“Sound as a Dollar” | SWP Cayman

“Sound as a Dollar”

Jeff Thomas | Apr 12th 2022, 6:54:15 pm

That was a popular phrase in the past. And, because the dollar has been the world’s reserve currency for nearly eighty years, there’s a temptation to assume that the dollar will remain the king of currencies. But history shows us that all fiat currencies eventually come to a bad end, and the dollar is most assuredly a fiat currency, having lost its backing by gold in 1971 – something that US President Nixon promised would be a “temporary measure.” But why should this be? Why should it end at all?


That was a popular phrase in the past. And, because the dollar has been the world’s reserve currency for nearly eighty years, there’s a temptation to assume that the dollar will remain the king of currencies.

But history shows us that all fiat currencies eventually come to a bad end, and the dollar is most assuredly a fiat currency, having lost its backing by gold in 1971 – something that US President Nixon promised would be a “temporary measure.”

But why should this be? Why should it end at all?

Well, Aristotle defined “money” about 2300 years ago and, to date, no one has done a better job. He stated that, for anything to be used as money, it should be durable, divisible, portable and intrinsically valuable.

Paper currencies are only moderately durable and, being made of paper, are certainly not intrinsically valuable. So they may qualify as “currency,” but not “money”.

For 5000 years, men have attempted to use other things for money – seashells, grain, cattle and even, briefly, tulips, in the 17th century.

But invariably, all fiat currencies have failed, and almost always for the same reason. Governments figure out that they can print currency to their hearts’ content, which eventually and inevitably devalues the currency.

Usually, they do this to cover for the fact that they’ve ramped up their debt to the point that it’s unsustainable. The increased production of fiat currency then buys them time – sometimes decades – before the entire system collapses.

And when this occurs, the world returns once again to regard gold as the one element that answers our old friend Aristotle’s description best. Again, the world turns to gold as its principal form of money.

Today, we’re at the end of the most extreme case of the repeated fiat fraud in world history. In the 1930s, the US avoided joining World War II for as long as possible and, instead, put its focus on manufacturing arms and equipment for the war, to be sold to the Allies. They made billions.

They insisted on being paid in gold and, by the end of the war, the US held the great majority of the world’s gold. As such, it was able to dictate to the world, after the war, to accept the dollar as the world’s default currency. It then reneged on the deal in 1971, when it removed the gold backing of the dollar, but by then it was too late. The First World countries were already passengers on the dollar train and were enjoying the prosperity that went with it.

But that also meant that the US could borrow more heavily than any country had ever done in history and eventually that level of debt required the creation of trillions of dollars, in order to keep the wolves from the door. All those countries that were on the dollar train – principally the First World countries – were in jeopardy.

At that point, the US’s long-held economic dominance over the world was quite fragile and all that would be needed was a fatal straw to break the camel’s back.

That straw came in the form of a gas pipeline that would deliver gas directly from Russia to Europe in far larger volumes than ever before.

As the new pipeline was in the Baltic Sea and did not pass through countries that would extract a toll, the gas could actually be delivered more cheaply than before – something no other gas distributor in the world could compete with.

This one fact would upset the economic balance between the US and EU and pass the economic baton to Russia. This could not be tolerated, as it meant that Russia would henceforth be in the catbird seat, ending the petrodollar and, with it, US hegemony.

The US responded by goading Russia into war. On 19th February, US puppet president Zelensky declared at the Munich Security Conference that Ukraine would become a nuclear state – a direct threat to Russia. Five days later, Russia, not surprisingly, responded by invading Ukraine.

That allowed the US to get down to the real business – attempting to freeze Russia out of worldwide commerce and confiscating its assets.

But unfortunately for the US, this backfired. Russia was ready for this eventuality and stated that, as the US had eliminated Russia’s ability to deal in dollars and euros, Russia was left with no choice but to demand that, henceforth, energy delivered to “unfriendly countries be paid for in rubles, as trust in the dollar has been compromised.”

This, of course, infuriated the European countries who had gone along with US sanctions. They were now stuck in the middle.

Not surprisingly, the ruble soared in value quickly (doubled against the dollar at the time of writing). At the same time, Russia offered payment for gas in gold.

The last time a country made such an offer – Libya, in 2011 – the US invaded Libya and destroyed it.

Prior to that, in 2003, the US had done the same with Iraq, also for attempting to ditch the petrodollar.

But this time, the US has taken on a much more formidable adversary. In addition, other countries are getting the message that the US is prepared to confiscate other countries’ assets at will. So, they now have two reasons for switching over to Russia as their supplier of fuel. Add to that the fact that the US has ramped up its money-printing by trillions of dollars in the last year, and you have a dollar that will be inflating dramatically, at the same time as it will be losing its value as the petrodollar.

Other countries will dump dollars back into the US, causing further inflation, if not hyperinflation. As Russian President Putin has recently said, “Many countries, in the immediate future may begin – I am sure this is what will happen – to convert their paper and digital assets into real reserves of raw materials, land, food, gold and other real assets.”

And just to be sure that that happens, Mr. Putin has pegged the ruble to gold at $1600 – a bargain price - at a time when gold is topping $1900.

This is unmatchable by any other fuel supplier in the world and will assure that the world will seek to buy fuel in rubles and/or gold.

And, in the mix, Russia will do what the US did during World War II: take possession of much of the world’s gold reserves in payment for oil and gas.

So, what does that mean to those who possess the yellow metal? Well, it means that the entire world will be scrambling to get their hands on the stuff. And, as always, whenever a commodity is in high demand, but limited quantity, the price will rise.

Today, gold is at $1921, but by the time you read this, that will have changed already. We shall soon see a dramatic rise and, in addition, as there will be few sellers, premiums will also rise dramatically.

As always happens in a crisis period, the fiat currencies that have, until now, appeared to be sound, will sink dramatically and gold will once again rise to its intrinsic worth.

 

 

 

There are currently no comments, be the first.

Subscribe to our Free Newsletter

We will use your information to send you a free report on offshore storage, our company newsletter and product promotions.