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The End of the Dollar

Last week’s tax and unemployment package was just one of a long series of events that will destroy the dollar. While most people are blissfully unaware, the government is working to undermine the U.S. dollar. I have written about this massive change that will affect all of our lives many times before.

Photo by dcJohn

This latest act of congress makes it clear why the dollar has no hope for survival: our government has no desire to be financially responsible. America is a country of debtors. We have the lowest saving rate of any developed country. Why would our elected representatives be any more responsible than we are?

How did this happen?

There are several factors that have created the likely end of the dollar. Perhaps the biggest cause is the dollar’s greatest benefit. It has been the world’s reserve currency for nearly 100 years. That means that when other countries wanted to hold their savings, they would buy U.S. dollars or U.S. debt.

This means that there was no limit to how much money the government could borrow. And like a teenager with a credit card (and many of their parents), they didn’t know when to stop. Since the government could borrow as much as it wanted, there was very little incentive to keep a balanced budget.

Politicians were afraid to say no. They did not want tol get voted out of office. When the Republicans wanted to lower taxes, they would say, “no problem”. When the Democrats wanted more benefits and spending, they thought, “It’s OK, we’ll just borrow a little and pay it back later.”

The problem with this approach is that laternever comes. When there is economic chaos, they say that now is not the time to cut spending. When times are good, like from 1995 – 2008, the last thing that people are thinking about is future financial problems. The net result is that the debt just piles up until it becomes too big to pay off.

I believe that we have reached that point. Between Medicare, Medicaid and Social Security alone, we have $72 trillion in liabilities. The national debt is approaching $14 trillion, and growing at a record pace. And, there is no slowing down in sight.

In order to pay all of these liabilities, the government (and the Fed, specifically) is creating dollars out of thin air. This means that they are inflating the money supply, or the number of dollars in existence. It’s like turning on the printing press, without anything to back up all the dollars being printed. It’s like a giant Ponzi scheme.

We have already seen the effects of this inflation. The dollar has lost nearly half of its value since 2002. And, the situation has become much more dire since then.

So what? How does this affect me?

This economic shift will affect every American, and most people around the world. It means that saving dollars is a recipe for poverty. Hoping to get a measly 2% or 5% won’t work. In a year the dollar could lose 10%, 20% or even more of its value.

Like most things in life, we can allow this force to destroy us, or we can harness the knowledge to our benefit. As the dollar falls, other assets will rise. Gold, silver, the Indian Rupee and the Chinese Yuan are good candidates. I don’t know what will happen, but it seems clear that the dollar’s rule is coming to an end.

We can control our finances, or allow our finances to control us. Millions of people will get wiped out as the dollar continues to lose value. Most will lament that it isn’t their fault and that the government is to blame. I beg to differ.

That is the fate of the average person, but not the destiny of those who choose to get educated. Now, like always, is a great time to invest and improve our future. We each get to choose our own path of prosperity. I can’t tell you what to do, but I can suggest learning about the forces at work in our economy and finding ways of using them to our benefit.

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  1. Mandamus
    December 20th, 2010 at 08:55 | #1

    Don’t forget about the phantom money created by wall street.
    When a shares value goes from 40$ to 60$, that value is marked down as an asset, and it can be used to borrow money. Where did that value come from? Since until recently there was only so much actual cash available to be put in bank accounts, they found a way to make imaginary money that everyone agreed was just as good as real money. That’s what all the debt is that’s floating around. Not just the government debt, the corporations have done it too.

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