David Galland

The US monetary system — and by extension, that of much of the developed world — may very well be on the verge of collapse. Falling back on metaphor, while the world’s many financial experts and economists sit around arguing about the direction of the ship of state, most are missing the point that the ship has already hit an iceberg and is taking on water fast.

Yet if you were to raise your hand to ask 99% of the financial intelligentsia whether we might be on the verge of a failure of the dollar-based world monetary system, the response would be thinly veiled derision. Because, as we all know, such a thing is unimaginable!

Think again.

Honestly describing the current monetary system of the United States in just a few words, you could do far worse than stating that it is “money from nothing, cash ex nihilo.”

That’s because for the last 40 years — since Nixon canceled the dollar’s gold convertibility in 1971 — the global monetary system has been based on nothing more tangible than politicians’ promises not to print too much.

Unconstrained, the politicians used the gift of being able to create money out of nothing to launch a parade of politically popular programs, each employing fresh brigades of bureaucrats, with no regard to affordability.

Former VP Cheney, who fashions himself a fiscal conservative, let the mask drop when, in 2002, he stated that “Reagan proved deficits don’t matter.”

Those words were echoed just a few weeks ago, when both former Fed Chairman Alan Greenspan and Obama economic advisor Larry Summers, in separate interviews, said almost the same, paraphrased as, “There is no chance of the US defaulting on its bonds, not when our government can borrow dollars and print new dollars to meet any future obligations.”

Of course, Greenspan and Summers were referring to an overt default — of just not paying — and not to a covert default engineered by inflation. Unfortunately, like virtually all of the power elite, both miss the point that the mountain of debt that has been heaped up since 1971 is fast reaching the point of collapsing like a too-big tailings pile and taking the monetary system down with it.

US Deficit and National Debt

Importantly, the debt shown in this chart whistles past the government’s unfunded liabilities, in particular for the Social Security and Medicare systems. Adding those would quintuple the US government’s acknowledged obligations — to over $60 trillion.

Given the role the US dollar plays as the world’s de facto reserve currency — with all major commodities priced in dollars, and dollars forming the bulk of reserves held by foreign central banks — the dismal shape of the US monetary system spells trouble for the global monetary system.

Making matters worse, following the lead of the United States, governments around the world long ago adopted similar fiat monetary systems. You can see the deficit contagion in this next chart. It is worth noting that the dire condition of the United States now leaves it in the same muddy wallow as Europe’s desperate PIIGS.

General Government Gross Debt

In a recent article in The Telegraph, Ambrose Evans-Pritchard referenced a paper out of the BIS that paints the picture using appropriately stark terms.

Stephen Cecchetti and his team at the Bank for International Settlements have written the definitive paper rebutting the pied pipers of ever-escalating credit.

“The debt problems facing advanced economies are even worse than we thought.”

The basic facts are that combined debt in the rich club has risen from 165pc of GDP thirty years ago to 310pc today, led by Japan at 456pc and Portugal at 363pc.

“Debt is rising to points that are above anything we have seen, except during major wars. Public debt ratios are currently on an explosive path in a number of countries. These countries will need to implement drastic policy changes. Stabilization might not be enough.”

Viewing the situation from another perspective, we turn to the work of Carmen Reinhart and Ken Rogoff, who studied the factors contributing to 29 past sovereign defaults. They found that default or debt restructuring occurred, on average, when external debt reached 73% of gross national product (GNP) and 239% of exports. Using the Reinhart/Rogoff findings, Casey Research Chief Economist Bud Conrad prepared the following chart showing that the US government is already far along on the path to bankruptcy.

External Debt of the US

It’s hard to argue against the contention that the situation is, to be polite, precarious. Given that the obligations of the US government, as well as most of the world’s other large economies, are now impossible to repay and that their reserves are just IOUs backed by nothing, the stage is set for a highly disruptive but entirely necessary do-over of the fiat monetary system.

“Preposterous!” say the lords of finance and masters of all.

Is it?

Of course, these very same mavens completely missed the looming housing crash and the depth and duration of the subsequent crisis — a crisis that is still far from over. In other words, listen to them at your peril, because in our view it’s essential in calibrating your financial affairs to understand that, if history is any guide, we are now well down the road to a collapse in the monetary system.


David Galland,
for The Daily Reckoning

David Galland

David Galland is Managing Director of Casey Research. Over the course of his career he has worked on the Gold Newsletter, the Aden Analysis, Wealth Magazine and Outstanding Investments. He currently serves as Managing Editor for Doug Casey's International Speculator, Casey Investment Alert, and What We Now Know and was a founding partner and Executive Vice President of EverBank.

  • http://bradyinc.com Frank Brady

    Thank you for a very cogent and inciteful article. I believe you are exactly correct. The events that will produce this collapse have already taken place. The forces now in motion are as immutable as gravity–and cannot be stopped.

  • http://www.freemarketpatterns.com John Thurston

    David, Well stated. Just to add a bit of fuel to the fire, Bloomberg reported this morning that the Fed is now backstopping over $75 Trillion Of Bank Of America’s derivatives trades. This is similar to Chase Bank, owned by JP Morgan holding 99% of JPM’s $79 trillion in notional derivatives. Supposedly the Fed and FDIC have $180 trillion of the US taxpayer money around to save them!?!

  • gman

    “you could do far worse than stating that it is “money from nothing, cash ex nihilo.””

    such touching innocence. oh it is far far worse than what you have stated. we don’t have just plain old fiat currency. we have debt currency. “debt from nothing, debt ex nihilo”. what this means is that no matter how much money is created, all it means is we owe more. if the fed prints a trillion dollars, we simply owe more. if the fed prints a quadrillion dollars, we simply owe more. that is its function. that is how it works. that is what it’s for. to leave us owing everything to a few bankers in exchange for ex nihilo debt.

  • gman

    “They found that default or debt restructuring occurred, on average, when external debt reached 73% of gross national product (GNP) and 239% of exports. Using the Reinhart/Rogoff findings, Casey Research Chief Economist Bud Conrad prepared the following chart showing that the US government is already far along on the path to bankruptcy.”

    an interesting view but perhaps not quite accurate. a better perspective might be obtained if it is realized that the u.s. monetary economy reaches whereever a dollar bill reaches, and that since 80% of the world economy is conducted in dollars then our debt might better be measured against that total instead of just against what happens within the borders of the u.s.

    not that we’re in good shape after all, it’s just better to see the entire picture accurately.

  • gman

    “Stabilization might not be enough.””

    stabilization is impossible. the dollar is a debt pyramid scheme. it has exceeded all possible base of support. it will now implode. it will continue to implode until new debtors are found. since none are available then the implosion will not be halted. stability will occur when all debt currency is completely unwound.

  • Tamil

    How does one prepare and protect oneself from the eventual collapse of the monetary system? Your suggestions, please.

  • gman
  • CT

    Hang on to your gold. Of course it will probably not buy you anything but you can always pound it into pretty jewelry and wear it when it gets cold. Stick close to your friends.

  • phelps

    I’m with you on that CT. Hang on to the things you will need. Information can be vital too. Cold springs (where are they), transportation w/o gas and auto, and the list goes on and on. Take Gary North’s advice and get maps.

  • Cannonfodder

    gman wrote: …that since 80% of the world economy is conducted in dollars then our debt might better be measured against that total instead of just against what happens within the borders of the u.s.
    This is correct to a point, however, revenues generated outside the US don’t necessarily contribute to US tax revenue. No matter how much paper is printed and used to purchase goods, services, and resources outside the US, when the SHTF, all those paper dollars will return to the only place where they will still be accepted. That will bring inflation the likes of which hasn’t been seen in many generations.

  • TimeTraveler

    Greetings to all,

    Mr. Galland,

    I think you all know deep down that the collapse is well underway, just that the human species is too occupied in keeping a reality going that is a total fabrication, or I should say a play that is going on in most of the consciousness of the human race.

    It doesn’t matter anymore about the money. It is fake, and this monetary system is a holographic projection of people who want to make you believe it is real.

    It is imploding, but most importantly, most humans aren’t awakened yet to the one thing that matters most, this planet and her health. You have extracted her oil, her blood I will say. You have polluted her water and land with chemicals and nuclear isotopes so lethal, that it will eventually kill all of you.

    This planet is therefore in a cycle of dissolving the way humans have treated her! Everything in this universe has cycles, and in this moment in time, all cycles are coinciding with one outcome. The end time is here for the human race as you know it. It is time for the human spirit to be at peace, and have true freedom, no chains to connect you to a corrupt and greedy system. It is time to connect to the light that is coming forth from the center of this galaxy, and begin anew.

    If you haven’t noticed, every major volcano is erupting on this planet you call Earth. Every area of your world is having seismic activity near every major tectonic plate on your planet. It is a scientific fact the Earth is expanding, and a change is taking place. The end of one cycle, and the rebirthing of another.

    Mankind has successfully destroyed most of the water on this planet. Water is what makes up 70% of you. It created life on this world, it is crytaline in structure, in other words light, which is frequency, an igniter for the beginnings of everything.

    It is no coincidence that at this moment in your linear time, that the economic system and these planetary changes are taking place. It coincides with the destiny of the human spirit to finally break free of the system you call usery, and let the human spirit have true freedom, like a feather floating in the cosmic wind.

    The ancient peoples of this world who lived thousands of years ago knew this time would come. It was prophesied by them. Your destiny was steered by beings who are many millions and billions of years ahead of your race.

    The time for this system to end is now. Humans are no longer at the helm of this ship. Destiny has taken over.

    You were provided the most beautiful planet in the universe, but have not respected her beauty, so now it is time for Gaia, the feminine energy to rebirth as a new light entity, but along with her she is going to bring forth a new being, a pure being, just like a new born infant, only this time it will be a new human being conceived in the vein you were originally meant to be, by the source of all creation, that is “Children of the Light”, where the love of the human heart will give humans the gift of manifesting a new world, one with this planet, and one with yourselves.

    This is human destiny, and if you believe it in your heart, you will get to a place that will be unimaginable.

    It is time to look inward, self-realization. Time to be one with ones self, and with this planet. One entity shining a light out into the center of this galaxy. Time for a new age to begin, and to leave behind the chains that have kept the human race in bondage for eons of time.

    I promise you, if you can visualize a healed world, and to see the unimaginable beauty this world has to offer, the unthinkable will happen, a new reality will emerge.

    You were given the most beautiful and spirtual planet in all the cosmos, with the most diverse and incredible life forms not found anywhere in the universe. It’s time to cherish what you were given!

    Nature is the key. It’s called the Philosophers Stone, or alchemy. Once you gain the knowlege of being one with yourself and nature, then you will have all the wisdom of the universe. The universe is inside of all of you!

    The real journey is about to begin, climb on board, this spaceship, it is about to lift off! It is the human spirit that is being reborn, so you really wont need a ship to leave, all you need is the light, where everything began, it’s called LOVE! It connects the whole as one. As above, so below. Listen for the heart of Gaia, when you hear her heart beating, as the frequency or music is heard, then the journey will begin. It’s all about the music, frequency, light. Get it?

    Cherish it, and all living things, and you will find the secret of life!


  • CT

    “It doesn’t matter anymore about the money. It is fake, and this monetary system is a holographic projection of people who want to make you believe it is real.”

    The entire universe is a holographic projection.

  • adplatt126

    True, but that holographic projection is a true one, based on true physical laws. Their holographic projection is a false one, based upon false economic ones.

  • http://www.facebook.com/petar.posavec Petar Posavec

    The monetary system as some people (and this very article points out) is fundamentally unsustainable.
    Money stopped representing resources in 1929 when the big recession hit the economy.
    Did we lose the technology, resources, food, housing, energy, etc. when the monetary system went down to a screeching halt?
    Resources and technology (as well as did the people) remained.

    There is no need for us to ‘de-evolve’ into bartering. With the technology in circulation today, we can automate 75% of the global workforce tomorrow (even though most of it works in areas that are completely unproductive to society at large).
    And in less than a decade, we can automate practically 99.9% of everything, transform the entire planet into a practical paradise for ALL 7 billion (and many more), reduce our footprint, repair the damage, eliminate fossil fuels, exhausts and replace them either with renewable energy sources (wind, solar, geothermal, wave power) or with metamaterials that can produce energy, heat, light, etc. all without a need for a powerplant of any kind, let alone exhausts.

    Our scientific knowledge and its practical applications are over 100 years ahead of what we are using today.
    We live in technological obscurity mostly because it is profitable.

    However… people are starting to realize what is happening.
    Even within the monetary system, companies are switching over to automation for everything because its: cheaper, a lot better, faster and more efficient than keeping humans in jobs (who need rest, sick days, pension plans and health care – machines, don’t need either).

    We have had the ability to turn things around for everyone in a sustainable capacity for over 100 years now.

    Due to advent of global communications today, more and more people are becoming aware that money is worthless and it only has value because Humans assign it (and have made an agreement that money is the way to gain ‘access’ to resources – which is fundamentally stupid because the monetary system cannot possibly accommodate EVERYONE on the planet, it ALWAYS caters to the minority, breeds corruption, and only treats the symptoms but never the cause).

    I hope people will continue to talk about this issue and expose others to relevant general education that might finally lead to a resource based economy (I know I will).

    As for the monetary system as we understand it.
    Due to the exponential increase in automation in the industry (in a short span of time) and the way prices of technology keep lowering, it will simply come to the point where production will be sky high and purchasing power will hit rock bottom – just like it happened in 1929… except that this time, new jobs won’t be created.
    It is already easier and much less ‘costlier’ (from a monetary point of view) to create an automated machine to do a job instead of spending time and money waiting for a Human to be trained (which can take a LOT of time).

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