Is the US Monetary System on the Verge of Collapse?

by David Galland, Casey Research

How Will You Protect Your Assets in the Coming Monetary Collapse?

Tune into CNBC or click onto any of the dozens of mainstream financial news sites, and you’ll find an endless array of opinions on the latest wiggle in equity, bond and commodities markets. As often as not, you’ll find those opinions nestled side by side with authoritative analysis on the outlook for the economy, complete with the author’s carefully studied judgment on the best way forward.

Lost in all the noise, however, is any recognition that the US monetary system – and by extension, that of much of the developed world – may very well be on the verge of collapse. Falling back on metaphor, while the world’s many financial experts and economists sit around arguing about the direction of the ship of state, most are missing the point that the ship has already hit an iceberg and is taking on water fast.

Yet if you were to raise your hand to ask 99% of the financial intelligentsia whether we might be on the verge of a failure of the dollar-based world monetary system, the response would be thinly veiled derision. Because, as we all know, such a thing is unimaginable!

Think again.

Monetary Madness

Honestly describing the current monetary system of the United States in just a few words, you could do far worse than stating that it is “money from nothing, cash ex nihilo.”

That’s because for the last 40 years – since Nixon canceled the dollar’s gold convertibility in 1971 – the global monetary system has been based on nothing more tangible than politicians’ promises not to print too much.

Unconstrained, the politicians used the gift of being able to create money out of nothing to launch a parade of politically popular programs, each employing fresh brigades of bureaucrats, with no regard to affordability.

Such programs invariably surged during political campaigns and on downward slopes in the business cycle when politicians hearing the cries of the constituency to “do something” tossed any concern about balancing budgets out the window of expediency. After all, the power to print up the funds for debt service whenever needed makes moot any concern over deficit spending.

Former VP Cheney, who fashions himself a fiscal conservative, let the mask drop when, in 2002, he stated that “Reagan proved deficits don’t matter.”

Those words were echoed just a few weeks ago, when both former Fed Chairman Alan Greenspan and Obama economic advisor Larry Summers, in separate interviews, said almost the same, paraphrased as, “There is no chance of the US defaulting on its bonds, not when our government can borrow dollars and print new dollars to meet any future obligations.”

Of course, Greenspan and Summers were referring to an overt default – of just not paying – and not to a covert default engineered by inflation. Unfortunately, like virtually all of the power elite, both miss the point that the mountain of debt that has been heaped up since 1971 is fast reaching the point of collapsing like a too-big tailings pile and taking the monetary system down with it.

Importantly, the debt shown in this chart whistles past the government’s unfunded liabilities, in particular for the Social Security and Medicare systems. Adding those would more than triple the US government’s acknowledged obligations – to over $60 trillion.

Given the role the US dollar plays as the world’s de facto reserve currency – with all major commodities priced in dollars, and dollars forming the bulk of reserves held by foreign central banks – the dismal shape of the US monetary system spells trouble for the global monetary system.

Making matters worse, following the lead of the United States, governments around the world long ago adopted similar fiat monetary systems. You can see the deficit contagion in this next chart. It is worth noting that the dire condition of the United States now leaves it in the same muddy wallow as Europe’s desperate PIIGS.

In a recent article in The Telegraph, Ambrose Evans-Pritchard referenced a paper out of the BIS that paints the picture using appropriately stark terms.

Stephen Cecchetti and his team at the Bank for International Settlements have written the definitive paper rebutting the pied pipers of ever-escalating credit.

“The debt problems facing advanced economies are even worse than we thought.”

The basic facts are that combined debt in the rich club has risen from 165pc of GDP thirty years ago to 310pc today, led by Japan at 456pc and Portugal at 363pc.

“Debt is rising to points that are above anything we have seen, except during major wars. Public debt ratios are currently on an explosive path in a number of countries. These countries will need to implement drastic policy changes. Stabilization might not be enough.”

Viewing the situation from another perspective, we turn to the work of Carmen Reinhart and Ken Rogoff, who studied the factors contributing to 29 past sovereign defaults. They found that default or debt restructuring occurred, on average, when external debt reached 73% of gross national product (GNP) and 239% of exports. Using the Reinhart/Rogoff findings, Casey

Research Chief Economist Bud Conrad prepared the following chart showing that the US government is already far along on the path to bankruptcy.

It’s hard to argue against the contention that the situation is, to be polite, precarious. Given that the obligations of the US government, as well as most of the world’s other large economies, are now impossible to repay and that their reserves are just IOUs backed by nothing, the stage is set for a highly disruptive but entirely necessary do-over of the fiat monetary system.

“Preposterous!” say the lords of finance and masters of all.

Is it?

Of course, these very same mavens completely missed the looming housing crash and the depth and duration of the subsequent crisis – a crisis that is still far from over. In other words, listen to them at your peril, because in our view it’s essential in calibrating your financial affairs to understand that, if history is any guide, we are now well down the road to a collapse in the monetary system.

In fact, over its relatively short history, the US monetary system has come unglued time and time again thanks to politically expedient attempts to interfere with the workings of a free market in order to reward constituents or kick the can on the economic problems of the day down the road.

Thus it is our contention that while the mainstream media focus on the daily gyrations of equity markets or the futile political charade that is Washington, they overlook powerful tectonic rumblings indicating the world’s prevailing monetary system is about to fracture.

A Brief Timeline of US Monetary System Failures

Here’s a brief history of past disruptions here in the United States. Importantly, with the US dollar now the de facto reserve currency of the world, this time around it’s global.

1861 – When the Civil War begins, the dollar is convertible into gold and silver.

1862 – Congress passes the Legal Tender Act and authorizes the issuance of non-redeemable “Greenback” currency. Convertibility into gold and silver is suspended for all US currency.

1863 – National Banking Act authorizes the chartering of banks by the federal government.

1865 – A 10% tax is levied on the issuance of bank notes by state-chartered banks, effectively ending that practice.

1879 – The US Treasury resumes redeeming dollars for gold and silver.

1900 – Passage of the Gold Standard Act, adopting the gold standard by the United States and demonetizing silver.

Specifically, the act provided for “…the dollar consisting of twenty-five and eight-tenths grains (1.67 g) of gold nine-tenths fine, as established by section thirty-five hundred and eleven of the Revised Statutes of the United States, shall be the standard unit of value, and all forms of money issued or coined by the United States shall be maintained at a parity of value with this standard…”

But 33 years later, to gain the power to inflate the currency and collect the profit from doing so…

1933 – By executive order, Franklin Roosevelt prohibits the private ownership of gold. Congress passes the Gold Reserve Act, which enacts Roosevelt’s executive order, abrogates all gold clauses in all contracts public or private, past or future (which cancels the convertibility of Federal Reserve notes into gold), though it confirms the convertibility of US Treasury notes held by foreigners into gold. Eleven years later, the US government takes its show on the road…

1944 – Bretton Woods system adopted with signature countries agreeing to tie the exchange rates of their currencies to the US dollar, which itself is linked to a fixed price of gold. Foreign trading partners retained the right to swap dollars for gold, imposing a de facto restraint on printing more dollars. For all intents and purposes, the US dollar becomes the world’s reserve currency. But 27 years later…

1971 – Nixon abruptly closes the “gold window,” unilaterally reneging on the Treasury’s promise to allow foreign governments to redeem dollars for gold. Bretton Woods collapses. With no remaining tie to a tangible, the dollar is reduced to a paper token. The transition to a global fiat monetary system is complete.

Until 40 years go by and the inevitable consequences of giving politicians free rein over money creation become untenable…

Present day – Sovereign debt crisis. Desperate, debt-laden governments around the globe – the bulk of their reserves composed of fiat US dollars and euros at risk of going up in smoke – turn to the only thing they know, printing more money and issuing yet more debt. The global monetary system cracks and heads toward failure with no workable alternative on the horizon.

Governments, corporations and investors alike are caught unprepared in the downward spiral of failing fiat currencies and are wiped out by a combination of frantic currency debasements, higher taxation, exchange controls and worse. Social unrest spreads, with the public paradoxically demanding that governments do more, not less.

That’s because all the world’s major currencies are at risk, simultaneously, as the issuers engage in a dangerous race to the bottom. As the monetary system moves inexorably toward terminal debasement and collapse, the results will be catastrophic for the unprepared.

Importantly, while the list of historical attempts to re-jigger the US monetary system have, to this point, more or less succeeded in kicking the can a bit further down the road, the sheer scale of today’s government obligations has driven us into a box canyon, with no way out. As the government’s debt and spending obligations are mathematically impossible to resolve, it is now a certainty that a lot of people are going to wake up one morning to the reality that they are a lot poorer than they thought.

Fortunately for those now paying attention, the collapse of a monetary system doesn’t happen in a flash. It is a progression, like the spiral of water down a drain. Thus, while no one can predict exactly when the downward spiral will accelerate out of control, there is still time to prepare.

Dark though the lens may be, this is the lens through which we here at Casey Research view all our investments. Simply, being right or wrong about your investment decisions in the years just ahead will be insignificant if the currencies underpinning those investments shrivel to just a fraction of their current values.

Editor’s Note: For updated information on this and related topics, see our new website:


  1. Don’t forget that under obama, the US deficit grew by 42% in his first 2 1/2 years.
    More than Bush grew it 8 years.
    democrat fiddling by Frank-Dodd Act accelerated the mortgage industry losses.
    Clinton’s repeal of Glass-Steagal act set the whole disaster in motion by allowing insurance to do banking and mortgages, banking to do insurance, and mortgages to do banking. This is what created the derivative disaster that led to the spot that we are in now.
    Although your article is fairly balanced, one still does get the sense that you think it is all the Republicans fault.
    democrats have been on the warpath to destroy the American dream for 40 years.
    Finally, they may have just done it.
    However, there is some real hope (not obama-style b.s. hope) because of three things.
    One, the USA still leads the world in innovation. Protecting intellectual property rights with stronger laws will help this a lot.
    Second, the USA worker is still the best in the world at large scale, and highly technical work. Protecting jobs in America by legislation or incentives to employers will help this as well.
    Third, the USA can print more money, which may enable it to outlast this storm.
    I don’t think all is lost, however, it is very close.

    • Thanks for your comments.

      • And, Mark, none of it would be possible without the Patriot Act…which, as we all know, was authored by the Bush Administration. Your right-wing bias is absurd; both parties are responsible for this fiasco. Man up already.

  2. “Unconstrained, the politicians used the gift of being able to create money out of nothing to launch a parade of politically popular programs, each employing fresh brigades of bureaucrats, with no regard to affordability.”

    In America your problem is certainly not unaffordable popular programs like medicare etc. Almost all developed economies have more comprehensive social programs than the US, and a smaller tax base.

    This is a common line marched out by those on the American right in order to blame the government for high levels of indebtedness.

    In actuality the problem is more due to the FED – a cartel of powerful banking groups who monopolize the ability to create money – in the form of Debt.

    You can familiarize yourself with this important issue by watching “The Wizard of Oz”:

    “Free markets” are not a magic panacea for economies. Left to their own devices they quickly produce a kind of Feudalism, where a few powerful people control almost all the wealth of a nation, with the majority working in poverty.

    Is this the kind of society we wish to create?

    The reason we pay tax is because we recognize that it’s better for most people to be comfortable than to have a few powerful barons.

    Certainly using taxpayer money to fund bank bailouts is appalling – but this is no social program.

    What we are witnessing is the fruit of unrestrained greed in the financial sector and weak democratic controls – not bankruptcy from feeding the poor and paying for hip replacements.

    • I agree with the idea that the Fed is a huge problem in the US. However I see it as a incestuous relationship between the Fed and the govt that creates the huge monster eating the country today.

      I disagree with your comment about free markets. The misconception here is that we have had a free market for a long time and this is what is causing the problem. We haven’t had a free market in our lifetimes (unless you are over 100 years old).

      Free markets existed for centuries before govts came into being.

  3. […] read more here… […]

  4. I, as a conservative find it interesting that all anyone can do is point to Republican, Democrat, The Fed etc. as the root cause for the situation we find ourselves in. In fact it is We The People who have truly been the problem. We simply got fat and happy and stopped paying attention to all of the above. We traded our souls for more and more from the government, no longer caring that as we did so, we were allowing them to screw us. It took us, taking Our Eyes off of the ball so to speak, to Allow this to happen. We could have stopped it. We could have stopped most if not all of what is happening. But we chose to ignore our own party’s misdoings, as we were certain they could not be corrupt. Well people, I am here to tell you, They are ALL CORRUPT. It’s the power. And We have allowed them to harness more and more of it away from us as they kept us fighting one another. At this point, one thing is very clear; we can point to who we Believe or Think caused the problems, but that Will Not Fix The Problems. They have all used the framework of the Constitution, to skirt the very Constitution, and thus the power given Directly to US by it. They have studied it to learn how to go around it, through it, above or below it. Anything to avoid adhering To It. Yes, Republicans did this. Yes Democrats did this. Yes the Fed and the IMF and the banks and all of those with power and money and connections, DID THIS. In addition, foreign entities hostile to the US have aided these politicians and power players in destroying us, only for different reasons. The former want power, money, fame, etc. The latter, want the US destroyed. From within. And our politicians were more than happy to go along for the promise of just those things. Never taking into consideration the final outcome. We elected these people. We let these people be assigned to positions of power by the very corrupt politicians We Elected. We did not speak or hold anyone accountable as we were too busy singing their praises over the scraps they were throwing to us to keep us silent. It was all a giant Ponzi scheme, and now, We The People, are Going to pay the price. As things continue to spiral, there will be those amongst us, hardcore ideologues, who choose to continue blaming, rather than preparing. That is fine and what happens in a free country. There will be those who call for war on the government, the banks, the IMF, the foreign entities, or even one another. Let them call for whatever they want. Let Them do as they desire. They will find a sparse few that, when the time for that very war is upon them, will run and hide like cowards, just as they did in the face of lying politicians and corrupt individuals, entities, and enemies of this country. What is needed now is for All, to prepare. We are on the bow of the ship and can see that striking it is inevitable. Will you stand there and bash the inept, drunk captain, whose breath you could smell the alcohol on as you boarded the ship, and yet said NOTHING? Or will you prepare your exit strategy and live. Your choice as free citizens. As for me, I claim not to be the wisest, or most informed among us, but as an intelligent, thinking human being, I can see the writing on the wall, and I have decided that at this point, the ship will soon be lost, and am making my way to a lifeboat. By all means, continue to argue amongst yourselves and ignore what is right in front of your face. Continue to yell at the captain who has already, along with his crew, insured that they are in a lifeboat and headed safely to shore as they watch you yell as the ship sinks.

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