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The Real Reason the U.S. Dollar Has Value

April 1, 2014

I found this article to be very interesting. It takes a look behind the scenes and tries to explain why the US dollar has value.

A couple concepts that I found interesting. One being the central banks have been able to remove any sort of physical backing for the dollar to give themselves the ultimate control. This will continue to be the case until the US citizens and other countries find a better alternative… which is coming, only no one knows how long it will take.

Another concept that the author focuses a couple paragraphs on is the following statement by economist Warren Mosler.

“When the government spends, only two things can happen to that money… the money can be used to pay taxes, or it isn’t used to pay taxes. In which case, somebody out there still has it.” So deficit spending equals financial savings at the macro level.”

Click here to read the full article and please let us know what you think of the comment made by Mr. Mosler.

 

Discussion
21 Comments
    MNH
    Apr 01, 2014 01:13 AM

    Time is an amazing thing.
    Everything in its season….
    http://thediplomat.com/2014/03/why-did-brics-back-russia-on-crimea/

    Apr 01, 2014 01:19 AM

    “Why does this piece of paper have value?” Answer: There is a gun pointed at your head and it is not the paper you value, it’s your life. The dollar will collapse because printing money is systematic stealing and YOU CAN ONLY STEAL SO MUCH. As the stealing continues, producers will produce less and have less to sell IN EXCHANGE FOR DOLLARS. In reality, the dollar is only as good as the economy of the country of it’s origin AS LONG AS LEGAL TENDER LAWS ARE IN FORCE THERE.

    b
    Apr 01, 2014 01:02 PM

    As I agree with it I think its a good article, I hve lways thought the backing of a currency is its ability to pay taxes.
    Which is why I don’t think these crypto currencies go anywhere until they can be used to pay taxes.
    Iceland apparently has created one.
    A neat point tho, is that the bigger the deficit the more the private secter has, obvious but neat.

    Apr 01, 2014 01:51 PM

    Great find Cory. I have not seen that dollar view expressed quite like that before. In fact the article strongly implies that the dollar can never fail as long as there is a taxing authority to demand it. What that tells us in other words is that it is the failure of the government itself or the political system that ends a currencies reign. So a country that abrubtly changes from a democracy to a dictatorship or to fascism for example might then be a good candidate for a currency collapse as revolution and/or civil wars prevail. Makes perfect sense to me. It also explains the tenure of Pound Sterling as the British government has been fairly stable for a couple centuries. So if the dollar is not at risk because the US government (democratic rule, two party system, republic) is not threatened we might ask harder questions about the whole theory of why gold priced in dollars is so flawed and has cost so many gold-bugs their nest eggs. I mean, the whole dollar collapse theory just aggravates me no end because it does not have legitimacy from a trading and investing perspective except across decades or possibly even centuries. We need to keep this kind of junk thinking out of our day to day analysis especially as it has proven to be so meaningless. Anybody else out there agree with me on this topic? The central theme of the goldbug philosophy is being challenged here and called into question. I say it has no validity and we should dispense with the idea altogether.

      Apr 01, 2014 01:10 PM

      There have been a number of articles written which explain the shortcomings with the line of thought in this article (and MMT — Modern Monetary Theory — in general).

      Here is a link to one such article, which does a good job of uncovering the flaws in this theory.

      http://www.businessinsider.com/weekender-the-trouble-with-modern-monetary-theory-mmt-2011-1

      There is a natural tendency to believe that the dollar is going to remain the world’s reserve currency and ignore that it will ultimately come down to simple math and the inability to finance the debt. The Japanese are close to their Minsky moment and we are trailing right behind them.

      Right now, it’s like arguing religion. Gold bulls and bears both believe what they believe. I am positioned in line with my beliefs and I assume that a gold bear is positioned in line with their beliefs. Call it junk thinking, call it meaningless, call it what you will.

      As far as Hugo Salinas Price, one should read the following interview with him at this link:
      http://www.plata.com.mx/mplata/articulos/articlesFilt.asp?fiidarticulo=229

      Here is a quote from that article:
      The world is attempting to live by means of the great lie of fiat money. It will not work. You deal with Reality by means of Truth; Truth is thinking that checks with Reality. Gold is money, and if we refuse to face that fact, we are lying.

      Keep the faith, Gold bugs. The dollar’s date with reality is coming.

      On a side note, I will be away from the forum for a week or so, but look forward to visiting with you all downstream. Have a good rest of the week.

        Apr 02, 2014 02:43 PM

        Many thanks Eric,

        Hurry back!

    b
    Apr 01, 2014 01:59 PM

    Well Bird, Hugo Price seems to agree with you, and if you ask Bill Still he would too.
    Ive never agreed with gold restricting government spending.
    I also think we could use sea shells or chickens as our currencies if that’s what was demanded for taxes.
    The greenback for example was hated by the british banks.
    The idea of a nation collapseing causing the currency to become valueless does make sense to me.
    Maybe a faith in a currency is misplaced, and should be faith in a government.
    But there ya go, bye bye dollar.

      Apr 01, 2014 01:36 PM

      Good to see I brought you around to my way of thinking!

      The dollar is good for now though. It is very, very good actually. We won’t invest in gold on the basis of the dollars imminent demise and certainly we won’t buy on the idea a collapse is at hand. Using our heads is a much better strategy and following policy is a better prescription.

      We will on the other hand invest in gold because of hype, sentiment, herd-behavior and related emotion because that is where the real money is made. This is truly the most mood driven of all trades.

      There are major undercurrents in the works now……technical issues for metals…..

      Let me explain. I will let you in on why I know that gold will get clobbered this month. Over in Euro-land the Bundesbank has just signalled that it is open to initiating Quantitative Easing (QE) as a remedy to fight the deflationary forces that have driven the Euro to nearly 1.40 against the dollar. They are the most tight-assed organization on the planet where monetary intervention is concerned so this is HUGE.

      A MAJOR policy change being suggested and nobody here is even discussing it yet.

      IF the ECB does confirm to signal it will engage in QE then we will see the Euro suddenly weaken against the dollar and by default we will see the crap get kicked out of gold as the dollar rises.

      The next meeting of the Bundesbank is around the corner and further guidance is expected to confirm that Germany is indeed finally about to relent on exceptional interventions and bond buying to rescue the currency and stave off the overwhelming deflationary trend. Their only other option is to employ negative interest rates and that idea is DEAD in the water.

      In other words……gold is going to get a shit kicking. Mark my words. You read it here first. Read the article appended below if you doubt what I am telling you. This is the most serious threat to the gold price and its strength since the breach back at the all time highs.

      April will murder gold. It is in the cards now.

      Watch for the ECB release on the 10th of April and the Bundesbank commentary prior to the weekend of the 12th. I believe a major announcement is in the works but it will not filter down until mid month. Short gold before the following Monday as it is set to fall hard. This is my opinion only of course. I could still be wrong (I doubt it) and this is NOT investment advice!

      Sluggish Economy Prompts QE Rethink at Bundesbank — Reuters — March 26, 2014
      http://www.reuters.com/article/2014/03/26/us-ecb-bundesbank-idUSBREA2P1NG20140326

        b
        Apr 01, 2014 01:46 PM

        Yes, that is major. I don’t short anything, I sell what I have and rebuy increasing shares’
        (hopefully). I never actualy considered the dollar until Gary started mentioning it.
        Obviosly I am not as sophisticated as other investers.
        But, its a darn good point. I believe I recall Rickards mentoning that europe would print.
        Seems to be he trend in this currency war.

        .”We will on the other hand invest in gold because of hype, sentiment, herd-behavior and related emotion because that is where the real money is made. This is truly the most mood driven of all trades.”

        Well said.

        I bailed on my position a bit back, didn’t hit my top but oh well, Im only lucky when I hit an exact top or bottom.
        Ill be looking to re enter as gold looks like its bottoming and holding again.

          Apr 02, 2014 02:14 AM

          Just to repeat a thought b. I don’t often let people inside my head on strategy so these last two posts are a bit unusual. Keep in mind I could be wrong in my conclusions. Don’t ever act on anything I have written unless you know what you are doing. As Al often likes to repeat “I am not an investment advisor and this is not a recommendation for trading”. In other words…..you are on your own.

            Apr 02, 2014 02:47 PM

            A person should always be on his/her own as long as they are an “informed” he or she.

          Apr 02, 2014 02:40 PM

          I gotta tell you b, I think that Friday will tell a lot of the tale.

        Apr 02, 2014 02:40 AM

        Good call b. At this stage it will be a lot easier for most to time a re-entry than to play prices day by day if you don’t feel comfortable going short. I have no such hesitation when my confidence is high though and this is an easy call to make. We do have an ECB Monetary Policy Meeting coming up tomorrow April 3rd and it is possible the discussions will reveal more of their thinking with regards to slating deflation threats. The market is forward looking of course. If it sniffs out a change in thinking as I anticipate then we will see positioning almost immediately in the Euro, dollar, gold and elsewhere because a European QE or bond buying program represents a significant departure in thinking over there. I mean to say, we do not need an actual announcement for gold to be hurt. The relationship between dollar strength and golds performance is still quite strong and it will immediately be understood by market participants that a weakening Euro means precious are a bad bet on the long side. Somthing to keep in mind heading into the end of the week…….

          Apr 02, 2014 02:03 AM

          And remember b….we are not expecting any firm announcements of outright action. All that is required is a hint that policy direction is going to change. It is what we call forward guidance. Just suggestions that maybe the ECB will do X,Y or Z is quite sufficient to change the game for precious metals and that will be reflected quickly in the futures markets. Just look at how many months that inflation has been on the decline already in much of the Eurozone. It has been relentless. The odds of that trend suddenly reversing are pretty much zero in my estimation which means that in the next quarter the Union could enter a period of outright disinflation signaling big trouble. The Euro is far too strong for the good of the member countries right now and unemployment numbers are just brutal. With China’s current Yuan devaluation in mind and their business sector and exporters cutting prices to keep their heads above water we are already seeing deflation being exported to the EU. Japan has already been on this same track for almost two years. Globally, excess capacity is beginning to take its toll and falling consumption patterns in the EU as a result of the strong Euro and high unemployment numbers mean prices will keep falling in all liklihood. So it is not if but rather when QE will actually be initiated as a stimulant to soften up the Euro. The market senses this and knows that it will be a game changer for all sorts of asset classes. What we are going to be most interested in here are the actions of those who will position ahead of the herd to capture the best bang for the buck. This is what I was talking about a few days back……we need to anticipate the future to be better traders. These are a kind of contrarian bets because they are done before the facts are actually in. We cannot always get it right of course but when I do the math on this one the probabilities look quite favourable suggesting my thesis will be correct. The Euro will be weakened against the dollar and gold will suffer as one of the outcomes.

        Apr 02, 2014 02:26 PM

        Not investment advice? Okay.

        I personally think just the opposite, if the Euro goes significantly down, I believe gold will do well in spite of the dollar.

          Apr 02, 2014 02:47 PM

          I speak my mind just as you do Al. Of course it is not investment advice. Just an expression of personal views however flawed they may be…..same as yours we hear each day……Okay?

            Apr 02, 2014 02:13 PM

            People who don’t speak their minds Bird are definitely not worth listening to.

            Flawed? I don’t know man. Opinions are just that, “opinions”

            Hang in there, my friend!

            Apr 02, 2014 02:50 PM

            Will do. We await Draghi’s comments tomorrow. Just a hint of suggestion he might get the ball rolling on QE is all I need. The EU has seen inflation numbers in decline for about two years without relent. Just a matter of time before the region slips into outright deflation. Months maybe at most. He could go with ngative rates tomorrow. Or he could start opening the door to more extraordinary interventions. If he cannot say anything to weaken the Euro then gold has a chance. They are indeed discussing interventions but what it might amount to is unknown. The one thing nobody wants to hear this meeting is more inaction. Guess we will wait and see what comes.

            Apr 02, 2014 02:59 PM

            Gonna be a very interesting day!

    Apr 01, 2014 01:49 PM

    “Government is not reason; it is not eloquent; it is force. Like fire, it is a dangerous servant and a fearful master.” – George Washington

    “Or think of it this way, as economist Warren Mosler puts it: ‘When the government spends, only two things can happen to that money… the money can be used to pay taxes, or it isn’t used to pay taxes. In which case, somebody out there still has it.'”

    In the most fundamental way an economist can define it, currency is what your employer agrees to pay you for your man-hour labor. The government stands over the employer and tells them how and what they can pay your compensation in. The government also stands over you as the employee and fellow taxpayer, and tells you what your man-hour labor is worth, as well as how much you are obligated to the government with that compensation for your blood, sweat, and tears. This is entirely arbitrary, and usually to the benefit of one party out of the three – the government.

    This is why you only need as much of the government’s currency to pay government taxes and government-controlled exchanges (at government-controlled stores). Everything else should be kept in a form you alone agree with. Throughout history, gold, silver, copper, and other precious elements have been known for their status as stores of value. Most governments recognize this and seek to replace such standards with their own derivatives, so that they control the storage of value, so that the accumulation of wealth is a one-way flow.

    Erudite enough for you? 🙂

      Apr 02, 2014 02:28 PM

      That is pretty good jhpace!