Choking on Gresham’s Law
February 2nd, 2010 by Grandpa OddballCopyright © GetOddNews and Grandpa Oddball February 2, 2010. All rights reserved.
Yup. A trillion dollars here and a trillion dollars there; first thing you know we’ll be talking about real money. Makes you wonder what will happen if congress throws all restraints aside and really starts spending money that we don’t have like water (yes, that was sarcasm). I guess our government doesn’t believe that a trillion dollars is really that much money. Just recently the US senate raised the national debt by 1.7 trillion dollars to a historic 14.3 trillion dollars!
Ah, where will it all end? In fact, just where do our federal lawmakers think all this money is coming from? Have they forgotten one of the oldest economic laws ever discovered? I’m talking about Gresham’s Law which was recognized as far back as 405 B.C. by Aristophanes. Usually it is stated as “Bad money drives out good“. It used to be that the US dollar was the good money. So good in fact that international contracts were specified in terms of US dollars. Unfortunately those days are fading as we try to solve our economic woes by “printing” more money. The more dollars we create the weaker the dollar becomes until it becomes the bad currency of the world. Economists and politicians usually call this process devaluing a currency but the stark reality is that eventually the currency becomes effectively worthless and nobody wants to accept it. If that happens the dollar devaluation will rapidly feed on itself until the whole system collapses.
Historically this type of monetary policy has NEVER worked. I wonder just why our “leaders” believe it will work now. As the dollar becomes the “bad” money of the world fewer people will be willing to accept it and those that have dollars will either spend or convert it into something of value. Hoarding “good” money while getting rid of dollars will further drive up inflation and possibly creating hyperinflation before a final collapse.
There used to be derisive term applied to country which didn’t have an industrial base and depended upon the largess of others to survive. They were call banana republics and their survival was typically at a subsistence level. The way our economic policies are devaluing the dollar implies that the US economy is headed towards becoming the biggest banana republic of all time.
And what will replace the dollar as it becomes more and more worthless? There are so many possibilities. Consider the Euro for example. While a relatively new currency it has steady increased in value relative to the dollar as shown by the graph at right (source: http://www.exchange-rates.org/history/EUR/USD/G/30). More and more international contracts are being specified in Euros rather than dollars. However this is just the latest indication of a long long decline in the dollar brought about by disastrous economic policies. As the following graph shows (source: http://mwhodges.home.att.net/exchange_rate.htm) 
the decline in value has been occurring for a long time and span many administrations.
The consequences of these short sighted polices have only been a slow erosion of our economy up to now but as we get closer to the precipice the end result may well be catastrophe. We can ask what’s next but no one can predict what will happen in the immediate future. Long term however is another story. Unless our economy is fixed in fundamental ways our children and grandchildren will face one of two possibilities:
- Ruin the economy via inflation so that enormous national debt can be paid back in worthless dollars.
Stop inflation by not printing more devalued dollars but not fix our fundamental economic problems. This will saddle our children with an enormous debt burden that could take generations to pay off,
I’m sure our children will thank and respect us for presenting them with this reality (yes, sarcasm again – it’s sad that I even have to be explicit about my sarcasm these days). Of course the above assumes that the government remains stable and in control. Given the inevitable chaos that my ensue this is not guaranteed. Are there alternatives to the above devastation? I believe so and have written about them elsewhere but the way things appear to be going don’t hold your breath waiting.
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