What Exactly is a “Dollar” Anyway?

Financial Health and Wealth Advice - What Exactly is a “Dollar” Anyway

Dollars.  We’ve had them around and used them for our entire lives.  We’re so familiar with dollars that we never really stop to think about what they actually represent.  All we know is that we need those bucks to provide for ourselves and our families.

And, if we can just accumulate enough of them, our lives will be improved (theoretically, at least) and we can acquire a lot more good stuff, like bigger houses, cars, boats, and education for our kids.

But, What Is a Dollar, Really?

There was a time when a dollar was a paper certificate, with no intrinsic value itself, but redeemable for something that has had intrinsic value for thousands of years – gold or silver.  Life was good!

Then something happened.  In 1971 President Richard Nixon “temporarily” changed the rules so that we could no longer redeem those dollars for gold or silver.

It was at that moment the dollar became a fiat currency – not real money.  A “fiat” is a decree by an authority.  Fiat currency is currency that is decreed by a government to be legal tender, and is backed only by that government’s power to tax and “legally” enforce its decrees, by force if necessary.

So, when President Nixon decoupled the dollar from gold, the dollar instantly became just a piece of paper, which now only has value because the U. S. government says it does, and the rest of the world has agreed, at least for now, to play along.

So, what is the dollar?  It is debt – debt of the United States government.  The fact that dollars really represent debt is not obvious, at first, but that is the reality of it.

The Dollar As Debt

All dollars which have been “printed” since Mr. Nixon’s 1971 decree have been created as debt.  It works something like this.

The U. S. government needs an ever-increasing supply of currency to operate the ever growing bureaucracy, finance its wars, pay its obligations, and to pay the interest on the debt it has already created.

The government can meet some of its financial needs through taxation, but not nearly all of its needs.  And besides, raising taxes is political suicide, and if there’s one thing politicians are good at, it’s making sure they stay in office.  So, the ability to raise taxes is limited.

What’s a Spendthrift Government To Do?

For many years the U. S. government issued treasury bonds (debts of the government) and because the world’s financial community regarded U. S. government bonds to be “as good as gold” there were plenty of buyers for those bonds because they were regarded as a safe haven investment.

Basically, the U. S. was getting a free ride.  Sure, it paid a reasonable amount of interest on its debts (bonds), but it paid that interest by issuing more bonds.  You didn’t really think the government actually paid the interest or, heaven forbid, paid down its debt too, did you?

That system worked pretty well for the U. S. for quite a while, but investors and other countries began to smell a rat as the U. S. kept increasing its money supply by issuing new debt, especially since no new assets were there to back up all of this newly created debt.

And, of course, the more debt the U. S. issued, the more interest it had to pay to service the debt.  A snowball began to form.

Eventually, there weren’t enough investors willing to buy U. S. bonds at a good enough price to support the government’s insatiable spending habit.

What’s a poor (literally) government to do?  Reducing spending by cutting counter-productive and wasteful entitlement programs was certainly never seriously considered.  That would be another form of political suicide.

A Brilliant Solution

Someone figured out a brilliant solution to the problem.

What if the U. S. government continues to issue ever-increasing amounts of treasury bonds, and the U. S. Federal Reserve Bank agrees to buy them (watch this!) with money, sorry – currency, that it creates out of thin air and with absolutely no limitation whatsoever on the amount of money it can create?

We have, indeed, devised a plan whereby currency is literally borrowed into existence in unlimited quantities.  The current rate of currency creation is running at around $85,000,000,000 per month as of October, 2013.

And, if you are the least bit concerned about how all of this borrowed money will be repaid, with interest, don’t be.  The solution is simple.  Issue some more treasury bonds and sell them to the Federal Reserve Bank, which will pay for them with newly printed dollars.  In other words, the interest is never really paid, and the debt is never repaid.  It’s all  just rolled over again, and again, and again!

As an aside, and on a purely theoretical basis, the U. S. government is supposed to pay interest on all of that newly printed money it is borrowing into existence.

I’m sure it is nothing more than an odd coincidence that Mr. Bernanke and the Federal Reserve Bank have manipulated the interest rate to something reasonable, like, shall we say, 0%.

Never mind the consequences to poor retirees who used to be able to live on the interest from the CD’s they worked their whole lives to save up.

Some of the more outspoken among us might suggest that this represents outright thievery by the government and the Federal Reserve Bank perpetrated on the defenseless.

No need to worry, though.  All that extra currency which is being borrowed into existence is backed by the full faith and credit of the United States government.  Whew!  That takes a load off my mind.

Remember that snowball I mentioned?  Well, I think it’s starting to roll down the proverbial hill (I wonder if that’s Capitol Hill).

So that’s about it, other than to say that all of the developed world’s governments and central banks are in on it and have variations of the same “borrow currency into existence” Ponzi scheme going.

What is a Dollar?

A dollar is a piece of  paper having no intrinsic value, backed by nothing tangible, being reproduced at will and in unlimited quantities by the Federal Reserve Bank, having been borrowed into existence by an over-spending, fiscally irresponsible, government, which is doomed to suffer a day (or more likely years) of financial reckoning when the Ponzi scheme, like all Ponzi schemes, is exposed and comes crashing down under its own weight.

When that happens, investors with dollar-based investments are going to quickly flee from the dollar and head for the safety of gold and silver.

The result of the dollar exodus will be a dramatic decrease in its purchasing power, since no one will want to own it, and a commensurate increase in the purchasing power of gold and silver, since everyone will be trying to buy an asset with limited supply. Supply and demand will then rule the day. Remember, the central banks can’t create more gold and silver.

Donna Morgan: Crank It is where inspiration, aspiration and solution converge to make things ‘happen’. Turn on your life or turn it around and see where it takes you!