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CHAPTER 1
The Dollarās Shrinking Value
As the U.S. government racks up a national debt approaching the size of the entire economy, somethingās got to give. When the public debt of approximately $15 trillion is added to the $50 trillion guaranteed for Medicare, Medicaid, Social Security, and other guarantees related to the 2008ā2009 bailouts, the government is on the hook for as much as $100 trillion.1 Increased taxes and budget cutting just wonāt make a dent in obligations of this size. When the bill comes due, expect massive inflation.
Why Governments Love Inflation
Inflation occurs when a government coins money faster than society creates wealth. The government, with its insiders and elites, is both the cause of and the primary beneficiary of inflation.
To see why, consider the past, when money was linked to metal coins made out of gold or silver. In ancient Rome, a denarius was at first almost 100 percent pure silver. Gradually, the Roman government reduced the amount of silver in the denarius until it contained only 5 percent silver. The hyperinflation induced by the currency manipulation made it impossible for the government to collect taxes in a timely fashion and led to this familiar scenario:
By debasing the currency, the Roman emperors were able to pay off government debts by forcing their citizens to accept coins that had less and less precious metal content. The debased coins were worth less, forcing citizens to spend more and more denarii to buy basic goods. In other words, debasing the currency caused inflation.
āIt Canāt Happen Hereāāor Can It?
Today a similar debasing process is going on with American money. Once a U.S. dime was 90 percent silver; now it is 0 percent silver. Until 1934, a U.S. dollar bought an ounce of gold for the fixed rate of $20.67. Now it costs over $1,500 to buy an ounce of gold.3
Taxes: Your Money or Your Life
āTo actually finance the Presidentās current spending plans, taxes would have to rise 20 percent across the board over the next decade and 60 percent over the next 25 years.ā
The U.S. dollar is almost certain to have a sustained run of extremely high inflation over the next decade because of continued huge government deficits and unfunded liabilities like the recent health care reform. To actually finance the Presidentās current spending plans, taxes would have to rise 20 percent across the board over the next decade and 60 percent over the next 25 years.4 Even before the health care makeover, the Petersen-Pew Commission on Budget Reform warned that in 2009 alone, the national debt shot up from 41 to 53 percent of the gross domestic product (GDP). The Commission expects the debt to reach 100 percent of the GDP by 2022 and 200 percent by 2038.5
In other words, in just a few years our nation will owe twice as much as it produces. Weāve run up the credit card to owe double what we earn in a year. Since no conceivable level of taxes and borrowing will enable the United States to service such an enormous debt, the cowardly political way to deal with the situation will be to allow inflation to run rampant.
How Low Can It Go?
What will happen is that more and more dollars will be pumped into the economyāfar more money growth than the underlying economic growth rate would justify. The newly printed money will gradually be worth less and less. But legally, holders of U.S. obligations are forced to accept the devalued dollars. This is exactly the same trick the Roman emperors used.
Itās a trick that works really well as long as inflation is so slowāa few percent per yearāthat people donāt really notice. But if the supply of money grows too quickly, the inflation rate can become very high very fast. (It would be hard not to notice the 25.8 percent loss of purchasing power consumers are experiencing in Venezuela this year, for instance.6) And if citizens completely lose faith in the value of a currency, the inflation rate can shoot up to hundreds or even thousands...
