Friday, August 8, 2008

The Yellow Brick Road Part Two

Had the gold standard not been abandoned in 1971, nobody today would be talking about the rising price of crude oil or gas at the pump. Why? Simply because the price of crude oil would not be rising. The chart above relates to the price of crude oil compared in dollars versus gold. Charts for virtually any commodity, for example coal, corn or beef would relate similarly to any precious metal such as platinum or silver.

What has gone hay wire with America? Why do we feel we have run off the road into a ditch? Is it really all about fall out from the aftermath of Septemeber 11, 2001 and the wars that followed? Or could there be a deeper problem?

Perhaps there is another explanation that doesn't involve just the events since September 2001 but goes deeper into the basic structure of the American and world economies and how modern nation states structure their currencies. What does it all mean?

To understand what it means one must be clear about the question, or really to understand what is "it?"

The meaning isn't so difficult to decipher if one approaches the problem from the proper perspective. Is the intrinsic value of oil or an overnight stay in London that much higher than it was a decade or a year ago? In a word, NO! Or, is the intrinsic value of the dollar that much lower? In a word YES! So, what is the explanation?

This is what The Rainmaker believes "it" means.

Let's begin with what the journalists would call "deep background," which comes in two parts.

First, for more than four generations America's elected leaders, business leaders, our friends and neighbors as well as (perhaps especially) our bankers from the Federal Reserve on down to the community bank next door have busily squandered America's inheiratance. This represents a moral crises involving our leaders and ourselves. The cure starts at home with each of us living within our means, saving, accepting that there really isn't any such thing as a free lunch and building a better future one day at a time by making the right decision in the present. Then America's leadership must focus on the real problems and leave the side shows of lifestyle choice, culture wars and celebrity politics behind forevermore. Until these changes are made the decline begun back in 1913 with the passage of the Federal Reserve Act and the Federal Income Tax, will continue.

Second, the American dream has captured the imagination of people around the world. Chinese, Indians ane Brazilians--as well as the rest of the world--all want what we've got. Their economies are cranking up to deliver the goods. However, those countries, not to mention the Japanese, Koreans, Taiwanese and Chileans have a built in advantage in the sense their economies don't have to finance the American military industrial complex, supporting troops garrisoned in more than 100 countries around the world and spending more on the military than all the other countries in the world combined. Nor do those countries sustain a social welfare safety net for their workers. These aspiring Chinese, Indians and Brazilians--and all the rest--are driving demand for commodities, especially oil, creating shortages and posing a serious threat to the relative value of the dollar. In short, goods and services are going to continue to cost more in dollars and dollars are going to continue to be worth less and less against other currencies until and unless we get our act together.

The Rainmaker does not believe that this is a problem unique to the dollar. Why? Read on!

Well to really grasp this one must understand that while the dollar's slide is an American phenomena it is also the symptom of a more serious global problem. Why? Well the dollar, like most national currencies is backed not by real wealth but by debt created by national banks secured only by the full faith and credit of the nation. The Federal Reserve, a privately owned institution, loans currency into existence and the United States (actually the tax payers) guarantees those loans will be repaid. Taxes levied on the income of individuals and corproations pay the debt service. The dollar isn't backed by precious metals. The dollar is backed by our capacity to pay taxes.

One can make the argument that the dollar is not nearly as weak as it currently seems (June 2007) and the current valuation, especially against the Euro is really a function of the incredibly bad PR associated with the current Administration. In fact the fundamentals of the Euro are in many ways worse than the fundamental foundations underpining the dollar. European countries have much more significant entitlement problems, less productive work forces, lower savings rates and higher taxes than Americans. This should eventually enable the dollar to rebound against European currencies and make London hotel rooms a little more affordable.

However these arguments don't hold against the Asian competition.

So, what is the real story? The bottom line is that most all national currencies are ultimately secured by the ability of the national government to collect taxes sufficient to carry the debt due the national bank issuing the currency. How can one judge the severity of our currenty problem? The answer is to look at commodity pricing and currency valuation compared to gold.
Please return to the chart at the top of this piece and look at it again with this analysis in mind.

Is this a problem unique to the United States? Or does it involve other national currencies as well? We'll explore that topic in Part Three of The Yellow Brick Road.

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