The Dollar Is a Swindle

“The Federal Reserve will do what it takes to maintain its credibility, which is central to preserving the integrity of the U.S. dollar,” Dallas Federal Reserve Bank President Richard Fisher said on Tuesday.

This report, from Reuters, continues:

“‘We seek to get it right. And the answer to your question is we will do what gets it right,’ said Fisher.

“Answering audience questions after a speech to the Dallas Friday Group, Fisher said the U.S. dollar is a ‘faith-based currency’ dependent on the credibility of a central bank.

“‘In addition to a faith-based currency, we are the currency of the world and we must maintain its integrity…'”

How can you maintain the integrity of something whose integrity rests on faith? There is the problem right there…out in the open. Faith is a matter of perception, of hope, of desire. The dollar will be worth something as long as people have faith in it. You can have faith in God. You can have faith in Mother Nature or in the cosmos, but how can you have faith in the dollar? Is not the dollar managed by men? Are not men easily corruptible? Are they not born of woman? Do they not eat bread, drink whiskey and wallow in sin from time to time? And, will they not be tempted to liven up the party occasionally, and try to get their pictures in the paper. And, being human, won’t they give into it every once in a while? People who have faith then, won’t they be chumps?

We’ve taken great comfort and amusement this week from the realization that even the swindles are phony. We have been worrying about fraud, but the fraud is fraudulent, too. We feel a perverse kind of comfort, we admit. It’s the kind that a man who is going blind feels when a judge takes away his drivers license on a DUI charge; he won’t need it anyway.

The dollar is a swindle. It is an imposter — pretending to be something of value. But neither Americans nor foreigners can seem to get enough of them. Their faith seems boundless.

What are Americans going to do, we wondered, when the Chinese decide to stop taking dollars for their gadgets? And, when the Iranians and Saudis stop exchanging greenbacks for oil? What will Americans do when U.S. householders can no longer refinance their houses to close the gap between expenses and income? And, how will they pay for health care? How will they afford to retire?

This is not a problem for Americans only. The Western world has grown fat and happy in the last half a century. Generations of politicians have made promises that not even geniuses or saints could keep, and the lumps have been living on expectations that only rapid economic growth could meet.

Western nations are not run by saints or geniuses, but by lunkheaded sinners. And rapid growth? In America, the average working man has seen no real gain in his disposable income since the Carter administration. In Europe, wages are up, but so are the costs of the social programs that are keeping marginal workers off the payrolls. That is why the rioting French students are so afraid of labor reform. They are not the idealistic dreamers of ’68; instead, they are the selfish hallucinators of ’06, hoping to keep globalized pay levels away from the land of the Frogs.

Meanwhile, the growth is in the East. Wages are currently rising by 10% per year in both India and China. GDP growth rates are nearly as high.

The tadpoles can stop worrying. American wage earners and retirees can relax, too. Yes, they are losing ground compared to the skinny Asians, but what difference does it make? The dollar is a fraud, and they don’t need so many of them anyway. Who is worse off for not being able to buy a big screen TV? We can remember back to the 1950s when our father brought home a TV. It was a big boxy thing with a curved greenish screen. We had to pull down the shades to watch it during the daytime. I Love Lucy…the Honeymooners…Amos and Andy — we loved them all. Does an eight-year-old today get more pleasure out of his big flat screen than we got from our old green one?

We doubt it.

And, what American really needs more food? That is the problem with prosperity, dear reader; a little goes a long way. The typical American has not too little food, but too much. He also has too many gadgets…too many diversions…too many mindless ways to spend his time and his money.

But, we are ranting, aren’t we? Besides, who are we to tell people how to spend? What do we know? Nothing. Still, we have a theory!

Our theory is that all institutions, bodies, societies, organizations — all things animal, vegetable, mineral — erode, degrade, and degenerate over time. That goes for the consumer economy, too. As time goes by, there are more parasites, leeches, conmen, grifters, anglers, idlers, kibitzers and no-account GS-6s globbing up the system. People begin by buying things they need with money they’ve saved. Then, they buy things they want with money they earn. Finally, they end up buying things they don’t even want with money they don’t have and will never earn. That is what home equity extraction is all about. It is not savings; it is not earnings. It is dream money — money that came in the door while the owner was asleep.

The giant swindle is that people think they are getting richer by having access to more dollars. They are suckered into spending and debt, like a lobster into a trap, believing they need more and more. But the promise of spending is as phony as the swindle itself; the more they spend the less they get for it. Before long, the real return on spending — as say, in eating too much, having too much surgery, too many mistresses, or too many soldiers throwing their weight around — is negative.

u2022 We are on the Eurostar this morning, traveling from London to Paris. The train line is still losing money — about $365 million last year — and now, it has to face its creditors, again, with a hard-luck story. It has about $10 billion in debt and no way to pay it. Eurotunnel is a publicly held corporation; its shares fell yesterday, to 37 cents.

The day before, the roof fell — literally — on Eurostar. Henry, who was in Paris getting his braces fixed, called with a report:

“Dad, the trains stopped this afternoon. Apparently, a house fell on the tracks somewhere in England. That’s what they told us, but it could be a made-up story. You know, like when they stop a train in France and tell you it’s because someone committed suicide on the tracks. They just do that because the conductor wants to smoke a cigarette or something.”

But this time it was true. This morning’s paper has a photo of a house that collapsed right onto the Eurostar rails.

u2022 “But can anyone be certain of anything but life and death?” asked Sumner Redstone.

u2022 Mato…matas…mata. Mate…mataste…mato.

This morning, we woke up conjugating Spanish verbs. Tomorrow, we are leaving on a new adventure. We are off to South America, where we have bought a ranch in Argentina, the land of the pampas…of tango…of Evita.

The children we still have at home are enrolled in a French school. French schools give children plenty of work, but plenty of vacation, too. We have two weeks.

Why Argentina?

We have no real explanation. The place appeals to us. It is civilized, but still wild. It is comfortable, but not too expensive. It is sophisticated, but not stifling. It is out of the way, out of the ordinary, and out of the line of fire.

Not that we’ve grown tired of Europe — not at all. We came to France more than 10 years ago. It has been an adventure. We think we learned something, and we have no desire to leave it.

But, we’re ready for a new adventure, too. We’re ready for a new culture — a new language. We want to learn new things. There are new people to meet, and maybe we’ll even make some new money.

Who’s going to raise the beef the Chinese want to eat? Who will be the world’s low-cost producer of corn? We don’t know, but Argentina looks like a good bet. In 1900, Argentina was richer than Europe. “As rich as an Argentine,” was a believable expression. But, that was before the world improvers got a hold of the place. Now, property prices in Argentina are barely 20% of those in the United States.

In Buenos Aires, you can get a handsome apartment in a good neighborhood for less than $200,000. Prices go down when you leave the capital. Hard up against the Andes, where we bought a place, you can get an acre of ground for $10 — if you buy bad enough land in bulk.

History has not stopped. It seems more likely to us that Argentine property prices will go up than that U.S. prices will.

We’ll let you know what we discover, but we may only be able to write from time to time…as time and communications allow.

Stay tuned…

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.