US Economic Collapse - Coming Soon to Your Neighborhood

In 1971 Richard "Tricky Dick" Nixon disconnected the US dollar from gold.  Previous to that (since the 1940's) the US dollar was linked gold as $35 USD per ounce of gold.

This meant that the amount of gold held by the US limited the amount of dollars the US could create (since the US had a relatively fixed amount of gold).

More importantly the Federal Reserve was bound to this as well.  So if the US government wanted to borrow dollars it had to have gold above and beyond that which backed the US dollars in circulation at the time.

In the 1940's after the war the gold backed US dollar was set as the reserve currency for the world.   This meant that all countries could peg their currency to the US dollar and exchange their currencies for gold at any time.

By 1971 the US was borrowing money for the Vietnam war.  In addition, countries such as France where interested in swapping currency for gold.  The US had run up trade deficits as well.  The US had been printing "extra" money to compensate which drove the real value of the dollar (and all the currencies tied to it) down.

To address this issue Nixon "temporarily" (though its still in effect today) decoupled gold from the dollar via the Nixon Shock.

This meant that the US could print as many dollars as it liked.

So it did...

This turned the US dollar into a fiat currency.  "Fiat" meaning that instead of an asset, say gold, backing the dollar government regulation and law back it.

How well is government regulation and law working out for us at this point?

And very soon the consequences of this after some forty or so years will, as they say, come home to roost.

Since the time of Nixon there has been steady inflation of US prices - let's say an average of two or three percent each year.

Now, without the US currency tied to anything prices simple creep upward.

So imagine Joe in 1965.  Joe is a carpenter.  His wife Mary has four kids at home.  They get buy on Joe's wages.

Over time Joe's work output - say the amount of doors or shelves he can make in a day - is fixed.  But each year the cost of everything Joe needs for his life goes up 2% or 3%.

So after ten or fifteen years Mary needs to work to make up for the deficit in Joe's ability to earn a living.  (No problem, now the kids are grown...)

But in another ten or fifteen years prices have increased another 25% or 30%.

Now Joe and Mary as grandparents have to help their children and grandchildren.

The reason is simple.  Joe's children's marriages have to support two working people to earn enought to buy what they need because of this inflation.

So savings are depleted to "invest" in the future.

Then houses are mortgaged because another ten or fifteen years go by and now to maintain even a basic standard of living there is simply not enough buying power left.

Today we have some $15 trillion in debt in addition to the vast pool of fiat US dollar currency.

Making the dollars relatively worthless.

While all this is going on the US government has used its gold resources to create a "paper" market for gold.

That is a market where you can buy "shares" in gold - but not own the gold itself.

Only after some forty years of this there is another problem.  Only about 2.5% of the paper shares of gold are backed by actual gold.  (For every 45 "shares" equal to a single gold bar I sell I would normally have to have 45 gold bars.  But in today's world I only need one.)

This means that the value of gold is diluted by some 45 times.

So we have the US Treasury borrowing trillions of dollars from the Federal Reserve Bank with I.O.U. backed by the full "Faith and Credit of the US Government."

But what does that mean?  There's nothing to back it up any longer.

Its not like the borrowed money is being used to buy assets that will appreciate in value, bridges, roads, land, islands, etc. 

Its being spent on big screen TV's and food stamps - basically day-to-day bills.

The bottom line is that the quadruple witching hour is upon US:

1) Gold is "devalued" (whether on purpose - see GATA -  or via greed) by some 45 times leaving bullion banks and governments open to a "run" on gold.

2) Dollars have been inflated to the point where a family simply cannot afford to live without financial help from relatives or the US Government even with no savings and both adults working.

3) The US government, all the states, and most municipal governments haave generated Federal Reserve and other debt equal to the US GDP for which it has no backing assets AND it has another 50 trillion in debt for unfunded future promises (Social Security, etc.) for which it has no resources.

4) The current administration is selling short term US Treasury's (with only a few years to maturity) which makes our ability to finance, manage and control the current debt dependent on low interest rates.

Now no amount of "Obama" taxing is going to fix this problem.

Nor is any sort of "Romney or Ryan" social security fix.

The reason is that the magnitude of the debt and devaluation is simply beyond comprehension.

And the rest of the world has followed the US over the cliff by purchasing US Treasury notes.  These are sold by the US Treasury to "fund" the printing of dollars by the Federal Reserve.  We can borrow a lot of money when the cost of financing is low (under 1%). 

But that will change too...

Fiat currency has a long and sordid history of failure.

In fact I am not aware of any case where things turned out well for a country with a fiat currency going back to Roman times and the Roman dinarius.