50 Years of Transitory Fiat System: The Danger of Spectacular Collapse
50 years ago, Nixon closed the Gold Window, defaulting on US liabilities. 50 years later, the Fed is cornered, and the danger of a spectacular collapse of the USD is something that we must be prepared for.
Published by Dr Jiulin Teng on 15 Aug 2021 · Updated on 15 Aug 2021
Fifty years ago to the day, Richard Nixon closed the "Gold Window", essentially defaulting on US liabilities. At the time, Nixon promised, and his actions suggested that he and his administration to some extent believed, that it was "temporary". This was the initial reckoning of the Triffin dilemma, though a great part of the inflation in those years were the direct result of funding the Apollo Program (by JFK), the Great Society programs (by LBJ), and the Vietnam War (id.) by money-printing (as opposed e.g. to the Marshall Plan). It was followed by a decade of devastating inflation that saw gold price rise from $36 to a high of over $800 in 1980.
Fifty years later today, the Fed is stuck between the prodigious rock and hard place: If it does not significantly raise the interest rate and correct course on its reckless monetary policy (that includes the direct purchase of speculative assets and junk bonds), inflation is almost certainly going out of control. In a high- / hyper-inflationary environment, the US economy will buckle (with bloating "GDP" numbers), and the dollar-dominated fiat system will collapse. On the other hand, if it does these things, the pressure on the largest asset bubble of global financial history that coincides with one of the worst debt burdens (public and private), both the result of the disastrous monetary policy led most notably by Greenspan and Bernanke, is almost certainly going to cause a spectacular collapse of the dollar-led financial system. The only difference is that in the latter case the world is saved of a lot of acrimony caused by inflation, as it will be a deflationary event that benefits savers.
The Post-Dollar Dilemma
Some people wish for the collapse of the dollar. I, however, want to point out that this is almost certainly a case of "Be careful what you wish for":
While the fiat system has devastated three generations of young people, increasingly depriving them of upward mobility in a stale state that violates all economic principles that classical economists of the 19th century opined about, it is an orderly replacement that we should be wishing for. However, an often-overlooked aspect of the fiat system is that the same forces that lead to the eventual destruction of the system also prevents a replacement from being formed. As of today, there is no viable alternative to the dollar, as every currency in circulation is based on nothing but air.
In other words, an orderly replacement is almost certainly not going to happen. Instead, we will most likely have to suffer the global consequences of 50+ years (at the time of collapse) of the sins of the fiat system.
I will discuss my thoughts on what countries can do to alleviate the shock to their economies in the aftermath in future posts.