The US Dollar and Gold
Yesterday, we discussed the possibility that in the not too distant future, your dollars could be worth far less than they are today. The US dollar is a fiat currency. This means that it has value because the United States government says it has value, and the rest of the world has chose to accept this notion. This wasn’t always the case. Our currency used to be backed by gold and silver. This had a purpose: paper currency was useful because it’s much easier to trade slips of paper in exchange of goods, than it is to exchange gold. But you always knew that you could take these slips of paper to the US government and they would redeem it with gold or silver. However, over the years many administrations slowly reduced the amount of gold that they held for each dollar in circulation. Eventually, President Nixon took us entirely off the gold standard.
Every fiat currency in the history of the world has eventually failed. When said government has the power to print more money in order to increase their own power, they seem to find this urge irresistible. When you look at the way our government is behaving now, you can see that it has gone absolutely hog wild printing money in order to “pay” for all their fantastic ideas. We constantly see the news that they borrow more and more money. We know historically that as the size of government increases, the health of its economy decreases. This happens every single time. So, as they borrow more money, we become less likely to be able to repay what we’ve already borrowed, let alone this new load of debt. The more indebted we become, the more unlikely that other peoples and nations will be willing to lend us money. Think about this: if you’re friend does well financially, but something bad happens to him (or he has a great opportunity) and needs to borrow some money from you, you will probably happily lend it to him. If on the other hand, this same friend develops a nasty drug problem, and you watch time after time as he blows borrowed money on drugs, and then he comes to you looking for a loan – would you give it to him? No, that would be crazy. We are quickly approaching this level as a debtor nation. So this is one problem.
Another problem arises when the government decides that it doesn’t want to borrow money to pay for things because it realizes that it is actually the one that makes the dollars that it so desperately needs to spend, and so hey, why not just make more of them? As I’m writing this, I just googled “dollars in circulation” to see if I could find the stats. I saw them a few months back, but didn’t quickly pull them up. What I saw then was that the amount of dollars had doubled in a short amount of time. I don’t remember exactly what I read and so that’s not a totally accurate stat, but it gives you the idea. I stopped looking because I found another point that illustrates it just as well. Apparently last week (as I write this), the Government printed a new $6,300,000,000 into existence. Those are billions. I realize the news throws billions around like nothing these days, but that’s $20 for each person in American – in one week!
Think about this: if the economy of America is represented by a certain number of dollars, and all of a sudden, the government prints twice as many as before, how much are the dollars that you are holding now worth? Half, right? In simplistic terms, this is what the government is doing to the value of every dollar that you own.
What do you think about what the current administration is doing to your wealth? Give us a comment.
Photo credit: tC riDer