Let's suppose six castaways are stranded on a desert island, five Asians and one American. Their problem is hunger. So they sit down and divide labor as follows: One Asian will do the hunting, another will fish, the third will scrounge for vegetation, the fourth will cook dinner, and the fifth will gather firewood and tend the fire. The sixth, the American, is given the job of eating. So five Asians work all day to feed one American, who spends his day sunning himself on the beach. The American is employed in the equivalent of the service sector, operating a tanning salon that has one customer: himself. At the end of the day, the five Asians present a painstakingly prepared feast to the American, who sits at the head of a special table built by the Asians specifically for this purpose. Now the American is practical enough to know that if the Asians are going to continue providing banquets they must also be fed, so he allows them just enough scraps from his table to sustain them for the following day's labor. [To make the analogy more realistic], let's assume the American on the island pays for his food the same way real-world Americans pay, by issuing IOUs. At the end of each meal, the Asians present the American with a bill, which he pays by issuing IOUs claiming to represent future payments of food. The castaways all know that the IOUs can never be collected, since the American not only produces no food to back them up, but also lacks the means and the intention of ever providing any. But the Asians accept them anyway, each day adding to the accumulation of worthless IOUs. The Inevitable Collapse of the Dollar Crash Proof: How to Profit from the Coming Economic Collapse For years the United States has been traveling a course the Nobel Prize-winning Austrian economist Friedrich von Hayek set forth in a book self-descriptively titled The Road to Serfdom. The coming economic collapse may finally bring Americans to that grim destination. But it is also possible that the same dire economic conditions will inspire a return to the country’s constitutional traditions of sound money and limited government, the foundation upon which a viable economy can be rebuilt. There is a fork in the road to serfdom. One choice leads back to freedom, and it is my fervent hope that Americans will take it.
Most simplifications like this forget to take in account a lot of factors.. for example the us$ is still the most powerful and most used currency, used to trade raw materials like oil, gold, copper, ... As long as international markets use us$ and not euro, the us$ can keep up with this scheme like you present: the 5 asians trade everything they produce themselves (hunting/fishing/cooking/..) in these IOU's. so they're not completely worthless to them like you say. And yes they can be collected - the island they are all on is owned by the american - so if they collect enough they can buy the whole island from him. Although the american doesn't produce (a lot), he has the power to set the prices, because he can print more iou's.. however this will cause inflation which he should be careful for.
That's too grim, the dollar will slowly lose favor as the sole reserve currency but it wouldn't collapse, at least not so fast.
Crash Proof is a great book. Peter Schiff is an excellent economist, because he understands advanced economic theory but can present it in common sense terms for people who are not very economically literate. The 5 Asians and an American analogy is one of my favorites. I really don't subscribe to this, "economics is so complicated" approach. In my opinion, economics is based on a lot of common sense. Sure, some ideas and mechanisms are complicated in their implementation but understanding them perfectly is not a prerequisite to becoming engaged in economic discussion. Right, but the scheme is still based on "nothing tangible", regardless of whether it keeps up. People do irrational things all of the time. When they gather into collective groups, they do really huge irrational things for really long times! But like any scheme, there is a beginning, middle and an end. And the end is approaching for American fiat currency dominance. They are worthless, because the IOUs cannot be redeemed without the American, his children and his grandchildren becoming the slaves of the 5 Asians. There is no other way to redeem their value. Assuming the American will sell. But if he sells the island, and he doesn't own anything else, he now has nowhere to live, and has to start working for the Chinese to survive. Does the American even own the island in this scenario? The IOU's are worthless. Period. If he prints more, it makes no difference. He's just producing more worthless paper. 0 x 100, or 1,000 is still ZERO.
Although I feel that the dollar is no longer going to be the universal currency in a matter of years, I do believe that the USD is not worthless. The analogy replaces the USD for IOU for simplicity, but you could replace the currency being used with GBP or Euro or RMB, the value of the IOU is the same. The difference from the analogy and the real world, is that the USD can be used to purchase (pretty much) anything in the world, the IOU cannot. Although the USD (and nearly every currency) is relying upon a promise, that promise still holds value and will not become useless over night. The analogy would be completely different if there was a supermarket nearby which accepted USD/IOU.
The value of the USD is tied directly to perception. There is no fixed value to a dollar. Even though you may be paid a fixed rate for your labor, and your taxes may be set at a fixed percentage of your wages, the actual value, or purchasing power of those dollars, is completely arbitrary. The entire point of the example is to break it down to it's simplest forms. 5 + 1, on a desert island. Of course, you can add more actors in a larger economy to the equation, but you still have to avoid rationalizing why they continue to take worthless paper that the American produces anytime he wants to buy something. I mean, what is the rationale? We have the biggest military, and if people don't accept our money, we will attack them? Isn't that coercion and theft? So what if our economy is enormous, if all we do is eat and sh1t, then why would the world continue to feed us? 70% of our GDP is consumption. We take out more than we put in. At one point, that game will end. No matter how much people like to snort cocaine or look at Brittney Spears naked crotch on the internet.
Name a popular currency which isn't worthless paper? If you replace the USD with Euro or GBP in the analogy, how is the outcome different? Just because Asian countries tend to have far more physical exports than Western ones isn't a reason for the dollar to be failing. For example, go back a hundred or so years and the UK was a huge exporter after the industrial revolution. Nowadays we don't really export any physical goods, but we have a very strong financial sector which keeps our economy alive. Western economies are far more conceptual. Hollywood, music, finance, education, tourism, even sports. Go to some random small town in China and you'd be surprised how many people can tell you the entire Liverpool FC squad.
There isn't much difference. It's all worthless paper, except OPEC and the Chinese prop up the USD by absorbing monetary inflation, as well as the perception of "American stability" which could be tied to our military interventionism. What part of the GDP consumption/production ratio are you not understanding? How long can you eat 7 apples a day if you only produce 3? How long is someone else going to keep giving you the extra 4 apples until they figure out that you don't even produce enough to match your own consumption, let alone enough to pay back the debt. The whole tangible/intangible argument is nonsense perpetuated by people who typically do not understand what money is in it's simplest terms. Your so-called "financial sector" merely props up the industry that exports inflation. That's totally irrelevant to the discussion.
Exactly, all money is worthless paper based on a promise. It doesn't matter matter what currency was being used in that analogy, the outcome is the same. It's therefore not about the collapse of the USD, but about the fallacies of the global monetary system.
I'm sure people thought the same thing until Clinton because president, balanced our budget and we had one of the best economic periods in history. The great thing about the U.S. is that we have a democracy where if things suck then we can always elect a new president every 4 years. We've overcome the great depression, we've overcome other economic problems and we'll overcome this problem. The dollar isn't going to collapse. Once this administration leaves office and the new administration takes over then you'll see our economy improve and the value of the dollar will rise again. We don't have to worry about repaying China because they've already gotten their payment in the form of stolen military secrets that we've never bothered to do anything about. Which makes me wonder if they were really stolen or just "given" to them "under the table" so to speak. Point is, we have ways of repaying China without actually repaying them monitarily. Japan's another story but I don't think they're giving us nearly as much as China is. They obviously don't care about the military info so I have no idea how we repay them but I'm sure the two sides will work something out.
Clinton only balanced the budget because a Republican Congress worked to control spending. Clinton gets way too much credit for the economic prosperity that was always temporary but came with long term costs like NAFTA. And that means what? The President doesn't write laws. He doesn't appropriate spending. He doesn't create taxes or tax breaks. Based upon what exactly? I'm curious to know how you will convert lead into gold, or 7 loaves of bread and 7 fish into enough to feed thousands.
You're saying the dollar is doomed and it's really just worthless paper... well duh? Then you say that the dollar is exactly the same as every single popular currency on Earth.
Does this mean we're safe because we're all in the same boat? Or does this mean that we're in a sinking boat and there is no other boat to save us?
The reserve situations are not the same. The tax climate is not the same. The foreign debt situation is not the same. The ration of consumption to production in GDP is not the same. The ratio of military spending to GDP is not the same. Fiat currency is doomed to fail, just like socialism. They are economically irrational ideas. But the American dollar hegemony is coming to an end, and relatively soon, because we have f**ked up so many other things. Being and staying #1 doesn't mean you can spend like a drunken sailor.
1. A lot of the budget balancing came of the backs of them military. Then people wonder why our soldiers don't have body armor. 2. Two as for the so called great economy under Clinton. For the majority of his presidency the economy wasn't that great, I'm not saying it was bad but it was average, except in the last two years when it really took off, on a number of factors, low interest rates set by the fed and a bubble internet sectors that spilled over to the greater economy which were great for a lot of people and people seem to think that all of the Clinton years were like that.
I agree. Although I would add, that if we were not in 2 occupations right now, #1 wouldn't be such a big deal. Most countries manage to get by without body armor. Of course, they don't bomb or invade other countries. They mostly just practice defense stuff at home.
The United States was the largest economy at the turn of the 20th century, yet people still used the British pound in international trade for the next 40 plus years until after WWII. Changing a major reverse currency does not happen over not, it takes decades. It isn't going to likely happen unless someone takes us over economically and currently we are the largest economy in the world. China if it grows at the speed it is growing would take us over in 50 years. It would probably take the U.S. another 50 years to lose it's standing as a reserve currency.