The Future of the Dollar Is Bleak

 

From an Austrian school of economics perspective the dollar is weak and growing more so every day, despite the fact that it is gaining against other currencies on an exchange rate model. There are some specific causes of this phenomenon, but the important point is that the dollar has been inflated massively and will continue to lose purchasing power against real goods and services, what the public and the press mislabel as inflation. The dollar's purchasing power will deteriorate at an ever-faster rate, primarily due to the Fed continuing to print dollars to fund the federal government's deficit spending and to spur the economy through monetary means. As Alasdair Macleod of GoldMoney.com has pointed out, the dollar already exhibits hyperinflation characteristics, because the federal government cannot fund its debt without the Fed's cooperation in monetizing it. Therefore, eventually the public will understand that the dollars in wallets and bank accounts will fall toward worthlessness and will begin to shed dollars in favor of real goods. Since the US monetary authorities are died-in-the-wool Keynesians and completely clueless to both history and sound economic and monetary theory, there is no hope for changing this outlook.

 

One would assume that the world is headed for disaster, but that would not be entirely correct. There is a new international currency in the works, sponsored by the Shanghai Cooperative Organization, sponsored by Russia, China, India, Pakistan, and other Asian nations. The new currency will be backed by commodities, including gold. It will be used first of all for settling international trade among its members. Be prepared for more countries to join this new group. Also be prepared for the Western press to paint the SCO and its new currency in the worst possible light, as if the members of this group were waging economic war on the West. Such is not the case. These countries are just wiser than the West. They have seen currencies collapse and know the chaos that ensues. Of course, it would be possible for the West to tie its currencies to commodities, as these nations are doing, but there is little hope of that happening. Our economic gurus will use the police power of the state to prevent the public from using this new currency.

 

At the current time the only safe haven is gold. Not electronically traded gold funds (ETF's), which are not fully backed by specie, but the real stuff. Gold is money. All the rest are currencies that may or may not be redeemable in real specie, i.e., gold. As the lapdog of the federal government, despite its claim to policy independence, the Fed will not use its very substantial gold holdings to back the dollar. To do so would be to expose the federal government's budget deficit and debt to reality. Without the Fed's debt monetization services, the interest rate required to fund the deficit would drive out all other borrowing, public and private. The federal government cannot balance its books without cutting entitlements, primarily Social Security and Medicare, or its military empire. Its current debt would be valued at less than junk bond status.

 

This is the reality of the future demise of the dollar. I wish it were not so.

The Fallacy of Calls for "A Manhattan Project" to Solve National Economic Challenges

 

The World War II project to build an atomic bomb is seen by many as a template for government action to solve what appear to be national economic problems beyond the scope of private enterprise. The analogy fails on several levels.

 

First of all, the analogy fails in the sense that the Manhattan Project was not an economic problem per se. It was a military development and procurement problem. There was, and still is, no commercial demand for a weapon of mass destruction.

 

Secondly, there is a difference between very large commercial projects and very large government projects. As Ludwig von Mises explained in his first great book Economic Calculation in the Socialist Commonwealth, economic calculation is possible only with private ownership of the means of production. Government does not own means of production in the true, private sense of the term. It uses only resources that it has confiscated from the private economy.

 

Because government is not a private entity with resources it has acquired through cooperative exchange, it is missing the vital link of capitalist entrepreneurship and the concomitant hierarchy of ordinal preferences from which economic calculation flows. In other words, government managers would not know which projects to pursue nor which factors of production to use.

 

For example, should government engage in a vast project for national energy self-sufficiency? If so, should it build wind and solar farms, or should it expand nuclear power or even fossil fuels? If government pursues all the above, in what proportions should it invest? An equal amount of money to wind, solar, nuclear, natural gas, coal, and perhaps geothermal, hydroelectric, or some other source? Without private ownership of the means of production, there can be no rational answer and no true economic answer.

 

A further and even more basic problem arises regarding whether or not government should seek any economic goals at all other than allowing the people to make private decisions with minimal regulatory encumbrances. Government managers have no special insight into the future of markets. In fact they have little reason to labor to do so. As a result we see government managers squandering vast amounts of public money on completely wasteful projects like wind and solar energy fields. They pursue their own private preferences just as Public Choice Theory predicts. They are not subjected to the discipline of the market and owners who demand a return on their investments.

 

In Conclusion, Expect the Worst

 

In conclusion I fear that the US and other Western governments are poised to waste vast amounts of money pursuing completely fruitless projects. The Ukraine War has disrupted economies and seems to justify government intervention to "fix" the most visible adverse consequence--skyrocketing energy and food prices. The West seems determined to keep in place its economic sanctions on Russia. Rather than adding insult to injury by implementing a "Manhattan Project" for energy and food, the Western economies should deregulate these markets and reduce taxes. Since deregulation and lower taxes require less management and enforcement, governments who desire to appear to be "doing something" about problems they had a good deal in causing can be expected to make things even worse. You heard it here first.

The Fed Cannot Go Bankrupt; However, It Can Bankrupt the Country

A recent essay on the Mises Wire triggered quite a bit of discussion among a group of Austrian school economists. Paul H. Kupiec and Alex J. Pollock's "Who Owns Federal Reserve Losses and How Will They Impact Monetary Policy? [5]" became the focal point for a wide-ranging discussion of monetary issues that got to the heart of our monetary and overall economic future.

The Fed Cannot Go Bankrupt

The article itself is a fairly straightforward explanation of how the Fed works, and provides several options that the Fed might pursue in a rising interest rate environment. The authors contend that the Fed has intervened itself into a corner, where losses probably will increase as the Fed raises rates. David Howden opined that this might not happen, as the Fed will roll over its mostly short-term, low-yielding investments into higher-earning assets, which will tend to protect its net interest income and provide an operating profit. Furthermore, the Fed is not required to mark its low-yielding investments to market. Were it required to do so, the Fed's true financial weakness would be revealed.

The Fed Ignores the Rule of Law

But what can or will be done about it? Early in their essay, Kupiec and Pollock conclude that nothing will be done, despite the provisions of the law that created the Fed over one hundred years ago. The losses will not go away; they simply will be transferred to the unwitting public through loss of purchasing power. Per Kupiec and Pollock:

"Innovations" in accounting policies adopted by the Federal Reserve Board in 2011 suggest that the Board intends to ignore the law and monetize Federal Reserve losses, thereby transferring them indirectly through inflation to anyone holding Federal Reserve notes, dollar denominated cash balances and fixed-rate assets.

The "innovation" in accounting policies centers around the Fed's newly minted "deferred asset" account, to which underwater assets will be transferred. Per Kupiec and Pollock:

Today, the Federal Reserve Board's official position is that, should it face operating losses, it would not reduce its book capital surplus, but instead would just create the money needed to meet operating expenses and offset the newly printed money by creating an imaginary "deferred asset" (Section 11.96) [6] on its balance sheet.

If the Fed were subject to the rule of law, either it would have stopped money printing years ago or its creditors would have forced it to close its doors. Yet the rule of law is completely ignored. Per Kupiec and Pollock:

The Federal Reserve Board's proposed treatment of system operating losses is wildly inconsistent with the treatment prescribed by the Federal Reserve Act.

The Keynesians running our economic life may be reassured that the Fed cannot fail in a technical sense, but the public should be appalled. The continual monetization of the federal budget threatens the complete loss of the dollar's purchasing power—to wit, a Weimar Republic–style catastrophe.

Unlawful Monetary Debasement Causes Capital Destruction

Today's monetary leaders fail to understand the true nature of money and, therefore, cannot conceive that there are real consequences to their outlandish irresponsibility in monetizing government debt and brazenly dismissing the rule of law. As the facilitator of monetary debasement, borne by the general public, the Fed fosters the destruction of societal capital.

The federal government does not have to answer to the law nor the public for its irresponsible and destructive spending. The purpose of insolvency is to force an institution, whether public or private, to stop destroying capital. Austrian school economists understand that capital must be created by hard work, innovation, frugality, and, most of all, savings. The market allocates scarce capital to those enterprises that create things worth more than those scarce inputs.

The Solution Is a "Return to Sound Money"

In 1953 Ludwig von Mises added a relatively short final chapter to his 1913 masterpiece The Theory of Money and Credit [7]. Chapter 3 of part 4 is titled "The Return to Sound Money." It is as relevant today as it was almost seventy years ago. Mises explains how the US in particular could anchor the dollar to its gold reserves. The Fed would be eliminated and replaced by little more than a board that would monitor all dollars to make sure they are backed 100 percent by gold.

Mises was a master in presenting what self-serving Keynesian scholars try to hide in a fog of deception; i.e., that money can and should be subject to the rule of law, as are all other economic goods in society. I daresay that there is no single reform that comes closer to fostering peace, freedom, and prosperity than a "return to sound money."

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Source URL: https://mises.org/wire/fed-cannot-go-bankrupt-however-it-can-bankrupt-country

Links
[1] https://mises.org/profile/patrick-barron
[2] https://mises.org/topics/fed
[3] https://mises.org/topics/inflation
[4] https://mises.org/topics/us-economy
[5] https://mises.org/wire/who-owns-federal-reserve-losses-and-how-will-they-impact-monetary-policy
[6] https://mises.org/about%3Ablank
[7] https://cdn.mises.org/Theory%20of%20Money%20and%20Credit.pdf