In today's current economy, its not uncommon to run into a person who thinks that America's current situation was caused 100% by former President George W. Bush. Little do these people know, America has been sinking long before Bush or even his father stepped foot into office. The root of America's problems has always been financial. Well, that and the government itself. I'm not going to go into every single issue that is plaguing our country, because that'd be an entire book (I will recommend a couple of books which go into great detail at the end of this article). I'm just going to go over the most basic, most important issue going on today. That is --- our money itself. Most of our problems began with the removal of the gold standard.
The gold standard, for those who don't know, is when our currency was backed up by gold. Each dollar bill (or certificate), was a note representing how much gold that bill had in storage. A person could actually get physical gold in exchange for their currency notes (before they outlawed gold bullion, at least). At one point in time, each bank issued their own individual notes representing gold, but the problem was that people would be inconvenienced if another bank or merchant didn't accept those notes. To make a long story short, around the Civil War, we went to a national currency which was backed up by gold. Before paper money/notes, our currency was actually gold and silver coins. Its unconstitutional for us to have paper money. But the paper notes were only supposed to be short term, or so "they" told the Supreme Court. Not gonna get into all the details.
Now let's fast forward to 1971 when Richard Nixon did away with the Bretton Woods agreement, which removed us from the gold standard, making our money completely worthless. Nixon said it would be temporary, but we see that was a lie 40 years later. We are now a nation with a fiat currency. Take a look at today's dollar bills --- it says "legal tender." Which basically means that its worth nothing... the only worth it has is the word of the government. That also weakened the rest of the world because The Bretton Woods agreement named the American Dollar the world's reserve currency. When we went off the gold standard, that made it easy for other countries to debase their currencies for trading advantages.
When we were on the gold standard, the government could only print enough money to match our nation's gold reserves. That way, the value of our currency wasn't volatile and prices remained steady. But today, with nothing backing our currency, the Federal Reserve (our nation's central bank) is free to print money at will, which diminishes our purchasing power faster than ever before. Since Nixon's decision in 1971, we've had run away inflation and stagflation probably more so than in our country's history.
We've talked a lot about the gold standard, but adopting it again is not as easy as it sounds. America in its current form would have to either crash or heavily deflate before we could go back to a gold standard. After the issue of fiat currency, we have the issue of massive debt. Our debt woes will most likely be our downfall. America went from being a producing and manufacturing nation, to being a consumer nation. Not only do Americans consume like crazy, Americans have stopped producing and stopped saving. The average American saves less than 3% of their income! In some cases, the average person spends more than they make! How is that even possible, you ask? That's because they have to borrow the remainder. What this has lead to is rampant consumption which sends American money overseas in return for foreign products (imports). In order to fund this consumption along with their own, the government has to continuously borrow money from nations who's citizens do save money. The first candidate is China, who's citizens save roughly 40% of their income on average. Because no one in America saves, and everyone is borrowing (government included) that means that America is bankrupt!
Since America is bankrupt, our system is predicated upon whether or not China and other nations will continue to loan to us. You see, when our government wants to raise money, they issue Treasury bills (T-Bills), which is an I.O.U. Our creditors hold a lot of these T-Bills. When these other nations calls American's debt, will these nations accept payment in American dollars? Chances are, they won't. WHEN that happens (its not a matter of IF, but WHEN), that will be the day America crashes. But why won't they accept American dollars as repayment, you might ask? That's simple: because of the runaway inflation in our nation and the value of the dollar quickly diminishing, caused mainly by The Federal Reserve printing money non-stop, our government would be paying their debtors back with dollars that are worth less than the ones they borrowed. In other words, they'd be repaying with cheaper money. Those other nations aren't stupid! They know what's going on. And as mentioned earlier, when they refuse to accept American dollars, the inevitable crash will occur.
That's when we can start from scratch and rebuild this system the right way. Our founding fathers laid out a great plan for us to follow to maintain a stable, well-run economy, but greed got the best of some people.
As promised earlier, here are a couple of books I recommend if you'd like to read more on this subject in great detail.
Recommended Reading:
The Real Crash by Peter Schiff
The Lost Science of Money by Stephen Zarlenga
Sean T. Alexandre is an experienced investor, entrepreneur, research and writer for First Point Capital, LLC, a company formed to serve the needs of up and coming entrepreneurs, investors, and scholars who wish to reach opulent goals and stay consciously afloat in these fast changing times.
Visit Sean at: [http://seanalexandre.com]
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