen is not authentic. It is due to the way GDP is calculated – as the sum total of transactions in the economy. This has been artificially inflated by government spending, half of which debt-fueled. There has been no real growth.
All depressions naturally exert deflationary pressures. The Great Depression is a good example. After the drop in value following Roosevelt’s confiscation of gold, the dollar kept its purchasing power.
This current depression, however, is different from the Great Depression in one crucial aspect. During the Great Depression there was little public debt. Our depression is now driven by public debt. In other words, we are in the midst of a currency crisis caused by out of control government spending. Such situations invariably climax in currency collapse.
The euro obviously cannot become king, because it is on the way out. It may survive the Greek exit, but it will not survive the exit of the next country, whoever that may be. It would be surprising if the euro is around twenty-four months now. There is a strong likelihood it will be gone withing a year or so. Once this happens there be a return to national currencies across the eurozone.
The dollar may become king for a while as people and investors flee to the “safe” haven of the US currency. The problem is that when you look at the numbers, the dollar is in worse shape than the euro. America’s public debt and long-term unfunded liabilities are greater than those in the eurozone.
There are three reasons why the dollar still enjoys the status it does:
- There is no viable alternative to the dollar;
- The dollar is the reserve currency of the world;
- Most of global trade is denominated in dollars.
Given the numbers, however, the dollar is doomed. Fiscal fundamentals being what they are, there is simply no way America can honestly discharge its obligation. The dollar, too, has to eventually collapse.
This nothwistanding, in the immediate future the dollar is likely to strengthen. It is quite possible there will be a sharp drop in commodities and precious metals as panicked money flows into treasuries. But the dollar is only a lame king. In the end it will topple due to the mind-boggling fiscal recklessness of our politicians and us, the voters, who keep demanding from government services and wars that simply cannot be paid for. Alas, such is often the end of powerful nations states and empires – domestic entitlements and foreign wars generate unsustainable fiscal burden. Interestingly, the founding fathers cautioned against both. It is sad that we so foolishly disregarded their good counsel.
In the end the US government will be forced to print more and more money to “finance” its obligations. At one point the tolerance point will be exceeded and investors will begin offloading US bonds. Panic will set as people and central banks will try to get rid off their dollars. The Great Depression will likely end in a hyper-inflationary spiral.
Born and raised under communism, Vasko Kohlmayer is a naturalized American citizen. He has lived in several countries under various forms of government, but he still marvels at the goodness of God and the wonder of life.
He has written for a number of newspapers, magazines and internet journals. Vasko currently lives in Europe with his long-suffering wife and two beautiful daughters. He is the founder of The Christian Writers Foundation.
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