Posted
by Chris Tackett
October 19, 2006 at 10:01 a.m.
End of the Dollar?
From what I've read about Robert Kiyosaki, author of the best-selling ["RichDad/Can I Borrow $20 Bucks Dad"][1] series of books, knows a thing or two about finances - certainly more than I do (which isn't saying much). And while I don't know very much about finances or money-exchange, I am well-aware of the current predicament with regards to China. The problem - as i understand it - is that they pretty much own us. And with that in mind, I found Kiyosaki's [column interesting][2]."...today, the United States is perceived to be the richest country in the world. In reality, though, we're the biggest debtor nation in the world. And who are we indebted to? What many consider to be a Third World country: China.*The irony is that many Americans think we're rich and China is poor. Exactly the opposite is true. This is because the removal of gold's backing from paper money has created a virtual explosion in credit and liquidity. The sheer amount of liquidity around the globe is incalculable....*In overly simplistic terms, China and many countries in the world today lend us billions of dollars to buy their goods. They send us products like computers, televisions, cars, candies, and wines, and we send them funny money in return.Since they can't spend those dollars at home, they simply lend them back to us so we'll buy more of their products. That would be like me going to my local grocery store and asking them for a loan so I could buy their tomatoes. A logical person would say, "That makes no sense." Yet it's exactly what happened after 1971, and to many highly educated people -- bankers and politicians, for instance -- it somehow does make sense."I'm hoping El_B (or other money-minded readers) will help make sense of this, but I think the overall theme is pretty self-explanatory. America is spending more money than we have. We're out-sourcing more than we should. We're borrowing more than we should. We're pumping billions into a war of choice and draining our domestic budget in the process. Social programs are being cut. And Americans continue to borrow and spend and borrow some more when the bills need to be paid. It won't be long before these types of decisions come back to bite us - moreso than they already have. And at some point, at least i assume, China is going to want to collect on this debt and we won't be able to pay. What do we do then? We've become too dependent on their products, so an embargo wouldn't make any sense. And other than a threat of war, I'm not sure how you can avoid payment (not that that is a very smart solution to the problem). What are your thoughts? And other than buying American and investing in gold, which most people can't seem to manage, what is to be done? [1]: http://www.richdad.com/ [2]: http://finance.yahoo.com/columnist/article/richricher/10932
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Todd (anonymous) says…
Rich Dad, Poor Dad is selling books and seminars for a reason. If he really wanted to educate people he wouldn't charge so darn much for his drivel. Don't let his cocky jargon confuse you. He uses the rear view mirror to show market success and doesn't fully disclose his financial deals. (ie he's blowhard)
Don't freak out too much. Everything comes and goes, ebb and flow. So the government is stealing money from it's people and other countries. (that's what inflation does in a USD based world) Historically that's what big government does up until it can't do it anymore. Sooner or later the government reach a limit or people will wise up. I'm better the country goes broke and kicks off a global depression. A depression every now and then keeps things in check.
El_Borak (Bill Hoyt) says…
Don't you call me, St. Peter, 'cause I can't go.
I owe my soul to the company store.
Rich dad writes: "Since they can't spend those dollars at home, they simply lend them back to us so we'll buy more of their products."
Except it's never that "simply." Following WWII, virtually all the currencies in the free world were made convertible into dollars at floating rates, which dollar itself was convertible into gold at a fixed rate. Since the US at that time owned 2/3 of the world's gold and had essentially the only functioning economy in the world, the dollar was as good as gold and was used like gold by all those who had countries to rebuild.
The dollar was not good only for buying from us, but for buying from every other nation as well. It became a "reserve currency," meaning that other nations used dollars to undergird their own currencies, with the presumption that those dollars were a proxy for gold.
It was the best of both worlds, because other nations didn't have to ship gold back and forth to balance accounts and Uncle Sam's Federal Reserve could create a lot of dollars for free, spend them abroad (on oil, for example) and they would never come back. Except that they forgot that the bill comes due at the end of the meal.
In the late 60s, France had the audacity to actually show up with boatloads of dollars and demand gold (at the promised $35/oz). Nixon, being the principled statesman that he was, "closed the gold window", reneged on the promises, and kicked off the era of "floating" currencies, wherein currencies float on a bed of unconvertible nothings. And the dollar became a promise to pay nothing.
That the current monetary system has lasted 30 years is a testament to inertia, nothing more. But today everything related to the dollar (both prices and volumes) is rising at increasing rates. That's all those trillions of dollars we've created and the interest we pay on them, moving faster and faster as they become worth less and less.
China will "collect" on the debt not by buying American products (what could we sell them? We don't make anything) but by buying companies and metals and oil and mineral deposits with dollars. They'll use what little value dollars retain to buy wealth.
No one will ever really collect on the debt, because a promise to pay nothing is not a debt; it's a fraud. One destined to fall in a pile taking our entire economy with it.
OnShakedown (Chris Tackett) says…
thanks, El_B. I was under the impression China would one day try to collect in Gold like France did in your example. Is it not feasible (or legal? okay?) for them to do that? Because obviously that would be a much bigger disaster obviously.
How do you forsee this shaking out in the next 5, 10, 30 years?
OnShakedown (Chris Tackett) says…
oops, one too many 'obviously''s in there.
i also wanted to ask what you thought about the Saudi money in our economy and how that could shake out...
El_Borak (Bill Hoyt) says…
"I was under the impression China would one day try to collect in Gold like France did in your example..."
See, that's the beauty of breaking your promises. The US gov no longer 'redeems' its dollars; once issued, they are with us forever. There's nowhere for China to go to redeem them, and all they can do is try to unload them on someone else. When it is in their best interest, not ours, to do so.
But if the Chinese could redeem their 1 trillion dollars in reserves at $35/oz, they could have our entire national hoard of 261.8 million ounces 120 times over. That illustrates how for out of whack dollar issuance has become in a generation.
France was getting gold from us at $35-$42/oz, and by one of the sweet ironies of life, 10 minutes ago I bought .1867 oz of French gold (in the form of a 1912 20 franc coin) for $113.60, or the equivalent of $608.46/oz. In my lifetime the dollar has gone from 1/40th of an ounce of gold to ~1/600th, about a 95% loss of value.
BTW, there are some sentences that can never have too many 'obviously's. Yours was one of them.
El_Borak (Bill Hoyt) says…
As for how it will shake out, there are simply too many monetary and political possibilities and too many possible emotional reactions, both here and abroad. The dollar underlies absolutely everything in the modern financial world, which means that whatever bad thing happens will not affect only us. It will hurt us worst (because we have been the primary beneficiaries for so long), but no one will escape unscathed. A lot of those no ones will not be happy with us.
I'm convinced when all is said and done, this episode will fall into the narrow category known as "things bad enough that they begin with 'The Great' and are spoken of only in hushed tones forever."
Much more than that, I just don't know. Personal skills, good friends, and assets unencumbered by debt are good things to have no matter the particulars, however.
MyName (anonymous) says…
As far as actual value, gold is not inherently better or worse than any other form of exchange. You can't eat gold (or other currency), you can't live in a house made of gold (or other currency), it's all about the things you can exchange them for. China (and other countries) are not trading goods for "empty promises". They are trading goods for something of value, either directly, by purchasing American goods, or indirectly by using American currency to purchase goods from other countries. The same can be said of the Americans who are buying Chinese goods. Trade occurs because it is mutually advantageous to both parties, or as Adam Smith put it in "The Wealth of Nations":
"Nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce are founded. When two places trade with one another, this doctrine supposes that, if the balance be even, neither of them either loses or gains; but if it leans in any degree to one side, that one of them loses and the other gains in proportion to its declension from the exact equilibrium. Both suppositions are false. A trade which is forced by means of bounties and monopolies may be and commonly is disadvantageous to the country in whose favour it is meant to be established, as I shall endeavour to show hereafter. But that trade which, without force or constraint, is naturally and regularly carried on between any two places is always advantageous, though not always equally so, to both."
The only thing that may occur is that the world will start using a different currency as it's main reserve. This may cause America to lose some advantages, but it's currency will still be worth something as a medium of exchange. What bother's me most about this Kiyosaki guy is that he seems to confuse balance of trade, public debt, and private debt, which are different problems and some of which may not even be a problem. But then again, I haven't read his books, just that snippet.
MyName (anonymous) says…
This quote might also add some further perspective on our present situation (again from Smith):
"The balance of produce and consumption may be constantly in favour of a nation, though what is called the balance of trade be generally against it. A nation may import to a greater value than it exports for half a century, perhaps, together; the gold and silver which comes into it during an this time may be all immediately sent out of it; its circulating coin may gradually decay, different sorts of paper money being substituted in its place, and even the debts, too, which it contracts in the principal nations with whom it deals, may be gradually increasing; and yet its real wealth, the exchangeable value of the annual produce of its lands and labour, may, during the same period, have been increasing in a much greater proportion. The state of our North American colonies, and of the trade which they carried on with Great Britain, before the commencement of the present disturbances, may serve as a proof that this is by no means an impossible supposition."
thetomdotdot (anonymous) says…
The Borack:
The on-line auction value of a 'rare' coin extrapolates the value of the US dollar? Not that I miss your point, LB, and I suppose its just as valid a measure of funny money as any other.
Chris:
Robert Kiyosaki and his ilk demonstrate the best way to deal with the funny money world economy, and that is to write and sell books about it. A well articulated grasp of the conspicuous is worth good money these days. As disheartening as the situation with the dollar is, it has to be admitted that this is a great environment in which to run a scam.
El_Borak (Bill Hoyt) says…
tt..: the 20 franc is not rare, but a bullion coin with no numismatic value whatsoever. So the $608/oz is about as low as one can expect to buy physical gold unless one contracts for more ounces than any of us could individually afford. Then the price is $599.90/oz http://kitco.com/
Myname: Smith was right about trade, but that quote does not tell the whole story. Because gold is finite, any nation that ran a trade deficit long term (think US colonies) eventually ran out of 'money' and could not buy imports. Then the process reversed. Most free-traders (of which I am one) still think this happens, but it doesn't.
Imagine, if you will, a nation that could just create as much gold as it wanted for trade. That's essentially what the Spanish had in the 1500s and what we have today, and the Price Revolution it caused then had some very bad impacts on European Society. Thus will the destruction of the dollar affect ours, though it will not take a century and a half. Volume of the medium of exchange is far more important than what that medium is made of.
So Smith is right that a balance of trade per se is not bad, but just like drinking is not bad, if that's all you do for a long time it's going to become bad.
MyName (anonymous) says…
Smith's argument is that trade balance (equal, unequal, whatever) is not really relevant to overall economic growth. Granted a favorable balance may allow economic growth to increase faster for one party than the other, but even an unfavorable balance still leaves both parties involved better off than if they had not traded at all.
I don't see any comparisions to the situation of Spain in the 1500s. Spain uncovered and mined more gold. This brought the value of the gold down relative to other goods due to a change in the balance of supply and demand. This was a form of inflation because the currency was based in gold, but the analogy to today's situation fails because at the time it was all gold that lost value, not just Spanish gold, while today, it is only the American dollar that is losing value relative to other currencies.
In any case, we are not undergoing a period of hyperinflation like the Spanish were at that period. Moreover, if we were to undergo such a period, it would not have anything directly to do with our balance of trade (though the increasing national debt may trigger such a period). If other countries stop investing in America, as some people suggest may happen, and we were forced to rely on domestic savings to supply capital, this could cause interest rates to rise and could trigger a reccession. However, this would not lead to higher inflation, and in fact would actually lead to deflation, as there is less U.S. currency floating around the economy.
El_Borak (Bill Hoyt) says…
"In any case, we are not undergoing a period of hyperinflation like the Spanish were at that period."
In Spain prices went up by a factor of 6 in a century. We've done that just since Nixon. You are right that it was all gold that went down, but it's similar to today in that all US dollars are going down, which dollars undergird all paper currencies. The dollar is falling against other currencies, but it is falling against non-currency items even more. It is falling against other currencies even as other nations purposely dilute their own currencies to gain trade advantages.
But the point in Spain's case is that they used that free gold to expand and become the most powerful nation in the world with an empire that was second to none at the time. Once the free ride was over, they were just Napoleon's pilot fish. Our free ride is almost over.
"However, this would not lead to higher inflation, and in fact would actually lead to deflation, as there is less U.S. currency floating around the economy."
Yes, we hope. At least I hope. If they simply stop buying more dollars you are correct. But if current dollars are repatriated quickly, inflation is the only possible result. We have already created enough dollars for a hyperinflation from years of shipping them out and other banks holding them.
El_Borak (Bill Hoyt) says…
Myname: "Granted a favorable balance may allow economic growth to increase faster for one party than the other, but even an unfavorable balance still leaves both parties involved better off than if they had not traded at all."
Agreed, completely.
todd: "He uses the rear view mirror to show market success and doesn't fully disclose his financial deals. (ie he's blowhard)"
Agreed, completely. I read his first 3 books and they were very good. But once he got outside of the Rah-Rah and started to comment on world events, he lost me. Kiyosaki is not an expert on currencies (neither am I, so don't listen to me either) and his analysis is simply a summary of stuff Harry Browne and Doug Casey were writing 30 years ago. He may be right (and I think he mostly is) but that doesn't change the fact that he's not doing his own analysis here.
OnShakedown (Chris Tackett) says…
I agree Kiyosaki isn't an expert, but moreso a salesman. However, i think you need people like him to speak to the common man in a way the real experts can't or don't have time to or want to. (as long as they are being honest and not trying to trick people into making bad decisions - which, then again I haven't read his books, so i'm really not in any position to say if spending $15 on his book is a bad decision.
thetomdotdot (anonymous) says…
Yes. The 20 franc piece is not rare (although billed as such on a major on-line auction site). I guess my point is too fundamental to be of value. I agree with myname. The value of gold (and silver) is as psychological as the value of green paper (or some other piece of paper 'backed' by gold). It's only worth what someone will pay for it. The idea of being 'backed' by a chunk of metal is only as good as the individuals in the organization controlling the backing. With armageddon around the corner, the value of gold or any other commodity will be a function of how well it goes with beans.
But thats just me.
El_Borak (Bill Hoyt) says…
Chris: "i think you need people like him to speak to the common man in a way the real experts can't or don't have time to or want to..."
Absolutely, and the beauty of Kiyosaki's style is that he can get across the point in a way that's extremely slick and memorable. My only problem with that is that in making a complicated issue too simple, he can deceive people into thinking they understand something when they don't (think "high school creationists"). An old boss of mine once told me to "make things as simple as possible, but no simpler." It remains good advice.
Two guys who get the point across very well are Bonner and Wiggin:
http://www.lewrockwell.com/bonner/bon...
They have a very readable style and I find a little deeper perspective than Kiyosaki. Both of their books are excellent as well.
ladylaw (Terry Bush) says…
Ya'll are silly.
I only have one question: Why does gold continue to be so valuable to human beings? I understand that it used to be highly prized b/c it could be used to make metal things, which were rare and useful (e.g. jewelry and weapons). But haven't we moved past that? We now make jewelry out of many other metals or things, and our weapons don't necessarily need gold (I hear anthrax is making a big come-back).
So why do economies continue to bench mark or attach themselves to this mere metal? Why not pick out something less rare or more useful (eggs & chickens perhaps; at least we can eat those things!).
I would like to see economies and value systems based upon things that truly contribute to the survival of the species; things like intelligence, honesty, loyalty, and the ability to find food!
I know I am niave and simple minded, but I was able to intelligent converse (and write) about anti-trust concepts with the top economists in the nation...So I am not incapable of being taught!
El_Borak (Bill Hoyt) says…
"So why do economies continue to bench mark or attach themselves to this mere metal? Why not pick out something less rare or more useful (eggs & chickens perhaps; at least we can eat those things!)."
But they don't, and they did. There is not a single nation today whose currency contains gold or is tied to gold. While many central banks still hold gold, they have been selling it off for decades (European central banks have an agreement that they will limit their sales to 500 TONS a year - I look forward to the day when they have none left). So no economy is attaching itself to metal.
And we did pick something less rare and more useful to use in its place: paper. We can now have as much money as we wish, far more than the number of things we are attempting to buy with it.
ladylaw (Terry Bush) says…
So, if paper is the new valued thing...why all this fuss over gold and the price of gold? Methinks there must still be some kind of hope or attachment to it.....
fletch (anonymous) says…
There's actually a parallel to the Democratic Peace Theory that some people dub the "Debtors Peace Theory." Most industrialized first world nations have huge debts they owe to each other. It goes back at forth (mutual debt does not cancel out in international finance) between almost every country we would consider to be international powers. Much like Democratic Peace Theory says that democracies will not attack each other because it would create massive instability, Debtors Peace Theory says that most industrialized nations will never declare war on each other because it would cause everybody to start debt collecting 1) to punish the nation they're at war with as well as their allies and 2) to finance the war from their friends. Regardless of how alliances fall, this would lead to the economic collapse of almost every superpower. Thus we can't attack China, Russia can't attack us, and everybody just agrees to behave.
alm77 (anonymous) says…
I'm a little late jumping in here, (I've been out of town) but I've been waiting for this subject to come up so I can ask this question and I hope I word it right...
Bill, I understand paper dollars are no longer a gold equivalent, but isn't money now the tangible form of time and talent? People get paid either by the hour (their time) or by their talent (production or salary). Now, time CANNOT be created (it is a limited resource), it isn't in mass quantities and we all have the same amount of time (24 hours) to convert it to money in our pocket.
As far as Rich Dad, read it before you knock it, and use it as a starter rather than your entire philosophy. His basic ideas are: Avoid debt save up for everything, live far below your means to save as much as possible, put your savings to work in investments and work hard at numberous things. I don't see anything wrong or flimsy with any of that. I believe "The Millionaire Next Door" says pretty much the same thing. Anybody could figure out if you don't spend what you have and then some, you'll eventually become very well off.
El_Borak (Bill Hoyt) says…
"...isn't money now the tangible form of time and talent? People get paid either by the hour (their time) or by their talent (production or salary). Now, time CANNOT be created (it is a limited resource), it isn't in mass quantities and we all have the same amount of time (24 hours) to convert it to money in our pocket."
Hi, Alm. Sorry it took me so long to answer this; I only saw it because I came back to steal one of Chris' quotes for Myopia.
In short, yes, you are exactly correct on an individual level. Money is all those things. And if we could leave it at that, the world would be a far better place.
But the major problem with money today (and the fatal contradiction that will eventually destroy the dollar) is that the there is someone for whom there are more than 24 hours in a day.
You earn your money by providing value, and spend it in exchange for valuable things that you do not create yourself. The government prints money and spends it for things they do not create themselves; but they create no product, no value in exchange for that money.
Consider the economy as a big auction. You arrive with all your savings (the monetary representation of all your accumulated work) as do many others. You can bid as much as you have dollars in your bucket, same as everyone else. But there is one bidder that has a bottomless bucket; he creates out of nothing what you have scrimped and saved for. He has the power to buy everything for sale.
It's not simply 'unfair.' The fact that he can and does create all the dollars he needs means that the total number of dollars (from our perspective, the total amount of accumulated work) continues to grow, yet because the things which those dollars can buy does not increase magically, the number of dollars needed to buy the things constantly increases. That's inflation. If you do not act, the value (the number of things you can buy) of your savings is constantly eroded, constantly depreciated, because every dollar becomes worth less and less as more are created (about 8% per year...that's a lot of dollars). The result is that eventually you'll be able to buy nothing with them and the auction will close.
When the dollar was under the discipline of gold, the bucket was not bottomless; the government could only create as many dollars as it had backing for. However, in the brave new world of floating currencies, the number created is unlimitable and virtually unlimited.
That, of course, is the saving grace of gold and the very reason governments hate it. There's nothing magical about gold, it is simply limited in supply and expensive to procure. It keeps them honest at auction, as you must be. And they can't have that, not when there are unlimited desires the voters expect them to satisfy.