The gig is up.
The last half century gave us growth and globalization. The next half century will not.
Why? Because the dollar-backed system that made it all possible has run out of steam. It has reached the limits of its effectiveness. Only the absurd remains.
Now, I can understand why people might reject this conclusion. After all, it’s the only system most can imagine because it’s the only system they have known. And that makes it easy to forget that the current money regime has no precedent in history. Nixon nixing the dollar’s convertibility to gold in 1971 began a 50-year experiment in money. And 50-years is hardly proof of permanence.
But there’s no arguing that it has been a success so far.
And that stage for that success was set when we negotiated Bretton Woods.
Dollar-Backed Fiat Kingdoms
Bretton Woods was a monetary system established in 1944 in which the value of the US dollar was fixed at $35 per ounce of gold and other currencies were pegged to the dollar. The system was created during a conference at the Bretton Woods Hotel in New Hampshire, where representatives of all 44 Allied nations met to establish a new international monetary system to rebuild the world economy after World War II.
The Bretton Woods system functioned well for a couple of decades, but by the late 1960s, the US was facing trade deficits (an inevitable consequence of the system as articulated in Triffin’s dilemma) and inflation due to the cost of the Vietnam War and increased government spending. In addition, other countries were becoming increasingly dissatisfied with the system because the value of their currencies was being held artificially low by their peg to the dollar.
In other words, we exported much of that inflation to the rest of the world.
In 1971, President Nixon was facing increasing pressure to address these problems, and on August 15th, 1971, he announced that the United States would no longer convert dollars to gold at a fixed rate of $35 per ounce. This action, known as the Nixon Shock, effectively ended the Bretton Woods system and marked the beginning of a new, floating exchange rate system.
That’s when our current 51-year experiment in full-fiat money began. The yen, euro, and pound sterling as we know them today would not have been possible without those currencies’ post-WWII link to dollars. But to understand what made that experiment so remarkably successful you need to look to the conditions in which it was run.
Why Fiat Must Fail
The past 50-years were defined by high population growth, globalization, and dollarization.
High population growth created the conditions for high economic growth. Globalization allowed those populations to access markets anywhere in the world. And dollarization networked the capital required to marry the two together.
Combined, these factors created a virtuous feedback loop of growth and fiat-backed debt, making the fully-fiat U.S. dollar the de facto currency of the world.
Those factors are now running in reverse.
Working-age populations in most of the world’s major economies are now declining. The localization of resources and manufacturing is removing the economic scale required to justify global supply chains. And the dollar-backed, fully-fiat network is being dismantled by regional currency and trade agreements.
The pro-growth, pro-capital, globalized world of yesterday is giving way to low growth, capital constrained, local markets.
Unfortunately for the kingdoms of fiat, the debt it took to build the world of yesterday is still here today. And tomorrow, I’ll show you what that means for today’s Fiat Kingdoms.
Think Free, Be Free.
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