The destruction of the dollar

By Doug Casey

There is no subtler, surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose.
–John Maynard Keynes

Inflation occurs when the creation of a currency outruns the creation of real wealth it can bid for. It isn’t caused by price increases; rather, it causes price increases.

Inflation is not caused by the butcher, the baker or the auto maker – although they usually get the blame. On the contrary, by producing real wealth, they fight the effects of inflation. Inflation is the work of government alone, since government alone controls the creation of money.

In a true free-market society, the only way a person or organization can legitimately obtain wealth is through production. “Making money” is no different from “creating wealth,” and money is nothing but a certificate of production. In our world, however, the government can create dollars at trivial cost, and spend them at full value in the marketplace. If taxation is the expropriation of wealth by force, then inflation is its expropriation by fraud.

To inflate, a government needs complete control of a country’s legal money. This has the widest possible implications, since money is much more than just a medium of exchange. Money is the means by which all other material goods are valued. It represents, in an objective way, the hours of one’s life spent in acquiring it. And if enough money allows one to live life as one wishes, it represents freedom as well. It represents all the good things one hopes to have, do and provide for others. Money is life concentrated.

As the state becomes more powerful and is expected to provide more resources to selected groups, its demand for funds escalates. Government naturally prefers to avoid imposing more taxes as people become less able (or willing) to pay them. It runs greater budget deficits, choosing to borrow what it needs. As the market becomes less able (or willing) to lend it money, it turns to inflation, selling ever greater amounts of its debt to its central bank, which pays for the debt by printing more money.

As the supply of currency rises, it loses value relative to other things, and prices rise. The process is vastly more destructive than taxation, which merely dissipates wealth. Inflation undermines and destroys the basis for valuing all goods relative to others and the basis for allocating resources intelligently – it creates the business cycle, and causes the resulting misallocations and distortions in the economy.

And, as I’ve mentioned in the past, all of the trillions of U.S. dollars floating around outside the borders could come back here in a panic if the dollar continues to weaken relative to other currencies. That could amount to an overnight devaluation on the order of 50 percent, which would not be mellow.