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I firmly believe that the U.S. dollar is a burning match. The longer I hold one in my hands, the less it’s worth. Eventually, it appears, it will be worth nothing at all, and I’ll get burned.
That’s not a revelation by any means. In fact, it’s more or less the basis of our entire monetary system. The idea being that if the government can effectively manage inflation at just the right rate, it will maximize growth, minimize unemployment and increase the overall standard of living indefinitely.
But think about the real effect of this policy. It means that real goods and services ALWAYS end up costing more over any significant period of time.
It means that unless you have some kind of edge in your field of employment, you will struggle to earn more (in real terms) than you earn today.
Now, think about the alternative that economists like Paul Krugman warn us about – the “bogeyman” of falling prices.
Under normal economic conditions we would expect prices to fall as technology, science and production efficiencies trend toward lower costs per unit.
In some sectors of the economy, that’s EXACTLY what we’ve seen, but only in highly unregulated (and highly technical) fields like microchips which either move so quickly or are so difficult to understand that they defy government regulation and control.
Think about it: Is there anything less regulated than microchips? We don’t hear about how microchips need to be controlled by the government, and I doubt there’s even been a Congressional hearing on the dangers of computer obsolescence for the American consumer…
And in just 20 years, computers have gone from super-expensive, high-end machines costing north of $5,000 – to commonplace gadgets that frequently cost less than $500 with 1 million times the capability!
I’m not saying that computer costs should be a benchmark for other industries, only that it’s a good thing when computer prices fall – a statement that few people would disagree with.
But as soon as we start talking about prices in general falling, it’s terrible news for everyone. Deflation is the word we hear, and even though no one likes higher prices, it’s somehow the *real* danger that our benevolent banker overlords need to protect us from.
In actuality, deflation is the foe only of the central banker. Our leaders seem to think they have the ability to create growth with the wave of a magic wand and the creation of more currency units.
We know that savings is the real motor that spurs investment and innovation. But when the government stacks the deck so that savers are punished and consumers are rewarded, it creates the situation we’re in now: no or low growth, slowing innovation, and the concentration of wealth into the hands of incestuous corporate/government interests.
So how can we win? The best way is to trade our dollars for productive assets now – before we get burned.
I’ve been buying gold and silver for the better part of five years now. If you haven’t started, it’s NOT too late. Better to own some portion of real wealth in your hands when the winds of monetary crisis shift to the United States from Europe, which they inevitably will.
Until then, those dollars you’re holding will appear to be safe – until they’re not.