There have been major riots in Greece lately, as people are upset with their government as it tries to cut back its out-of-control debt. Greece is one example of what has become a global problem of governments overspending, and while Greece seems to have had its number come up first, many experts are predicting that the crisis will spread.
Certainly here in the United States we have our own share of government overspending. We run huge deficits and have huge entitlement programs like Social Security and Medicare that are putting us deeper and deeper into debt. Countries like China and Japan help support our government debt by buying treasury bills and holding our debt which is spiraling out of control.
On the horizon is a currency crisis. Currently the Federal Reserve can create money out of thin air by having it printed and putting it into circulation. The effect of this is the devaluation of the dollar. Printing money doesn’t create wealth out of thin air, but rather robs value from all the other dollars in circulations as adding money to the money supply means that money is worth less.
Since the Federal Reserve was created by Congress in 1913, the value of the dollar has plunged by more than 90 percent. This is where the stories about how gum used to be 5 cents, gasoline was less than a dollar, etc came from. We have had massive inflation over the years, and it has been able to finance our governments out-of-control spending.
Inflation punishes those who save. If you had put $1,000 away in the bank ten years ago, and then went to use that same $1,000 today, you will find that it is worth much less than it was ten years ago. The monetary supply has been increased and thus the value of the dollar has decreased.
We are now seeing debt become a major problem for Greece, but the United States’ debt is going to be an even bigger problem, as the dollar is currently used as the world’s reserve currency. Just as the housing bubble revealed substantial problems in the fundamentals of the housing market and severely impacted the major financial firms, a currency crisis will reveal the substantial problems of our fiat currency system. The consequences will affect all those who deal with dollars.
The current system is completely unsustainable. As our government spends more and more, other countries will grow increasingly wary of loaning us money. When this happens though, the Federal Reserve can try to pick up the slack, but it will only make things worse as the more they pick up the slack, the more they weaken the dollar and threaten our economy.
One of the indicators of people becoming increasingly wary of the dollar and fiat currencies in general, has been the recent rise in the price of gold. For thousands of years gold has acted as a currency. It serves as a hedge against inflation; if we go back to the example of putting a thousand dollars away for ten years, imagine switching dollars for gold. Gold cannot be printed out of thin air and as such its value is much more stable than that of the dollar. It is far more reliable than paper money.
I’ve been reading a book lately by Peter and Andrew Schiff, called “How an Economy Grows and Why it Crashes” and I’d recommend it to anyone who wants to know more about this subject. It discusses the fundamentals of economics and expands into how Keynesianism has played a role and a discussion the crisis that the Federal Reserve has been creating for us. It does so in a very easy-to-understand manner, and it’s filled with pictures.
Just as the housing crisis affected our entire economy with people being foreclosed upon, rising unemployment, etc. the same is going to be true of a currency crisis, although its effects will be much more potent. We have some real problems in the fundamentals of both our currency and government. I’m worried that we may have already passed the point at which we can still deal with these problems before they blow up in our faces and it’s too late.