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The Imminent Dollar Collapse, Explained To An 8-Year-Old

67

United States

United States

It’s the elephant in the room. The United States is utterly bankrupt and has been living off of borrowed money since 1971, when it defaulted on its loans — though of course, it wasn’t worded like that. Not even an income tax of 100% is enough to cover the expenses, and the US is about to go the way of the Soviet Union.

A while back before the dollar’s dead cat bounce, I wrote a story in Swedish explaining the issue to an eight-year-old. I think it’s time to repeat it in English.

So imagine we we’re a bunch of eight-year-olds. There’s Anna, Wei, Jesús, Felipe, Maria, Sven, Jean-Pierre and Sergei.

Oh, and there’s Wedgie.

His real name is Eddie, but everybody calls him Wedgie because he’s such a mean bully. Nobody really wants to play with him, but if we don’t, he’s mean to us. So we do anyway.

We collect nice shiny things. We build other things out of them sometimes. And then we sell the things we find and make to one another. And playing with Wedgie was okay after all, because he was buying a lot from all of us. Candy, jewelry from smooth stones, shiny seashells. Everybody was happy. Or at least nobody wanted to protest, because as fun as it was that Wedgie was buying, he could get very threatening when people would doubt him.

The thing was, Wedgie had been buying more than he had been selling for quite some time now. He was always in the red, living “above his means”, like they say. Wedgie had stopped paying in money altogether, because he never had any. He would pay with little pieces of paper instad, where it said how much he owed us, and he promised to pay for real later. He was writing those small pieces of paper in his room at night, and paid the rest of us with them, promising to replace them with real money later. He never said when that “later” would actually be.

Nobody else could pull this off. Only Wedgie. Because if somebody were to stand up to him… Wedgie was rather large and could look mean. Could be very mean, too. And besides, everybody wanted their money back the day Wedgie would have real money to pay us back, so everybody kept accepting the small pieces of paper that Wedgie was making in his room. “Five Wedgiemoneys”, they would say.

We even started trading directly in Wedgiemoney. Everybody had collected so much, it was just simpler that way. Some of us had almost as much Wedgiemoney as we had real money, or more.

Wedgie also made sure, in his threatening way, that some things could only be bought with Wedgiemoney. This forced us to change our real money for Wedgiemoney first, between each other, before we could buy what we wanted. Or we could Wedgiemoney directly from Wedgie, of course. In exchange for real money.

But it was fun too, in a way. Everybody had more money. Well, the price of everything went up too, of course, because we couldn’t find or make more things, we only had more money. But several of us had gotten much richer thanks to all the Wedgiemoney we had. We were very glad over that.

Then… something happened. We started thinking about the fact that Wedgie almost never sold anything. First, we were just looking at each other, as if we knew what we were thinking. Gradually, when Wedgie was not around, we started to look worried among each other.

Then somebody, I don’t recall who it was, said out loud what everybody was thinking:

What happens if Wedgie never pays back?

Suddenly, like a strong flashlight being turned on in the night, everybody realized that the Wedgiemoney could be completely worthless. Everybody was just pretending that they were worth as much as real money. If Wedgie didn’t pay back, everybody was sitting with a pile of stupid paper that wasn’t worth anything. But since nobody wanted to say out loud that “my money isn’t worth anything”, and suddenly be very poor compared to everybody else, we kept on pretending that Wedgiemoney was worth as much as real money.

Felipe was the one to carefully try to get rid of all his Wedgiemoney. He offered all of us to buy his Wedgiemoney for less than they were worth. Or less than the worth Wedgie claimed, anyway. Felipe wanted four real moneys for every paper that said “Five Wedgiemoneys”, the Wedgie-fivers.

Then, Anna asked for three real moneys for every Wedgie-fiver. Anna and Felipe soon only had real money, for the rest of us had bought their Wedgiemoneys. For Wedgie would pay back soon, wouldn’t he? It would have been a good deal.

But it wasn’t. All of a sudden, everybody was trading the Wedgie-fivers for two and fifty. Nobody really wanted Wedgiemoney any more. We agreed that they were only worth half of what they said. Nobody said it out loud, we all knew it anyway.

This didn’t worry Wedgie at all. He just started writing Wedgie-tenners instead, so he would continue buying things that cost five real moneys. When somebody asked when he was going to pay back, he just looked mean like Wedgie could do, and that everybody knew that Wedgie could do.

Then, that day came.

The day when we realized that Wedgie never had had any intention of paying back in the first place, and we realized he had been playing us for fools. We had paper, and he had all the nice things. He had been writing pieces of paper for us that we had accepted as real money, and didn’t want to lose.

But it was too late. We had realized he was never going to pay a single money back, even though the Wedgiemoney said he would.

So we put all our Wedgiemoney in a large pile, that we knew were garbage. And we didn’t accept any more from him. They weren’t good for anything, he was never going to pay back. He became really angry, and really mean, but it didn’t help him this time. We knew that we had been played for fools, and were going to keep our nice things to ourselves instead.

But only then came the real shock.

None of us had any money to buy things from each other any more. We had gotten so used to things costing both twenty and thirty moneys, even though they had only costed one or two before Wedgie had started writing his stupid pieces of paper. We thought we all had a lot of money, but we didn’t. We had gotten used to paying for a thirty-money item with five real moneys and 25 Wedgiemoneys.

Suddenly, nobody could afford the thirty-money items at all. Nobody had any money. Nobody could buy things as the prices remained where they were, and nobody could lower their prices, as everybody needed the money for what they wanted to sell.

We realized, even though we didn’t really want to, that it wasn’t only Wedgie’s fault that we had become poor. It was just as much our own. We had been dumb enough to believe him, even though we knew he was lying. It was always too expensive for us to say out loud that he had been lying the whole time, and therefore, we were in a much worse situation now.

We entered a very poor and rough time where nobody could afford anything. Everything was very, very expensive, all because of Wedgie’s stupid pretend money. They had made everything expensive, when nobody really had any money in reality. We had to get used to buying things for maybe one money instead of the things that we had bought before for ten. We weren’t used to living like that, day by day, and it was really rough. But nobody had any money and everything was still expensive.

Let’s end the story here and jump to today:

The United States has had a negative trade balance since 1976. The United States has lived above its means every year, year by year, after 1975 — and at a rapidly accelerating rate. Five years prior, the United States had unilaterally terminated the Bretton-Woods agreement that tied the dollar to gold, following a rapid decline in gold coverage during the Vietnam War. Charles de Gaulle of France demanded that the United States made good on its loan contract, and demanded gold for France’s dollars. The unsolvable situation caused President Richard Nixon to default on the US debts and say they weren’t going to pay any back. This event has been called The Nixon Shock and happened on August 15, 1971.

Of course, it wasn’t called a bankruptcy; it was spun as a reform of the international monetary system. Had anyone else done it, it would probably have been called a bankruptcy. In any case, after that point, all the United States had to do was to fire up the dollar printing presses. And boy, did they.

The last few years, the United States has had a trade deficit of over 500 billion US dollars, peaking at over 800 billion. That is eight times more than the country in second place and is growing rapidly. The United States is simply buying vastly more than it is selling, and has done so for thirty-five years. It compensates for this by selling IOUs, and at the same time pointing at its huge military powers for an implied threat in the case of nonacceptance of the IOUs — a military force which is unsustainably funded by these same IOUs.

Today, there are over three trillion dollars in currency reserves outside the United States. More specifically, there are 3,144,256,000,000 US dollars. That’s one portion of those IOUs. They have roughly halved in value in the past ten years.

In 2008, people were talking about a “financial crisis”. As if the bottom was reached, as if it was a temporary glitch, as if things were under control.

We have only reached the point in the story where people look at each other and ask “what if Wedgie doesn’t pay back?”.

There’s only a seed of doubt necessary to let loose the snowball in the avalanche slope. In 2008, the seed came from financial institutions that went belly-up. Unwisely, the US absorbed their huge losses into the government and so created an even worse situation for today, even though it created a dead cat bounce.

Some of the most prestigious financial analysts — Standard & Poor and Moody’s — have warned the US that they may downgrade the United States’ credit rating. The European ratings firm Feri Euroratings went ahead and actually downgraded the United States on June 8, right after Republican Paul Ryan said right out that the United States should default. That is quite extraordinary.

Many brokers have as a stability rule that they may only trade in triple-A bonds, the highest creditworthiness. With the US Treasury Bonds now downgraded, these brokers need to sell these bonds, accelerating the process. This was unthinkable — the US Treasury bonds have been the norm for credit grading, axiomatically being the triple-A rating.

The world has been buying IOUs without coverage to maintain the value of the previous IOUs, with no other creditworthiness than an assumption that the US will pay back some day. That day is not going to come, and we’re all going to be poor for a while.

The situation will stabilize, but not without Wedgie ceasing to buy things for pretend money. On the other side of that fence is another world economy, that I know very little of.

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About The Author: Rick Falkvinge

Rick is the founder of the first Pirate Party and is a political evangelist, traveling around Europe and the world to talk and write about ideas of a sensible information policy. He has a tech entrepreneur background and loves whisky.

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67

  1. 2
    ForskarGurra

    That analogy is a bit similar to old immateria – it has a value just for as long as people agree that it has. When people realize that it doesn’t – the value vanishes. Then money can be spent on other things instead – such as investing in the creation of new immateria rather than paying people for their old works.

  2. 3
    Walter

    This article is utter horseshit Almost every sentence is brimming with horseshit. Right at the start we read that the US has been living off borrowed money since 1971, when the reality is the exact opposite. There was no borrowing and no national debt before 1971? Ludicrous. The dollar will still be around long after Mr Falkvinge.

    • 3.1
      Rick Falkvinge

      Dear Walter,

      Thank you for this candid and straightforward feedback. I appreciate your highlighting the ridicule in the point that there was neither borrowing nor national debt before 1971, a ridiculous point which, I may add, is nowhere at all in the article. In particular, I appreciate your mixing national debt into the argument, which isn’t part of the article, either.

      Enjoy the weekend,
      Rick

  3. 4
    Walter

    I realize English isn’t your first language, Rick, but here’s what you wrote:

    The United States is utterly bankrupt and has been living off of borrowed money since 1971

    The implication therefore is that the US was NOT living off of borrowed money before 1971. But it was, making your reference to 1971 utterly irrelevant. So you are wrong right in the second sentence of your article. It all goes downhill from there. But please don’t let reality get in the way of your writings.

    Cheers

    • 4.1
      Rick Falkvinge

      Dear Walter,

      I was referring to The Nixon Shock on August 15, 1971, when the IOUs in the hands of other countries were declared worthless, and that these others could trade with the IOUs in-between them best they wanted.

      This was money that the US had borrowed — specifically, gold borrowed with dollars as the IOU documents — and the US decided to not pay back on that date of 1971. Additionally, the trade balance has been negative since 1976, increasingly so.

      It is possible that the US has been living off of borrowed money in other times as well, but this is not what I write. I write that a) the US is utterly bankrupt, and b) the US has been living off of borrowed money since [August 15] 1971.

      This does not imply anything at all regarding what happened before 1971, which you appear to suggest.

      Cheers, mate!

      • 4.1.1
        Walter

        I’m well aware that your reference to 1971 was to Nixon’s closing of the gold window.

        But your reasoning is still thoroughly convoluted. Money that the US ‘had borrowed’ before 1971 becomes ‘living off of borrowed money’ AFTER 1971? This makes no sense and shows a thorough misunderstanding of what ‘borrowing’ means. The US had a national debt before 1971 and after. It was living on borrowed money before 1971. You simply want to argue that going off the gold standard in 1971 was bad. But you can’t back that belief by claiming the US was living off of borrowed money after 1971 when it was doing so in 1970, 1969, 1968, and so on.

        And if your claim that borrowed money means a trade deficit (which isn’t what the term ‘borrowed money’ means, but let’s move on), then why did you say 1971 when your recent common says no this happened starting in 1976? The answer is you are a gold standard crackpot who wants to believe that everything bad began as a result of closing the gold window in 1971, even though your two main points – living off borrowed money, which means national debt, and running a trade deficit, didn’t begin in 1971.

        I won’t argue with you any further. I only read your blog for laughs, not to learn about economics, because you have no idea what you are talking about.

        • You attack like a vicious beast because you are afraid. You lie because you’re wrong. You bully because you’re weak.

          We see you for what you are.

  4. 5

    I’m asking myself: isn’t that a bit of catastrophism? Yes, the dollar will devaluate, as it has been doing for the last 10 years, the euros is devaluing too. Well, what will really change for us? Hasn’t the last 10 years be like that the whole time?

    • 5.1
      Rick Falkvinge

      The change that can shift balance the most, and which is a likely scenario, is that the USD ceases to be the standard international trade currency and reserve currency.

      It has used to be that before you can buy anything else, you must first by United States Dollars from the United States, and then you can buy the other thing. This has given the US a standard well above the position given by its fundamental production.

      But as the value of currency reserves dwindle with the value of USD, this position is weakened and may be toppled by an alternative. There are a few contenders, but no one even seriously competing for a succession at this point.

      Bitcoin may become one of the standards for international trade, but isn’t there today.

      • 5.1.1

        Thanks for the article, though I dont’ agree with much of it, unless the Republicans actually don’t raise the debt ceiling, though the Fed could print money to pay for the deficit averting an immediate collapse. A county that denominates its debt in its own currency can never go bankrupt.

        Of course your comment leads to which currencies are the contenders? Yuan, Yen, Euro and Pound.

        The Chinese deliberately keep the Yuan devalued and claim their economy will tank if it rises in value. so the Yuan isn’t likely soon.

        The Yen continues to deflate – but doesn’t have the power it once did. Besides, by your logic, Japanese government debt as a % of GDP is much higher than the US so they are even worse than the US.

        The Euro could be a contender, but the ECB and Germany seem intent on forcing the periphery countries plus the Baltics to suffer an internal deflation which will keep the European economy in the doldrums all while preventing the cleanup of their troubled banking sector. They share a great deal in common with the US on that last point.

        The pound is been there done that, not going to happen again. since the UK is smaller than Japan among other things.

        Of course if the US dollar fell in value then our exports would increase and imports decrease. and we would be forced to switch to smaller cars. The Euro and kroner would rise and unemployment would increase in Europe. Most US govt debt is bought by people in the US, so I don’t see the immediate deficit as a big problem.

      • 5.1.2
        Rick Falkvinge

        A county that denominates its debt in its own currency can never go bankrupt.

        This is an interesting observation, although I have to disagree slightly. It is true that a country that can print more of its bills to pay off its debts certainly doesn’t need to default on its obligations, but that particular solution has led to hyperinflation when governments have tried it.

        Also, I need to question whether it can’t fail to meet its obligations anyway. After all, USD is controlled by the Federal Reserve, which is a private company and not the US Treasury.

      • 5.1.3
        Rick Falkvinge

        Also, I agree with your observation that neither the Yuan, Yen, Pound Sterling nor Euro can fill the USD’s role in the present time. They may be able to change their role to do that, particularly the Euro, but as long as the stability pact is in effect, the ECB will not allow for large enough a deficit to allow Euros to flood out of Europe to the extent necessary to become a new reserve currency.

  5. 6

    How come when I read this story and read wedgiemoney I read it like bitcoin instead ?

    Bitcoin ain’t backed by anyone. Noone has promised to buy bitcoin back.

    If it looks like a dog , it walks like a dog and it barks like a dog …

    • 6.1
      Walter

      Anders, stop using logic. Mr Falkvinge wants the US economy to collapse, so therefore it will collapse. You can’t argue with that kind of thinking.

    • 6.2
      Rassah

      A Bitcoin isn’t an “IOU 1 Bitcoin,” It’s an actual Bitcoin. Unlike Wedgiemoney, no one can make more Bitcoin. No one can lend Bitcoin they don’t actually have (unless they lie about it). If you have Bitcoin, you have Bitcoin, just as if you have Gold, you actually have Gold.

    • 6.3
      Elmo

      … then it’s a dog. Not Bitcoin, but dollar. Did you actually read the story? Wedgie HAS promised to pay the loan, or “back it up”, but it becomes obvious that it wont’ happen. Now, you rightly spell that no one is promising to back Bitcoin, which is the total opposite of wedgiemoney. Bitcoin’s value is not based on any promises, only in the value it’s users give it based on it’s utility and how others value it.

      • 6.3.1
        Stefan

        The difference is that you can’t lend out bitcoins you don’t have, which is exactly what Wedgie did.

        You can however still use IOU’s in place of bitcoins. Which also basically is what Wedgie did.

      • 6.3.2
        Elmo

        This is creepy… while I would not put money on it I cannot remember having written that post. Could someone with the necessary access please comment on whether the email address of my post is the same as the one of the post I am commenting? I just want to figure out whether someone is using the same name as me (pretty unlikely coincidence) or whether I am just coming apart at the seams…

      • 6.3.3
        Rick Falkvinge

        @Elmo (“this is creepy” comment):

        Different emails. Also, different IP addresses, clients, operating systems, subnets, and countries.

        Cheers,
        Rick

    • 6.4
      Björn Persson

      Gold ain’t backed by anyone. Noone has promised to buy gold back. Therefore gold is obviously worthless, right?

      • 6.4.1
        Elmo

        It is, but it is in the same class as Bitcoin in that it is worthless-but-of-limited-total-supply, making it a more reliable carrier of imagined value than dollars which can just be reprinted ad nauseam.

  6. 7
    Rev. Smith

    @Anders S et al. Rick gets a little carried away impling that the USD will be worth zero, which it won’t. Still the argument still will hold since it will devalue very rapidly, making the world reserve, oil money and everything else which is pegged to the USD will rock the world. Further, the stockmarket, banking system will have global consequnces, since the decreased value will be beyond what the market can expect in fluctuations.

    So what’s the difference between USD, GPB and JPY in comparison with BitCoin. Well first of all none of them has an inherent or utilization value, but many has the perception that so is the case when it comes to national currencies. Another difference is that the national currencies are backed by a government (more or less), therefore I guess that Rick is referring to the IOU simile. So when the “creditors” wants their “money back”, this will not be possible. The result of what happens then, we seen in Greece right now btw.
    So to the difference between USD and the rest of the currencies are mainly two things: USD has been the “hard currency” since WWII, hence they have been able to print as much money as they felt they were needing. Any other currency doing the same would lead to inflation or even hyperinflation (compare with Germany between WWI and WWII).
    the second (and most important) is that the assets of USA are mostly “of national interest” meaning that they can not be sold to none americans (such as most of the Hollywood companies, the mines etc.) In other words we, the “creditors”, will not get our money back. No other national currency with such legislation would be made void or ostracised from the global economy (leading to that the economy in the country would collapse).

    So to sum things up: What is 100 SEK worth? Exactly what the market thinks, no more or less.

  7. 8
    Geraldine Austin

    This seems to be a lot of relentless navalgazing. Rather than explain what you think may happen, or perhaps already is happening, what are next steps to either avoid this situation or to protect one’s individual wealth in wedgiemoney? Assume bitcoin is not an option. Does this mean buy up land? gold? silver? Levi’s jeans? Having the information is only part of the problem. What does one do with this information?

    • 8.1
      Scary Devil Monastery

      Well, the Chinese have 4000 years of history of pointing out that to the wise man the only real value is in land. For good reason.

      • 8.1.1

        In the near future, 10-50 year, mankind would have “endless” “land”. :-)

        We have til today found several solar system with possible Earth-like planets. With the new James Webb-telescope we would be able to found out what type of atmosphere this planets have.

        In the very near future, 5-20 year, asteroid mining and living in the asteroid belt, between Mars and Jupiter, would be reality.

        The 100-year Starship project that plans plan to transport humans beyond the solar system within 100 years., http://100yss.org.

        Please learn more, get inspired by reading: http://www.centauri-dreams.org

  8. 9
    Rev. Smith

    @Geraldine, As always: one should not put all the eggs in one bag. As for the so called “fiat money”, it is impossible to foresee what the effects will be one each currency when the domino effect starts.. So my best bet is as in times of hyper inflation – put your money in land, gold, silver since these seldom looses value.

    • 9.1
      Morten

      I think land can definately loose value. It depends very much on it’s location and what it can be used for after a potential big shift in the economy.

  9. 10
    HugeHedon

    Rick, you’re a good writer, but not as good an economist — pretty much like the archetypal uneducated tea party deficit hawk. There are so many articles like this, and they are so mistaken and so harmful.

    The errors you’re making are numerous.

    For example: U.S is a “monetarily sovereign” nation (since the Nixon shock 1971 when they abandoned the gold standard and replaced it with a sovereign fiat currency system), Just like Sweden (but unlike Greece and Ireland, who are users of the euro).

    To understand the financial concerns of a monetarily sovereign regime, the household analogy that you seem to be using inside your head is fundamentally inadequate.

    Such a nation can not financially live “beyond its means”.

    It can not involuntarily go bankrupt.

    It can not involuntarily go bankrupt.

    Just like another commentator states above: It can not go bankrupt — unless it choses to for political reasons (or due to a lack of understanding of how modern monetary systems work).

    Unlike Greece, the U.S can always pay its debt (as long as it is dollar denominated).

    There is plenty of research and debate going on about this. Take a look at MMT (Modern Money Theory, a “Post-Keynesian” school of economic thought). It’s not mainstream yet (and von Mises fans don’t like it), but they’ve got this just right (http://mmtwiki.org is one resource, though somewhat “under construction”. Warren Mosler, Bill Mitchell and L.Randall Wray are the main guys right now, I think.)

    Inflation can be a problem, yes. But default: Nope, net, nix, nej för fan.

    If the Chinese suddenly starts to spend all their dollar hoards into the American economy, then measures may have to be taken (such as foreign trade restrictions) to prevent inflationary pressure from building up. The Chinese are the ones in a precarious position with all those fiat dollars that they’re not even sure they’ll be able to use,

    That is not to say that the U.S does not have problems — they certainly do. However, unemployment and the related social issues is the main thing, not the “finances” and the import of cheap real goods from Asia — that’s just a benefit for crying out loud.

    • 10.1
      Rick Falkvinge

      If the money-issuer had been politically controlled, you would have been 100% correct. However, the US money supply is controlled by a private company, the Federal Reserve.

      I would welcome your comments, when this is taken into account?

      Regardless, you are correct that I may be using the world “bankrupt” in too bit general a sense. My intent is to express “indebted over their heads so they can’t solve the situation without going piss poor, and drawing the rest of us in to it to some extent”.

      • 10.1.1
        HugeHedon

        The Fed is formally a private company, yes (although it is legally and organizationally intertwined with the public sector in various ways, so perhaps a better word would be “quasi-private”).

        But I think you’re assuming that the Fed will bounce checks issued by the Treasury.

        That is of course the law — the Treasury is not allowed to overdraft it’s account at the Fed.

        That is however a politically self imposed constraint for the U.S that they can alter at will.

        They could of course also reform the Federal Reserve system – it’s not necessary for it to be private – just like Riksbanken in Sweden (the central bank) is not private.

        The U.S can always alleviate those self-imposed legal constraints. A monetarily sovereign government can always spend in its own currency – if it wants to.

        A crude analogy is this: The government always has an infinite fund of financial assets (denominated in its own currency) at its disposal.

        If the US selects to not remove those self-imposed constraints and “default” instead, then that’s a voluntary action (and very bone-headed at that).

        Now, you may be thinking: Ok, he may be right – the Treasury/government can not “go broke”, it can never “run out of money”, it is not financially operationally revenue constrained – they can always pay their debt etc — but what about inflation/hyperinflation!?

        Excellent: That’s a better discussion then, let me know if you’re interested.

        Note though that there is a huge difference between today (free floating fiat currency system) and the old times of the gold standard (or pegged currency in the case of Sweden), when the currency peg had to be defended. The lack of operational financial constraints today gives the government another degree of freedom.

        The inflation constrain remains however, but the difference is immense.

        Also, regarding the so called “debt”. The Chinese hold hoards of U.S government bonds, Treasuries. Treasuries are much like regular dollar currency except that it carries an interest.

        If the Chinese are no longer interested in holding bonds at the time of maturity, they could select to get regular dollar currency instead. In practice (using another crude analogy), this would mean that some interest carrying “savings accounts” at the Fed are debited and non-interest-carrying “deposit accounts” at the Fed are credited. It’s a simple switch. This is the way government “debt” is “paid back”.

        To think of government bonds as “debt” that will have to “paid back” or be a “burden for future generations” is in fact utterly misleading. Government bonds is just an interest carrying alternative to regular currency.

        Yes, I know, this is outside of mainstream thinking of course. There’s a lot more I could say that would clarify these ideas.

      • 10.1.2
        HugeHedon

        There is a rather funny discussion going on right now:

        Even under current regulation, the U.S Treasury could buy back (pay back) all its debt. The process would involve the Treaury letting the U.S Mint minting a Giga-dollar coin (in plastic, say) and deposit it at the Fed. Apparently the Fed must accept it as legal tender. See for example http://neweconomicperspectives.blogspot.com/2011/07/qe3-treasury-stylego-around-not-over.html

        Ka-ching: The U.S will not default in it’s own currency.

        Debt ceiling — schmebt ceiling.

        Again — sure, the Fed is a “private company”, but that will not really matter when push comes to shove (barring some immense policy maker stupidity).

        But then, some would ask, what about the risk of inflation (or to be more specific government induced inflation)? Yes, that could theoretically matter. But in the current American economical environment, the risk of that is lower than the liveness of Elvis.

  10. 11
    Magnus

    I think you should have done a straight translation of you old swedish version, that was far better in explaining the situation.

  11. 12
    Magnus

    If there are is any country in the world that is living far above what it can afford, it is the USA, not for example Grece that is beeing robbed by entities like Goldman Sachs to be used as a wedge against the euro.

  12. 13
    Hideo

    Rick, you are brave to talk of the elephant in the room, indeed, especially judging from the vitriolic comments.

    There are a couple of fundamental reasons why gold could be the answer…. (or Bitcoin, if it proves secure and overcomes the hurdles you mentioned and the additional hurdle of the innate suspicion the general public has for everything the geeks claim is cool).

    These are:

    1) There is a limited supply and it can’t be printed by anyone.
    2) it’s value is intrinsic, and doesn’t favor any country over any other.

    Gold is awesome because it is universally accepted, with a long history.
    Bitcoin has it all to prove, yet, but the great advantages over gold are the ease of effecting transactions and the difficulty authorities have in confiscating or controlling it.

    The US has run its course. It will not be judged the best or worst of empires, but nonetheless it is OVER., because the rest of the world has been financing it, and is in a position to stop doing so. It was STUPID of the world, post WWII, to accept the USD as the base standard, instead of gold, and they only did it because they trusted the US and its constitution, and the promise to pay gold if needed at the window.

    The world would do well not to make that mistake again.

    Hideo

  13. 14
    ANNM

    There will hardly be a “collapse”. USA isn’t Zimbabwe, it is one of the largest markets in the world and an enormously important player in international trade. The rest of the world can’t afford to let it collapse and will support the dollar by buying more of it if needed. The US is almost certainly going to lose it’s dominance but it will happen gradually over many decades much like it has in the past 30 years.

    • 14.1
      Rick Falkvinge

      You’re exactly right when you describe how networked the United States is today. The US is just like the Soviet Union was in, say, 1989.

  14. 15
    Slasher

    Great story Rick. I am not as nit picky as others here so I accept it as an overview of the problem.
    I am also annoyed when you hear people say that they lost 1 M dollars or something when it turned out that the IT-company they invested 10k dollars in and then rose to 1 M dollars before it turned out that the IT-company wasn’t worth more than the furniture they had. You haven’t lost 1 M dollars because the company wasn’t worth anything in the first place. You can argue that you could have sold your shares before everyone realized the company wasn’t worth anything but that is just like saying your lottery ticket is valued 1 M dollars before you have scraped the surface to see if its a winner. It might work one person to another but when the whole world realize that there is no value you just have to accept that the “money” you had is gone. It never really existed.

    The difference between the story and the real world is that in the real world we have other currencies which can be used to buy the same things we used to buy dollars in. The only thing that happen is that dollars are worthless but the commodities and companies that produce real value is still worth money. It is the same as in Zimbabwe. They printed 1 Trillion dollars notes that one week later were worthless. No one in Zimbabwe accepted them anyway. They wanted American dollars, euros or South African rand. So I don’t think it will be so bad as in the 8-year olds story. It will just be bad until the bankers accept that their huge profits wasn’t really worth anything.
    My advice: Don’t let the bankers give you the black card. Invest in companies or currency that has a real value, don’t overpay for them, and don’t morn over the loss of fake money.

    • 15.1
      Björn Persson

      The difference between the story and the real world is that in the real world we have other currencies which can be used to buy the same things we used to buy dollars in.

      No, the other currencies are present in Rick’s story, under the name “real money”.

  15. 16
    Balthazar

    Some off topic thoughts of mine; I wish I could still be around when our grandkids start colonizing other planets. Thus, creating new self sustained living zones. And new economic zones. Zones that have their own resources, other than the ones we are limited to on Earth.
    What will Gold (or all other resources) be worth on Earth, if you are able to import loads and loads and loads, from other planets?
    How will all the currencies on Earth be affected, if suddenly other Giant trade zones/partners/competitors are added to our civilization?

  16. 17
    Morten

    Good article. Anyone with some sense can see that the dollar is headed for collapse. Yes, there is a slight possibility that the US government will choose to stop printing, and therefore default, but this is very unlikely I think. So they will continue printing faster and faster.

    If one takes a good long look at how the world works, one can see that the chinese people is not in any way helped by constantly devaluating their currency. The people are bing held poor by this. Of course their political leaders do get a benefit by this, so they will continue as long as they can, but I think they are seeing that they have to stop soon. This will make most things the west is buying a lot more expensive, while the chinese will switch production towards things they actually need themselves. It will be great for humankind, but bad for lazy western people.

    Chinese is not dependent on trade with the west, any more than the slaves were dependent on their owners for jobs.

    • 17.1

      Yes, there is a slight possibility that the US government will choose to stop printing, and therefore default, but this is very unlikely I think. So they will continue printing faster and faster.

      Agreed. Due to immense stupidity among policy makers, they could actually choose to default.

      But I’m not sure where you get the “printing faster and faster” stuff? Why this fear mongering about government bonds held by the Chinese? (Yes, I do know that — it’s the same uneducated reasoning that current policy makers seem to abide by).

      Contrary what people here seem to thing, a fiat currency regime under a flexible exchange rate is nothing like a household or a gold standard system.

      (From http://mmtwiki.org cc-by:) A common misconception is that future generations will suffer under a “debt burden”, making them poorer than they otherwise would have been, because of the government “debt” (issued bonds) today. This is incorrect.

      Neither government bonds nor currency is “debt” that will have to be “paid back” by future generations, but rather financial assets that will be /inherited/ by future generations. A government bond is a form of financial asset for the holder, much like currency.

      Indeed, government bonds can be thought of as interest earning “deposit” in a “savings account” at the central bank. If the future holders of the government bonds desire to hold currency instead, or if the government desires to reduce its amount of outstanding bonds, the government can simply issue currency to buy back the bonds, thereby removing them from the economy.

      The “deposit” is shifted from the “savings account” to a non-interest earning “deposit account” at the central bank (i.e bank reserves). This is done by changing electronic accounting entries (much like changing numbers in a spreadsheet).

      This changes the composition of the non-government’s financial assets as some of them are shifted from interest earning (bonds) to non-interest earning (currency).

      A difference is that bond holders receive interest payments that over time will increase non-government net financial assets, potentially increasing nominal aggregate demand and thus possibly contributing to inflation. On the other hand, currency holders may be inclined to spend more than bond holders, causing the opposite effect. The resulting effects on aggregate demand are unclear and ambiguous.

      Government bonds held by the non-government sector should not be seen as “debt”. Rather, together with issued currency they constitute the financial wealth of the non-government sector – the net financial assets.

      Of course, should the government reckon that there is too much base money and too little bonds in circulation, it can sell bonds to remedy this. This is what is sometimes called “borrowing” and is purely a monetary policy option; it serves to alter interest rates, not to raise revenue for deficit spending.

  17. 18
    Mårten

    The way I understand it (but I’m in no way an expert so feel free to point out any errors) the US is borrowing money from the Chinese in order to buy goods produced by the Chinese… it should be clear to anyone that can only go on as long as China benefits from it. Eventually there will be a tipping point when that’s no longer the case and then China will stop devaluating their own currency and their 1.3 billion population will start consuming what they produce themselves thereby increasing the standard of living of the Chinese people.

    Now, I don’t think the Chinese will benefit from a sudden crash of the US economy either, and they likely worry about the US military like everyone else, so my gut feeling is China will prefer a slow decline while the Yuan is going to be pushed as the alternative.

    But as I said initially, I’m no expert so feel free to point out if I have I misunderstood something?!

  18. […] The Immi­nent Dol­lar Col­lapse, Explained To An 8-Year-Old. It’s the ele­phant in the room. The United States is utterly bank­rupt and has been liv­ing off of bor­rowed money since 1971, when it defaulted on its loans — though of course, it wasn’t worded like that. Not even an income tax of 100% is enough to cover the expenses, and the US is about to go the way of the Soviet Union. [Falkvinge on Infopol­icy] […]

  19. […] entendermos melhor as implicações deste cenário chamamos o sueco Rick Falkvinge para nos […]

  20. 19

    We are a month after the original posting. Barack Obama has stormed out of a session with the Senate. Moodys is contemplating lowering the credit rating of the United States. If that happens, a majority of the funds oning US Treasury Bonds will have to sell them, since their rules require top credit rating for any debt they are to hold. Who will buy in this market? At what prices? Who will buy any newly issued bonds when there is a bargain to be had in the old bonds?

    I think that Rick may be right in that the USD may collapse. This doesn’t mean that it will be worthless, but a 90% drop over a couple of months is not unlikely, as long as there is a strong trigger. Lowered credit rating is the most likely one to show up, but there are other possible triggers.

    Until someone actually has said that the emperor is naked, we all get to imagine that he is clothed.

    • 19.1
      jimbob

      Yeah, that totally happened. They downgraded US debt and now treasuries are trading at record lows. That means people are clamoring for treasury bonds more than ever. So what really happened in the story is the kids all looked at each other and said, “Oh well, who cares if Wedgie pays us back, as long as we all continue to accept Wedgiemoney everything is perfectly fine. There’s no reason to freak out. In fact, Wedgie, can I have some more of those IOUs?” And if one of the kids stopped taking Wedgiemoney, nobody would have anything else to pay him with anyway. So they’d just stop buying his trinkets, and buy the trinkets from the other kids instead.

      My big problems with the analogy are: 1) A real bully would just beat you up and take your “real money.” This is the whole plunder thing that used to be common in war time. 2) What the hell is “real money” supposed to represent in the story, gold? Yeah, I’d take USD over gold any day. 3) The world economy is a lot larger than a handful of people. There are a lot more options, and a much more complicated dynamic that does not scale well.

      Things are worth exactly what people are willing to pay for them. No more, no less. To my four-year-old son, rocks are a perfectly good payment method. They are valuable to him. He can trade them for different kinds of rocks at the local nature swap shop. The rocks at the swap shop are not for sale. USD would be of no use to him there. So he gets paid in rocks. Some day he will not be interested in rocks, but for now it works.

      The same is true for the USD. Some day people will not be interested in USD (or gold, or platinum, or whatever), they will be interested in culture, or helium, or Yuan, or Lego or something else altogether. Hell right now there’s a market for incandescent light bulbs. But you can’t just take a light bulb to a hot dog vendor and say, “I’ll give you three bulbs for a dog.”

      Believing that gold (or whatever Rick meant by “real money”) is any different than light bulbs (or Lego, or rocks) is absurd. It’s still just barter. It has value, but only to certain people.

  21. […] has to end. It’s time for the United States dollar to collapse, already, to put an end to this […]

  22. 20
    XanII

    Good article. I believe Karl Denninger over at Market-Ticker.org will comment on this soon. He has really dug very deep into this.

  23. […] Read The Imminent Dollar Collapse, Explained To An 8-Year-Old PermalinkPosted: Sep 05 2012Categories: PoliticsTags: American freedom, economic turmoil, federal budget, foreign aid, military spendingComments: 0 […]

  24. […] falkvinge.net, Rick explains US economic dumbfuckery in terms an 8 year old can understand. Fun […]

  25. […] value. In economic terms, this is called a “correction”. (I’ve written a previous piece on this that’s easy to read.) Such an avalanche would be the definite end of the United […]

  26. 21
    Ano Nymous

    Well, that explained a lot. It just goes to show how much I know about world economics. But there’s one thing I don’t get, and that is why prices can’t be lowered again.

    You write “Nobody could buy things as the prices remained where they were, and nobody could lower their prices, as everybody needed the money for what they wanted to sell.”

    If everyone were to agree that they would lower their prices, then why would they need the money for what they wanted to sell? Why not simply say “We all divide our prices by ten, and from now on the Wedgiemoney is not usable”?

    If it happened simultaneously enough, everybody would be able to buy, and the real money they get from selling would be enough for their needs.

  27. […] “correcció” (he escrit un article anteriorment sobre el tema que és fàcil de llegir: http://falkvinge.net/2011/06/17/the-imminent-dollar-collaps-explained-to-an-8-year-old). Una allau així representaria la fi dels EEUU com a superpotència, i s’assemblaria força […]

  28. […] del valore di oggi. In termini economici, questo si chiama “correzione”. (Ho scritto un pezzo precedente su questo, è facile da leggere.) Sarebbe la fine degli Stati Uniti come superpotenza: e in gran […]

  29. 22
    Kiaya

    Slight typo “we could Wedgiemoney” – great post.

  30. […] long ago, and is being kept alive by blowing up a bubble harder by the day. An ELI5 version can be found here (ELI5 meaning “explain it like I’m five”), but in a nutshell, the USA defaulted on its […]

  31. […] long ago, and is being kept alive by blowing up a bubble harder by the day. An ELI5 version can be found here (ELI5 meaning “explain it like I’m five”), but in a nutshell, the USA defaulted on its […]

  32. […] is életben, hogy napról napra egyre nagyobbra fújják a lufiját. Ennek a történetnek itt olvasható egy jelentősen leegyszerűsített változata, de dióhéjban a lényeg annyi, hogy a […]

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