U.S. Dollar and the 1971 Shock: How Going off the Gold Standard is now Coming Back to Harm the U.S. Dollar. The 40 Years Spending Spree.

The U.S. dollar has been on a wild rollercoaster ride for decades.  Most Americans rarely concern themselves with currency markets or larger macro economic trends.  Yet this is such an important financial area to understand since Americans are paid in U.S. dollars.  It is fascinating to understand why the U.S. went off the gold standard to begin with in 1971.  As you might suspect, we were spending more than we could afford and the Vietnam War was costing more and more money so countries like Switzerland and then West Germany were worried about being paid and converted dollars to gold as was possible then.  Inflation was rampant.  Clearly this was unsustainable yet today we have taken the game to another level.  The banking sector with no restraints was then able to print and expand as much as it needed.

The critical problems we face today stem from decades of horrible economic policy.  Let us first look at the U.S. dollar over this time period:

It is fascinating that after we went off the gold standard, the U.S. dollar remained rather steady for the decade.  In the early 1980s the dollar strengthened but this really had nothing to do with how we were managing our budget.  This was an era when the idea of deficit spending was somehow seen as a new miracle of finance.  The corporatacracy was finally unhinged to print and spend whatever it wanted.  And many Americans didn’t argue because they now were able to go into massive debt at the expense of the world.  This system is now failing.

If we look at our Federal surplus or deficit over the years it is rather clear when this mentality took hold:

This chart is downright astonishing.  Those years of spending have now come to catch up with a tanking U.S. dollar.  Now if we couple the charts you can see how this notion exploded quickly and re-coupled:

This spend more than you earn idea worked for the first decade with no problem.  But then the entire system started re-coupling.  Americans had the illusion that things were getting better and their quality of life was improving but this was all due to massive consumer debt spending:

U.S. households took on so much debt that they reached a peak of $14 trillion.  This is made up of all things including mortgages, credit cards, student, and auto loans.  Yet that game is quickly reversing as we are seeing with the bursting housing bubble.  But were Americans really better off?  Not exactly.  Because now our employment base is being destroyed and the artifacts of wealth are being taken back by the corporatacracy since you don’t own the item until the debt is paid off.  People that thought they owned their home no longer have possession with a few missed debt payments.  Even if we look at the graph above, if our annual GDP is roughly $14 trillion American households have this much in debt!  This was clearly unsustainable.

The U.S. dollar has taken a massive beating.  The Federal Reserve is eating up toxic mortgages and trying to keep the credit bubble going.  The world by their reaction to our dollar is clearly not buying this game anymore.  The Federal Reserve cares not about the typical American.  They would be satisfied if every American was out in the street so long as their elite group of cronies was able to maximize their banking profits.  What real innovation has come from the financial sector?

Now some might be saying so what if the U.S. dollar is declining.  For most Americans however I would imagine that they would like to keep their buying power as strong as possible.  Other countries are getting stronger (China now overtook Japan as the 2^nd largest economy) and are growing their middle class.  You think we’ll keep buying cheap products forever?  This is unlikely especially when other economies start creating their own internal demand.

We can thank the banking system for ripping off the country and leaving a bucket of pain with 10 percent unemployment and massive amounts of debt.  Yet somehow they are the industry that gets bailed out.

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