The Rise and Fall of the Dollar

0:00Common Sense Radio, The Michael Duke Show. Thanks for joining us. 458 Talk, 458-8255. Today's show, we kick off with a bang. Joining us on the phone is author and columnist Mark Thornton. He's a senior resident fellow at the Ludwig von Mises Institute, and he is a book review editor for the quarterly journal of Austrian Economics. I spoke about his article here back in late May about the rise and fall of the dollar and exactly what did it mean for us here in America if we were not anticipating potentially things that could happen to our currency system. What was it meaning to the world? You know, what was the ramifications of that? It's a great article and he joins us on the phone now to talk more about it. Good evening, Mark. Thanks for joining us. Good evening, Michael.

0:46It's great to be with you. Well, thanks for coming on. I got to tell you that I've been following And kind of this whole discussion that's been going back and forth about the rise and fall of the dollar, this give and take between the Kenzians and the Austrians that are basically, the more spending, the less spending, the fiat currency, the fact that you've got, I think you put it best here when you say the bad behavior. You're reviewing a book by Barry Eichengreen in the article called Exorbitant Privilege is talking about the rise and fall of the dollar, and you basically say that this bad behavior on the part of the Fed and the monetary folks out there is really what's going to bring about potentially, if not the demise of the dollar, at least its demise as the world reserve currency, is that right?

1:41That's absolutely right. That's what's been going on for quite some time. The US dollar has been the World Reserve currency since after World War I, and after World War II it was made the World Reserve currency officially as a result of the Bretton Woods system. This means that central banks can hold US dollars as if they were as good as gold. And so the Federal Reserve, our central bank here, and the politicians that motivate that bank and the New York City banks that motivate the central bank, and the Federal Bank, you know, they're all about just printing up more and more dollars and after we went off the gold standard in 1971, they've basically been free to inflate and to create currency in an infinite way, almost, and of course, you know, when you have that kind of power, when you have that exorbitant privilege, you're just bound to misuse it, especially when politicians ultimately hold the strings of this game, and so what we've seen is that the value

2:44The US dollar has continued to fall. They've been continuing to print. Other central banks have gone along with the Fed and they've inflated right along with the Fed. As a result, the value of money, the value of currencies is both declining and unstable. We're not sure who is inflating faster. Is it the Fed? Is it the Japanese Bank of Japan, China, the Well, and I think that's the part of the problem, and I was talking about this a couple years ago because I was doing a lot of reading about the fact that, well, there's this discussion amongst, first it started around the Middle East, you know, as Qaddafi and some of these other guys basically saying, they were really pushing to not have the dollar be the World Reserve currency for oil transactions, that they were pushing more towards, you know, using gold or maybe the US dollar.

3:41of Money, The Theory of Money and State, The Theory of Money and State, The Theory Show how important this is. You mentioned that other countries wanted to see oil transactions done in something other than the US dollar, and that was Muammar Qaddafi in Libya, that was Iraq with Hussam Hussein, and it was in Iran. Those are the three countries that were pushing for that. And so what's happened is Qaddafi has been taken out, Iraq and Hussein were taken out and Iran is facing significant sanctions and the threat of attack by the U.S. And so that just underscores how important this is that we maintain this World Reserve currency and we can continue to inflate. But if the rest of the world believes that we're not going to stop, that we're going to continue to inflate irresponsibly forever and we're We're going to try to pay for our national debt by printing up money.

5:11Well, if the world loses confidence in the U.S. dollar, they're going to stop holding the U.S. dollar. China has already stopped buying U.S. dollars and is buying gold instead as its reserve. So if this were to become a worldwide movement, you could see a precipitous drop in the U.S. dollar, something like 25 to 30% possibly. That would mean big changes in the economy. Imported goods, which we rely on so heavily, would rise rapidly in value. The price of oil, the price of gold, all those would shoot up in a sense that they would be valued higher in terms of US dollars and that their prices would rise and consumers would be very much hurt by all that.

6:02Right. We're talking about, I mean, just to quantify it, and these are all hypotheticals, obviously, but we're talking about, you know, $20 a gallon for gasoline. We're talking about things that all of a sudden were, you know, $3 or $4, and all of a sudden, if it's a 60% or 70% valuation change, you're still making the same amount of money. But it literally is almost the Zimbabwe or the Bismarck wheelbarrow full of Deutschmarks for a loaf of bread kind of thing. Well, you know, you can imagine a scenario where war breaks out in Syria and Iran, the whole Middle East shuts down, the world supply of oil constricts very significantly and people lose faith in the U.S. economy and therefore the U.S. dollar, American consumers are hurt across the board, it could be horrific and you know, they're playing a very dangerous of Money, The Theory of Money and State, The Theory of Money and State, The Theory What really, you know, when it comes down to it is, I've been saying this, the theme

7:30of the show the last few weeks has been, you know, I don't care if you're R or a D or if you're left or you're right, the problem is all of them. Because they all say the same thing, they, you know, they tear their hair and they beat their chest and they say things have got to change and something's got to give and we've got to be do this and do that and that they go back to Washington and it all remains the same. It's a constant. There's a problem. But nobody acknowledges that the problem is, I mean, whether it's quantitative easing or whether it's just outright, you know, mismanagement of the funds of the country and spending more than they take in, whatever it is, nobody's willing to acknowledge it somewhere along the line. Something has got to give. Well, they both seem to complain, both parties seem to complain about the other parties rather vociferously, but when you look at their actions, they both are willing to go along with this

8:21open-ended, non-budget, continuing resolution of spending way beyond our means. Just going along, they're all attacking this new leaker, Snowden, so they're united in and so many things. He's a trader, he should be shot, right, you know, the whole thing. Yeah, so they're united on that kind of policy. They're united on monetary policy. They don't want to have to balance the budget. They want the Fed to buy up the debt to keep the interest rates down. And so they're united on fiscal policy, monetary policy, civil rights, transparency, privacy. They're all united with each other against us. We often argue that basically the R and the D are the, you know, two sides of the same freaking coin.

9:12I mean, that's really what it comes down to. You know, you like the left side, you don't like the left side, flip it over. It's the right side over here. It's the same thing. It's just, you know, the same coin, just a little different vantage point. Well, you know, I'm speaking to you from the Mises Institute in Auburn, Alabama. Right. And our former long-time governor, George Wallace, nothing to write home about, but he famously declared that there's not a dime's worth of difference between the Republicans in the Democrats, and he was exactly correct. And you know, all of, when I came to Alabama so many years ago, every politician was a Democrat. Now, 25 years later, every politician is a Republican, and they both harbor the same bad policies, the same bad ideology of big government.

9:58Right. The policies remain the same. The faces change, the colors of the ties change, but But the base policies remain the same. You just mentioned that everybody's okay with what they really want the Fed to do is continue to buy up the debt and monetize it. Now, I'm not an economist, Mark, I mean, I'm just a talk radio host, that's the kind of guy I am. But I even understand this. When you mentioned earlier, you know, China has stopped buying US dollars, they stopped buying our debt and in fact, there's been talk about whether or not they would liquidate some of that debt. The Theory of Money and Credit And what I'm getting back is essentially, it just basically cut my value in half.

11:03I can understand that. I mean, I'm a pretty simple guy. And that's what China is doing right now. We've said we're going to pay them back, but we continue to deflate the QE2 or 3 or 4. What are we up to now? I can't even keep track. We just continue to inject liquidity, that's their word for printing money, into the economy. And we expect that there's going to be no ramifications, well, we, I guess the Keynesians, there's going to be no ramifications for that except of course now the Chinese have stopped buying it and they're talking about actually dumping it well I mean how do we continue in this direction well you know it's called QE infinity right now because a lot of people believe that the Fed is not going to taper off and that this first sign of you know problems in the US economy they're just going to announce more purchases of government debt and you know mortgage debt things of that nature to try to continue to prop up the system

11:57Regulation, the big banks, and the federal government's credit rating. But it can't go on forever. It's a matter of, you know, the situation we're in right now is that people don't like the dollar, but the alternatives are also bad. You know, China is an economy with a lot of question marks, a lot of financial imbalances. Japan is an economy that has been mired in stagnation for over 20 years, and so the alternatives in the euro, I mean the euro, they think it's going to come apart entirely, and as a matter of fact, we've had two young scholars who put together a book on the euro, it's called The Tragedy of the Euro, and they say that because of the moral hazard problem built into the euro, that ultimately it has to break down at some time in the future, so the alternatives is really aren't that good. And so people have turned to things like the Swiss franc and the Norwegian kroner currencies as possible safe areas. But you know, those countries

13:05are so small that they can't, you know, they can't really absorb the world's demand for a safe currency. Right. And the problem is the US dollar as the... I mean, it's so big that if something And bad does happen, the ripple effect from that, no matter what country you are. I mean, I don't care if you're the, you know, the littlest country. Well, what, I mean, you're going to be affected by it. Oh, yes, everybody. And everybody is affected by it right now. I mean, you know, you don't see about in the mainstream media, but Norway and Sweden, there's housing bubbles all across Northern Europe and Brazil. They've got some severe problems. Inflation is creeping up. rates are being forced up and so you know the problems associated from the dollar and these other currencies are rippling throughout the world. Canada has a housing bubble right now or in a real estate bubble so the problems continue to be omitted and nobody outside of the Austrian economist basically understand

14:06that the Fed inflating is the cause of all of this reality out there and we We recognize that the problems are much more extensive than what's being talked about in the mainstream media and you know just a little while ago the nation of Germany requested an audit of their gold holdings at the New York Federal Reserve Bank where they're held in a protective below the ground vault and they refused the audit so Germany put in a request to get back part of their gold to send it back to Germany for safety. Keeping, and there's a big public uproar there, and the New York Fed said, well, we'll get it back to you, but it's going to take seven years for us to be able to get it back to Germany.

14:54This small portion of it, yeah. Yeah, and so, you know, those are signs that there's real trouble out there, and people need to be aware of it, at least, and try to take defensive measures against it. Well, and you talk about, I mean, this book, this Eichengreen's book, he talks about these 3 different kind of conjunctions of three things that could bring about the crash, you know, China's dumping of the dollar, runaway government spending and the, I guess, the loss of confidence in the economy, because basically the whole economy is, because it's not based on anything of value now, it's just basically based on full faith and credit of us, the people. And he said none of these are highly probable, but you say these are actually all connected and bringing them all together and being connected gives them a much higher probability.

15:46Yeah, he treats these things in isolation from one another as though, you know, China would not want to repatriate its one trillion dollars that it holds of US government debt. If the US economy was stable and if the government had proper spending policies, well, I agree that's a low probability event, but you know, the government has not balanced its budget. is not acting responsibly. People are losing confidence in the economy. Ben Bernanke was talking about 2008, 2009, that he could see green shoots coming up in the economy. Well, that's been a long time ago, and nothing has become materialized as a result. And so, I see all, and of course the Chinese have stopped buying government debt and that there's indications

17:10There's a crash in the dollar, a fall in the confidence in the US dollar, and the loss of our monopoly as a world reserve currency. And then that sets off everything in motion in terms of the fall in the dollar, the rise in prices, and other things. Because when you're in a currency war, currency war is just like a protectionist war. It has a tendency to increase the probability for outright war in the economy, and of course Russia just announced today that it would not abide by a no-fly zone over Syria at the same time that we're announcing our intentions that it's becoming more and more likely to happen. So we're coming into conflict with Russia, we're coming into conflict with China, and There's a lot of other countries around the world that are very worried about the dollar, but most of them are military allies that are dependent upon our military power, like Korea, Japan, Taiwan, and so they're not going to come out and speak publicly and negatively

18:19against us, but they're all very concerned, of course. Well, and I think as you look at this, I mean, there's really only one solution that I can to look at this and say, we have got to pull back, if on nothing else, on our own spending as a nation. That is first and foremost. I'm an assemblyman here in our town, and I try and talk to my fellow assembly members and say, you know, look, this quote-unquote free federal money that you guys are just spending willy-nilly is not free. We need to really stop and analyze what we're doing here and say no to some of this free money. And they say, well, if we don't take it, somebody else will. I mean, it's at every level. It's a trickle down. It's the politicians, like I said earlier. But really, isn't that the first real step in making this happen is basically saying we're going to have to tighten our own belt up and cinch down the hatches a little bit?

19:19Oh, there's no question about that. I mean, just basic common sense, you know, responsible behavior, economic, you know, stability, balancing your budget, all that is what would actually solve the problem. The problem is when the Fed is inflating, inflation is a very insidious phenomenon and it makes people behave differently and it's almost like a bribe to behave irrationally and Irresponsibly and so it's something that permeates all of society. That's something again that the Keynesians don't understand that the Austrians emphasize that inflation changes everyone's behavior and if you get into a hyperinflation, well it just causes a breakdown in human personality and people do very odd, very strange, very irresponsible things and it leads ultimately to a breakdown in social order. We're talking about very, very serious things when people lose all connections to reality because the dollar is the thing that we all interact with one another. Whether we're buying something on Amazon, some book by some author, that's an interaction between two people who will never know one another

20:33and it's conducted on the basis of dollars. You use dollars on the streets of Alaska in And so all of our relationships are ultimately economic relationships except for friendships and family. And so all of our social and economic relationships are conducted with that one thing. And if that one thing is destabilized and we don't have any confidence in it, we don't know what its future value is going to be, we might not even know what its current value and the uncertainty more than anything else would damages the very fabric of that social order in the society as a whole I mean it really does set back a society on its heels when there is no stability in those you know that uncertainty of you know where's that you know how am I going to transact for the next meal or do this or that I mean it becomes a whole new it's a whole new ballgame

22:06Talk about imported goods and all these other things and the cost would then be associated with it if we did see a fall in the dollar. This is really kind of the spooky, I mean, this is the precipice, it seems to me again as a layman to look over the edge and say, that's a big long fall on the other side of that cliff. Yes, and you know, take something like the iPhone, you know, parts for the iPhone come from 15 different countries with 15 different currencies. They're manufactured in China then, and then they're shipped back to the United States and around the world. Well, imagine being at Apple and trying to figure out how to price your product when the imports, the parts are coming from 15 different countries, all with different currencies.

22:54It's a very complex matter and it makes the benefits of trade either decline or disappear. And the globalization has had some problems, but it's produced products that could not have been produced prior to globalization, and it's reduced the price of so many things that we buy and that we buy in Walmarts and stores around the country. And if the dollar is the cause of the breakdown of that international trading order, then the ramifications are going to be far ranging and a significant hit to our pocketbook. Yeah, and especially, like you said, all these divergent currencies. All of a sudden, I'd have to, if I'm a guy at Apple, a logistics guy trying to figure out how to make all these things work, but now I can't use the dollar anymore.

23:40I mean, it just becomes really problematic. Your final thing that I know we're short on time here, but the final thing is, is that Eichengreen kind of pooh-poohs gold as saying, you know, it has its bugs, dismissing it that it's inconvenient and a lot of these other things. and other things. You just mentioned Germany wanting gold back from the reserve depository in New York. Of course, there's been lots of discussion about whether or not the Fort Knox or depository there even has the amount of gold that we're supposed to have in it. I mean, could we even do that? Could we even return to it? Do you think it's possible and is that the solution? Oh, yes. I mean, it's definitely possible to go back to the gold standard. All they would have to do is to relax the legal tender laws and to make it so, as it says in the Constitution, that you don't have to pay capital gains tax on gains from holding

24:30gold and silver and copper coins. I mean, all you have to do is open it up to the free market. The free market will provide those an alternative currency, which would put a break on the Fed entirely, which is why they're not going to allow it voluntarily anytime soon. But yes, I mean it's the solution and central banks around the world, China, India, Russia, all these larger central banks around the world are buying up more gold reserves. Yeah, I saw Russia was at 934 metric tons of gold here in the last, it was a quarter for Russia. They're like the largest net importer of gold in the world right now. Yeah, and they're also a large producer of gold. China is a large producer of gold and it still imports hundreds of tons of gold every quarter that it tells us.

25:22I mean, they don't actually are open and honest with that, but not only are central banks buying up gold, but after we've seen this dip in gold prices, gold shops and coin shops around the world, whether you're talking about Hong Kong or China or Japan, the US, they're And there's been intense demand for the products and if you go online and look at some of the online gold dealers and silver dealers you'll find a lot of their products are simply not available at this time because they've been bought up at these lower prices. People are taking advantage of these, what I think is a temporary although the price of gold and silver could still fall more but as money has come out of paper gold and the Gold ETF, and as the price has shrunk, the physical demand, the retail demand has intensified to something that we haven't seen since 1980, I mean it's that significant.

26:26All right Mark, last question, the every man on the street, I mean how do we deal with this on a micro level, you're giving us, we've talked about a lot of the big picture things, what do we do down here on the street to try and isolate ourselves or insulate ourselves

27:12Gold and Silver in their portfolios, physical gold and silver coins, get your financial house in order, get your spending levels down, be debt-free, live within your lifestyle, right? Yeah, get your lifestyle in line with your income and be prepared to lose your income stream at some point in time so that you're able to take care of yourself or you're able to take care of your friends and family members who lose their income stream. You know, so your social network is going to be important, you know, economic rationality is going to be important and information sources like Mises.org and your program to keep alert to what's going on. You know, when the mainstream economists, which is basically everything you're going to see from Bernanke to Krugman and so on and so forth, they have one story.

28:06The Austrian economists have a different story. It's almost the exact opposite story. We believe in private property, sound money, a free market, and the rule of law. And the Keynesians don't. They believe in easy money. They are not supporters of private property. They're not supporters of the free market. And they're willing to change things willy-nilly, so they don't really Support, The Rule of Law. And so when, you know, silly proposals come down that violate the U.S. Constitution or violate the laws of economics, they're willing to go along with them. So be leery of what you see in the mainstream media, and make sure you have sources of alternative information.

28:52Mark Thornton has been our guest. He is a senior resident fellow at the Ludwig von Mises Institute. You can find out more, read his articles. I'm constantly reading his articles The fact I'm listening to a new thing he just did, audio blurb you did the other day, about gun control and prohibition of the great Gatsby. It's a good piece. Oh, yeah. More information on it. You can again find it at Mises.org. Mark, thanks for coming on the program with us right now. I appreciate you taking the time to talk to us today. Thank you, Michael. I enjoyed it.