The Emperor Has No Gold

After World War II, the U.S. led the development of an international system (known as the International Monetary Fund), which linked the value of foreign currencies to the US dollar and the US dollar to the price of gold. Under this system which became known as "The Gold Standard," the U.S. promised to redeem U.S. dollars with gold to the central banks of other nations. This is how the U.S. dollar became the "world currency" because everybody knew how much it was worth.

This system collapsed in 1971 when the U.S .abandoned the gold standard. Why did we do that? As our government admitted at the time, the Treasury had printed way more money than we had gold to back it up (and had been doing so for years). In other words, we were "overdrawn." Seriously overdrawn. If everyone holding U.S. money or notes redeemed at the same time, we'd be in bankruptcy (kind of like the run on banks at the outset of the Great Depression).

When we originally initiated the gold standard, Ft. Knox held our reserves which were then worth $227.36 billion. At that time, our national money supply (basically the amount of money we had printed and put out there) was $62.5 billion. For every dollar we had printed, we had 3 and 1/2 times that much in gold). Today, even with the skyrocketing price of gold, Ft. Knox is worth $140.4 billion; but, our money supply today is ... at least $8.4 trillion. We have printed at least 60 times more money than we have gold. I say at least because several years ago the government quit making the number public - I guess they had their reasons.

Okay, so why is this important?

Since leaving the gold standard, we have continually had to borrow "real" money from other countries. All we've ever been able to do is pay the interest. In order to keep paying more interest each year AND fund an ever-growing federal budget, we just kept printing more money. Lately though, our two largest creditors (China and Japan - see my earlier post) have become worried about our solvency. They have both said that they might stop lending us money. This sounds eerily familiar to me. Let's see - AIG, Lehman Brothers, GM, Chrysler? Isn't that why they collapsed? Once the world, especially their creditors, got a clear look at the books, it was apparent that they all owed more than they could pay. They were no longer able to borrow money for operations and Whammo - we have an economic crisis! So what did we do? You guessed it. We printed even more money and gave it to ourselves. Brilliant!

Question - what happens when the world gets a clear look at our books? Who's gonna bail us out?