Are we living in the last days… of the dollar?

In 1971, President Richard Nixon made financial history by removing the U.S. dollar from the gold standard. Although the US dollar was still the world’s currency, but it was a road to financial ruin. The United States was free to print as much money as it wanted, and like blind leading the blind, the world went along with it.

Roll of Cash

Because of this historical change, foreign exchange became more complex. Today, to understand the world of currency, you need to think a little… differently — essentially because they don’t really don’t make a lot of sense. For example, today, the United States is “perceived” to be the richest country in the world. But like Hollywood, perception is usually wrong. In reality, though, America is now the biggest debtor nation in the world. And who is America indebted to? What many consider to be a Third World country: The People’s Republic of China.  The irony is that many Americans think we’re rich and China is poor. The joke’s on us because 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 and a vacuum in accountability. The sheer amount of liquidity around the globe is like the sands of the seashore.

This excess money is constantly creating inflation and causes people to feel rich and almost everything to be more expensive. Today, stocks, real estate, automobiles, and gasoline become more expensive as the dollar depreciates. While some people do become richer in this system, this financial system actually punishes working people who save money. It devalues the value of your work and your savings, even though you may feel wealthier.

In overly simplistic terms, China, Japan and many countries in the world today lend the US trillions of dollars to spend. They send us products like mobile phones, electronics, LCD televisions, cars, clothing, almost every product in your home. 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 potatoes. 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, especially — it somehow does make a lot of sense (or cents).

You can find current smaller examples of such financial insanity. For example, many people refinance their homes to pay off their credit cards. This makes no sense; obviously someday that debt will have to be paid.  Yet getting deeper into debt does make sense as long as you can repay your lender with cheaper dollars, and as long as your lender is willing to take those cheaper, less-valuable dollars. As long as the grocer is happy with this arrangement, things are fine.

Over the years, other currencies got stronger and the US dollar got weaker simply because America printed more and more money, all the while consuming more and producing less. Japan would lend America money and we would buy their products. Japan’s economy boomed, and so did America.  The problem today is that China isn’t willing to play the game the way the Japanese did. If America drops the purchasing power of the dollar, China, by pegging their currency to the dollar, also drop the value of their currency. The United States then pays back its debt with a cheaper dollar.

The irony is that America accuse China of playing games with their money. It’s more honest to say that China just isn’t willing to play the game America want to play.  But an even bigger problem is looming: It seems like the rest of the world is less willing to play that money game too. That’s why the European Union introduced the Euro.  If the oil-producing nations stop accepting the dollar and switch to gold or the Euro, things will definitely go “pop”. The world might be tipped into a global recession and possibly even a depression (which is actually a prolonged recession).

For now, though, this money game continues. When will it pop? Nobody really knows, but throughout history all paper money has eventually come back to its true value – zero. That’s when the game truly ends, and a whole new cycle of pass the buck begins. We’re living in the dollar’s last days.

Whatever debt you have, its time to start taking action. Many of you are perhaps deeply in debt and have no assets at all. In fact, statistically, 80% of Americans owe more than what they own. You must decide, first of all, not to take on any more debt, and second, to set up a schedule of debt repayment.  To learn more, you can  download the Financial Freedom Small Groups kit from our Store.