Dogged by Nixon’s Dollar

Yesterday, some French rowdies set fire to cars, burned down a school house, and sent police officers to the hospital. What’s their beef?

Who knows?

These are the ‘dog days’ of summer. They’re called the dog days because the dog star, Sirius, and Canis Major, or ‘big dog’ constellation, is prominent in the sky this time of year.

We went up to Paris yesterday morning. The city is practically empty. Only the tourist spots were crowed; the Parisians are away on summer holidays.

In the markets, the dog days are marked by slow trading on low volumes, because investors and traders have better things to do during these August weeks, such as go to the beach.

Yesterday, for example, the Dow moved only two lousy points.

Gold had a bigger day, down $10, for reasons unexplained.

Yet, in the middle of these dog days at least two remarkable things happened. One of them is the reason the church bells from our nearby village are ringing this morning. The other rang a bell too… but of an entirely different sort.

This is the day reserved to mark the assumption of the Virgin into Heaven. How exactly this happened, we don’t know. We weren’t there. But it’s a big day on the church calendar, at least on the Roman Catholic calendar, and there’s a mass this morning to celebrate it.

It is also the day that old hound, Richard Nixon, chose to interrupt the TV show, Bonanza, in order to tell the nation that he was doing something very stupid. He said that after much sober reflection he had decided to give up on a market economy.

Henceforth, a group of bureaucrats would decide who could raise prices, how much, and when. And by the way, he added, from now on those dollar bills you have in your wallet… well… they’re worthless.

He didn’t exactly say it like that. But that was the gist of it.

We still live in the world Richard Nixon created. It is a world in which dollars… pounds… euros… and zlotys have no real, fixed value. They float, one on top of the other, like windblown leaves. How far they go depends entirely on how fast the breeze is blowing.

What’s a dollar worth? Intrinsically nothing. And all paper currencies sooner or later revert to their intrinsic value – zero. There are no counter-examples in history… except… the present one. So, we have to wonder. Did Richard Milhous Nixon begin a really ‘new era’ on this day 41 years ago? Or, are today’s paper currencies doomed, just like all those that came before them?

One thing to keep in mind is that whatever the value of the dollar, there are a heck of a lot more of them than there were in ’71. The quality may have slipped, but the feds more than compensated in quantity.

How much value has the dollar lost since it was cut loose from gold? Just look at the gold price. In round numbers a dollar was worth 1/40th of an ounce of gold in 1970. Now, it’s worth 1/1,600th. So, the dollar was worth 40 times more back then.

Or take gasoline. You could have bought a gallon of ‘high test’ gasoline in ’70 for 25 cents. That’s about 1/15th today’s price.

What about stocks? From about 800 to 13,000 is an increase of 16 times too. So, investors have made nothing… zero… for the last 40 years. All those gains that they think they made are nothing more than a money illusion.

However you choose to measure it, the value of the piece of paper known as a ‘dollar’ has gone down.

But that doesn’t mean dollars aren’t popular. In some ways they’re more popular than ever. People need them to pay their rent… their auto payments… for their bar tabs and cocaine habits. Mostly, they need dollars to pay their debts.

Whence cometh these debts? Ah… glad you asked. Since Richard Nixon broke the bond with gold, the financial system was free to create as much dollar credit as it wanted. It never had to settle up. That’s the main difference between a paper system and a gold-backed system.

In a gold-backed system, you settle accounts by transferring gold from debtor to creditor… from deficit country to surplus country. Then, when the debtor country runs out… game over. Usually, the gold-backed system is self-correcting.

As soon as gold begins to flow out of the country, interest rates rise… credit becomes dear… and savings increase. This boosts exports relative to imports, stopping the growth of credit and the outflow of gold.

But without this feedback loop, the feds – in collusion with the financial industry – could create dollars by the boatload. It could lend them out. And so it did! Trillions of them.

The amount of credit in the system exploded 50 times. (At least that is the number given to us by our old friend Jim Davidson… It is a round number, easy to remember.) Debts of all sorts – mortgage, student, financial, credit card – grew larger and larger… so large that in 2007 the underlying economy could no longer support them.

You know what happened next.

Which is how we came to be where we are on this ides of August, 2012. We’re paying down… renouncing… and reneging on bad debt. This debt de-leveraging is in its fifth year… with about $16trn worth of debt still to be squeezed out of the US economy alone.

The debtor is dogged by his debt. The creditor is dogged by worry that he won’t be repaid. The Fed is dogged by concern that its cheap money policy isn’t working. The investor is dogged by doubt as to when the Fed will give the market more printing press money.

The saver is dogged by wondering what this new printing press money is worth. The spender is dogged by not having enough of it. And we are dogged by the suspicion that the whole system has become so infernally cut off from financial reality that we will never be able to figure out what is actually going on.

Dog gone!


Bill Bonner
for Markets and Money

From the Archives…

When the Trickle Becomes a Flood
10-08-2012 – Greg Canavan

What Central Planners Can Never Know
09-08-2012 – Bill Bonner

The Central Bank Big Bazooka in Theory and Practice
08-08-2012 – Bill Bonner

In Thrall to the Iron Fist
07-08-2012 – Dan Denning

Cracks in the Foundation
06-08-2012 – Dan Denning

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail Markets and Money.
Bill Bonner

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