Show Stopper: The Demise of the Dollar

The bigger they are, the harder they fall. As we go to press, this past Sunday became one bloody mess for our nation’s financial system: Lehman Brothers filed the largest bankruptcy in the history of the U.S. Merrill Lynch, also insolvent, fell into the scrap heap and sold itself to Bank of America. Along with the earlier failure of Bear Stearns, only two of New York City’s five top independent investment banks remain: Goldman Sachs and Morgan Stanley.

To grasp the profound shock behind this, consider that 158-year-old Lehman and 94-year-old Merrill had long weathered economic ups and downs, including the Great Depression. Amazingly, these catastrophes weren’t even the top story . . . that belonged to AIG, the failing trillion-dollar insurance behemoth that secured an $85 billion loan from our government to stay afloat. And all of this came on the heels of the previous Sunday’s bloodshed, when our government seized mortgage finance goliaths Fannie Mae and Freddie Mac before they defaulted on $5 trillion in outstanding mortgage guarantees.

You can stack all of these financial corpses on top of the walking-dead Federal Deposit Insurance Corp., the federal fund that insures American bank deposits for taxpayers. After 11 bank failures so far this year, especially the July collapse of the giant IndyMac Bank, the FDIC now has less in its fund than is required by Congress.

As these mounting failures inch ever closer to the local taxpayer, the impact on financial investments in the metalworking industry will ultimately affect everything from capital equipment purchases to employee pension plans. Look no further than the current condition of our automotive industry, where General Motors, Ford and Chrysler are already begging for their own government bailout.

So where does it all end? How many investment banks, mortgage guarantors, commercial banks, automotive manufacturers, airlines, drug companies, etc. can our government take over before we the people are forced to come up with the money to meet all these financial obligations?

The bottom line here is that we do not have a surplus to draw from. We must borrow it or print it out of thin air. In either case, we are stretching an already-thin credit line that reflects the weakening value of our currency.

Like it or not, the foundation of our entire financial system is now essentially based upon credit. The word credit is derived from the Latin term creditum, which means "something entrusted to another, to believe in, to trust." In other words, our entire financial system is based upon the common trust that when one financial value is borrowed, that value will be returned in the form of another financial value having equal or greater worth. From a very practical standpoint, let’s apply this principle to the financial challenges we are facing right now as a nation.

The U.S. government currently runs about a $500 billion dollar annual budget deficit. This is added to our national debt, which now totals about $9.6 trillion. If we borrow or print more money for current and future bailouts, we’ll no doubt eventually run our national debt up to $12 trillion. Or maybe $15 trillion. Ok, make that $20 trillion.

Please note that none of this national debt includes the so-called "off-budget debt" found in our Medicare and Social Security obligations. These, by some accounts, now exceed $52 trillion. You gotta love our government officials.

By carrying all of this enormous debt, how much more credit – how much more trust – can really be placed in the value of the U.S. dollar? Said another way, at what debt point will our dollar cease to have value if we can never repay any of this?

"The U.S. dollar has always been the currency the world turns to when there is trouble," notes Craig R. Smith, CEO of Swiss America Trading Corporation (Phoenix, AZ) and co-author (with columnist Jerome R. Corsi) of the book Black Gold Stranglehold: The Myth of Scarcity and the Politics of Oil. "The dollar has always represented safety. But can it maintain that trust if we just continue to print, borrow and move dollars around from balance sheet to balance sheet ad infinitum?"

This is where the rubber meets the road, because Smith does not believe we can continue employing the broken business model that our current financial system represents. "It doesn’t work. We cannot leverage, inflate and deflate forever . . . I see vulnerability in America that must be addressed, and time is of the essence," he warns. "For the first time in the post-World War II era, our dollar is susceptible to competition from another currency that is based in an identifiable and universally-accepted value that cannot be created out of thin air."

Is such a currency available? "Not yet," responds Smith. "But you know the old saying, ‘Necessity is the mother of invention.’ Right now the world has three very strong and prosperous countries competing on the world stage with huge amounts of capital, natural resources and gold that could easily, if they so chose, create a currency much like Europe did in the euro. But this time, it could be backed with oil and gold."

Challenge our dollar? Stay tuned. Next month, Smith explains who these countries are and how this new currency could work.

Mike Riley is the editor of Fabricating & Metalworking magazine. Share your views with him at 205-681-3393 or [email protected].