August 1971, the nation of France allegedly sent a warship to New York harbor. President Pompidou had tasked the captain to fetch the country's gold as he was displeased with America's spending, to say the least. You see up until that period, currencies had backing with solid gold and the American dollar was the reserve currency as its link. But, deficit spending came in with America having to find the money for the Vietnam War and its programs at home.
To complicate matters further there was an enormous demand for gold that fueled a frenzy. To end all this, President Nixon shocked the world, "…the strength of a nation's currency is based on the strength of that nation's economy and the American Economy is by far the strongest in the world. Accordingly, I have directed the Secretary of the treasury to take the action necessary to defend the dollar against the speculators. I have directed Secretary Connolly to suspend temporarily the convertibility of the dollar into gold or other reserve assets…" That was the year President Nixon officially opened the flood gates.
Fast-forward to the year 2021 and President Joe Biden put pen to paper a dizzying $1.9 trillion relief package. We all know that since the gold standard was abandoned, money is printed for literally any purpose the government needs. The United States government like all others before it runs a budget deficit every year without fail. The American dollar is still the world reserve currency and here lies the danger of printing too much money. Over the last few decades, this is the only time in history where there has been a sharp increase in US dollars in circulation. See the graph below for specifics:
This is a lot of money within a short period and doesn't exactly store or create some value. Yes, the danger here is inflation. Not just an American issue but a world issue. All currencies on the surface of the planet measure themselves against the dollar. Should the dollar lose value, the rest will very likely follow suit. To simplify the case, although many nations are sovereign and have their currencies, they all value the dollar. The dollar is like a beautiful woman, she is accepted everywhere!
Modern monetary economists in simple terms suggest that as long as a country owns its currency as a public monopoly, it can operate as a public monopoly. Such a policy allows the said country to print however much as it needs. This notion goes back to 7th century China which did the first printing en mase. The paper money was a representation of the number of coins you had. In the Bretton Woods system, the paper was a representation of the gold you had in reserve at Fort Knox. In 2021 the paper currency is FIAT. A representation of faith in the government. Internet kids would say the paper currency is backed by vibes (tongue in cheek). If the major currency in global markets is used to fund perpetual deficits in the US, one may wonder just how long the situation can hold.
Instead of looking at countries as separate sovereign nations think of them as one unit all under one currency, the American dollar. To fully understand this, you need to look to the mid-1970s. During an oil crisis, OPEC elected to have oil exclusively sold in US dollars to stabilize the market. A keen eye will see this as another form of the Bretton Woods system where instead of gold you have oil. When most nations experience extreme volatility in currency, they price everything sold in dollars to have some stability. And like Nixon's government back then, Biden's is not shy to print and spend the money. In all scenarios right before a crisis, the nations experienced a market boom.
Before the 2008 economic crisis, the stock market was more bearish than ever and of course the real estate market. Money supply feeds speculators to want to use the money to invest in majorly the stock market and real estate. New dollar millionaires and even billionaires are made overnight and life is good! Well until it isn't which has been the case before.
Forty percent of the dollars in circulation currently were printed in the last thirteen months. You do not need to be a financial wizard to notice that ever since the 'stimmy' (ok I need to keep off social media for a while) hit the accounts life has been good! Spending has been nice, and surprisingly some businesses can't seem to find workers! I mean why you need to go to work when 'stimmy' cheques will come. Overnight millionaires are made from the stock market, crypto, and of course the new kid on the market the Non-fungible token. Most of these new millionaires aren't from manufacturing and barely technology.
Life is so good we sometimes forget we are supposed to be in a pandemic. Naturally, my 'end is near' roadside preaching would not be complete without quoting scripture, and from the book of Ecclesiastes, we know there is nothing new under the sun. Everything we have today is some version of what has been, hopefully, a bit improved. As we dance away the rhythm of this beat, we do know historically that the disc jockey may do that sudden scrubbing and introduce an unfamiliar beat. Will we adapt to the new beat fast enough or get completely thrown off?
In the current monetary policy, it feels a bit like experimentation. If successful, it may usher in a new golden age if not, we hope a collapse can be managed seamlessly and anarchy doesn't get a chance to set in. We do not need to live in Mad max times just because the reserve currency was printed too much. I agree it tempts the primitive parts in all of us. I mean it sounds fantastic desert wind blasting your Mohawk as you ride eternal, shiny, and chrome!!