Take the collapse of the Zimbabwean dollar, which went from trading for $250 USD to more than $250,000 USD. That country's entire society was ravaged as though from a drought or plague. A similar phenomenon occurred in the United States (and subsequently around the world) during the so-called Great Depression after the money supply increased substantially on order of the Federal Reserve. The Treasury printed many times the then-current total number of dollars already circulating around the country. The more of something there is, the less valuable it becomes... so the value of the US dollar fell dramatically.
They used to say before the Great Depression, a dollar could buy you a wheelbarrow of bread-- but afterwards, it would take a wheelbarrow of dollars just to buy a single loaf. These boom and bust cycles, which critically effect our lives and livelihoods, don't usually represent natural disasters or political turmoil. They are a consequence of today's definition of 'currency' and the many large-scale economic manipulations which currently regulate its value.
There is a new hot-selling Chinese book which has been making waves about how currency can even be used as a weapon to destroy entire economies. So the question remains; what's so interesting about our current currency model which gives it these properties?
All national currencies were once backed by gold.
In fact, there is a definite connection between the gold-currency conversion and the Great Depression of the United States (many economists believe that the decision by the Fed to increase dollar supply was designed to help support the Bank of England return the sterling pound to Pre-World War I gold-currency levels). In fact, you can use the price of an ounce of gold today to track the public perception of the 'actual value' of currency.As you can see in the graph here, the price of gold has risen dramatically in recent years as public perception of the value of the dollar has decreased. In fact, it recently reached a 27 year high. This is an indication that people believe inherent 'value' in gold is becoming higher than the fiat currency.
Why is this happening?
To begin with, let's spy briefly into our US Treasury (directed by the non-government Federal Reserve Board) which actually makes money out of 'nothing' at their printing presses. Haven't you seen videos of rows and rows of bills being printed off in massive sheafs?
This video shows how $2 billion in emergency cash was printed out and given to banks during the Depression banking credit crisis. A similar thing has been happening in recent years, spurred largely by the huge amount of debt the federal government has taken on ($9 trillion USD, or more than half of an entire year's GDP for the entire country) and the massive trade deficit. Eventually, when you finally print the money owed, you greatly devalue the dollars already being earned in the "real world". And that's basically what's happening today (and into the near future, until a major new depression serves to correct these imbalances).
Major economies like China and Japan have relied heavily on the United States consumer to buy their goods and keep them in business. US consumers have also fueled the American economy by buying very expensive houses in the suburbs and condos on the lakefront. Unfortunately, they have financed these buying sprees largely by acquiring significant personal debt. Ironically, Chinese and Japanese central banks have in significant part funded the credit banks extend to borrowing US consumers through loaning money to our own Federal Treasury (a policy which may end soon given lower and lower interest rates and the falling dollar).
What does the future look like? To begin, there is evidence that Asian economies in particular are attempting to wean themselves off US consumerism and develop intra-Asian supportive trade networks in preparation for a predicted American decline. Since two of the emerging powerhouse economies, India and China, are both Asian, this may speak to the new makeup of the post-American dominated international financial model. However, whether the Rise of Asia will indeed be the story of the new century remains to be seen.
What is sure is that the dollar will continue to be 'worth' less and less to the rest of the world. Already, one euro is worth a record $1.43 USD and, for the first time in history, the Canadian dollar is worth more than its southern namesake. Americans will be able to afford less goods from outside their country, travel less, buy less overseas commercial assets, and so on. Asian central banks, on the other hand, will redirect their massive dollar reserves to snap up U.S. dollar-denominated properties and corporations. Who can really predict now where this whole intricate network of financial obligations will lead us in the coming five years? Warren Buffett, for one, thinks it's heading towards a US "sharecropper society".
One final cautionary note: the Great Depression in the United States ended because of the massive World War II production orders we filled for the Europeans. If the US economy experiences another massive slowdown, will the country's leaders look to external enemies as the way to get ahead once again? Given the massive war profiteering going on right now during the Iraq war, this is a dangerous possibility worth considering.
