Unbacked paper money, like the US dollar, depends on confidence. People accept it in exchange for goods and services only because they believe that they, too, will be able to spend it when they wish.
When confidence in the issuer begins to crack-up, people begin losing confidence in the currency.
Today, confidence in the US government is severely strained. We’ve been here before. During the double-digit inflation of the late 70’s, prices were rising fast. Confidence in the dollar and its purchasing power were being tested. The dollar was losing value so fast that the Bank of International Settlement – the central bankers’ central bank – warned the US that if it didn’t get things under control, the dollar would lose its role as the international currency of choice.
Few presidents have inspired confidence like Ronald Reagan with his “morning in America” optimism and demeanor. He helped restore confidence, but he had the help of the new Federal Reserve Chairman, Paul Volcker, who was determined to wring inflation out of the monetary system.
Crisis averted.
Today confidence in the US is fading fast as there is no sunny confidence-inspiring president. Nor is there a Fed chairman or any possible successor free from today’s worst monetary delusions.
The ignominious exit from Afghanistan – the longest war in American history – has undermined confidence in Washington like nothing else in years. Writer Matt Taibbi tweeted, “As the Taliban waltzes into Kabul, the look of surprise on the face of top officials should frighten us most of all.” The chaos begs the question: How are assurances of authorities who have given us a 13-year Quantitative Easing money-printing flood any different from the assurances of those who gave us 20 years of Afghanistan occupation?
After the Afghan debacle how much confidence can Taiwan have in US war guarantees? As Pat Buchanan put it, “Not once in this century has the U.S. decisively won one of the wars it launched — in Afghanistan, Iraq, Syria, Yemen or Libya. And the sole superpower status we enjoyed as the 21st century began is gone with the wind.”
The US economy is much weaker than the casual consumer of news would suspect. The handouts, stimmy checks, and unemployment bonanzas are mostly finished, and with them the artificial props that lifted consumers disappear.
Little wonder that consumer confidence is in free-fall. MarketWatch reports that “the University of Michigan’s gauge of consumer sentiment plunged to a preliminary August reading of 70.2 from a final July reading of 81.2. Economists polled by the Wall Street Journal had expected an August reading of 81.3.”
Inflation is running hotter than Fed authorities expected. The Wall Street Journal calls it “the biggest inflation spike in decades.” For the three months May-June-July consumer prices are rose at an annual rate of 8.1 percent. With prices rising so fast, even the dollar stores are wondering what to do when their merchandise goes over a buck. They will probably go the way of the old five and dime stores.
The US government is spending $2 million a minute, exploding the debt by $5 trillion over just the last 17 months.
Now a new public debate about raising the debt ceiling is about to begin. It won’t do anything about Washington’s orgy of spending, but the spotlight on our politicians’ irresponsibility will widen the confidence gap.
Official confusion about COVID hasn’t been exactly confidence-inspiring, either. Mask don’t work. Masks work. Maybe you should wear two. The vaccine is effective. The vaccine hasn’t kept recipients safe. Another, third shot may be required, and after that…? Government pronouncements now provoke wide-spread skepticism.
There is much more. The US southern border is a mess and appears to include a special exemption from health mandates that are applied to the rest of the country. Many of our biggest cities are like war zones with shootings setting ever-new records. At the same time homeless encampments along streets, under bridges, and in city parks of major cities grow relentlessly.
These things drain confidence in America.
To repeat: the dollar’s value, like that of all paper currencies, is dependent on confidence. Its global role is co-extensive with the US empire which as seen better days. International dollar reserves and the empire rose together and will fall together.
Gold, on the other hand, is not dependent of the political affairs of the issuer: its murder rate, growing debt, consumer confidence, or imperial overreach. An ounce of gold is an ounce of gold no matter whose picture is on it and who issued it. Its value does not depend on fancy linen stock, ornate engraving, and the signatures of treasury officials. All those flourishes are designed to inspire confidence. But they have graced hundreds of over-issued and failed currencies. They are no substitute for the intrinsic value of gold, a value recognized by people around the world for thousands of years.
Gold is the only financial asset that is not dependent on someone’s promises or performance. A time of waning confidence is a time to protect yourself from confidence games. Take steps today to protect your wealth, your retirement, and your family with gold and silver.
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