The Simon Lectures. Series I, Part 2.

posted 2 years ago by simon_says 2 years ago by simon_says +50 / -0

Originally published on greatawakening.win, 2022 August 3.

This is Part 2 of Series I of The Simon Lectures. Part 1 can be found here: https://greatawakening.win/p/15IrUHyPbl/the-simon-lectures--series-i-par/

Distilled all the way down to its essence, Part 1 established that the United States federal government is insolvent, and that all of our assets bear illusory valuations – they’re all overvalued. If you haven’t read Part 1, those claims may be hard to swallow. Think of Part 1 as the tall beer that helps you swallow those bitter pills. So give it a read. Or don’t. It’s your decision.

I struggled a bit with Part 2. Part 1 is the logical launching point for two different topics. And I’m doing this in bite-sized pieces. So I had to pick one to go with now, and reserve the other topic for later discussion. Since we began Part 1 with an examination of our money supply, I thought I’d continue the theme here in Part 2. Let’s talk more about our money.

What do you think makes our money valuable? What separates it from any other piece of paper? What “backs” our money? Prior to 1971, the answer was gold. Gold used to back our money: until 1971, the United States Dollar had been convertible into gold bullion. But Nixon ended that. That’s an interesting story in and of itself, but for my purpose here, I’m leaving it out. The bottom line is that, beginning in 1971, our dollar was no longer convertible into gold. So what confers value upon the dollar in the wake of 1971? What backs it now? Anyone?… Anyone?… Bueller? The full faith and credit of the United States government. That’s what.

I can hear you now. “The full faith and credit of the United States government!? Simon, I’m not a genius, and God knows I’m no economist, but in Part 1 didn’t we conclude that the government is insolvent? Our currency is backed by the full faith and credit of an insolvent government? Who’d want the paper it was printed on? Why does anyone use it?”

Our dollar is what is known as “fiat money” – i.e., money not backed by or convertible into any particular asset. Let me ask you a bigger question. Why does anyone use fiat money? Why does anyone use money that is simply printed into existence? Seems irrational, doesn’t it? The answer? Compulsion. Compulsion is why you use it. In the United States, the compulsion is subtle but effective. No private citizen or business is actually compelled by law to accept it as a form of payment. There’s no federal law requiring you or the 7-11 down the street to accept the dollar as a form of payment. You can accept bitcoin and refuse the dollar, if that’s your choice. Or you can barter, if you care to. But you have to pay your taxes in dollars. So you better agree to be paid in dollars, or you won’t be able to pay Uncle Sam. And for this simple reason all of us agree to be paid in dollars. And because we are paid in dollars, dollars are what we have to spend, so that’s what the 7-11 down the street agrees to accept.

I know what you’re thinking now. “Okay. That’s why I use it. And that’s why my neighbor uses it. And that’s why every other United States citizen uses it. But why the hell does anyone else use it? Why does it have such value all around the globe? This makes no sense!” It’s true that the dollar is, in fact, strong. 6.76 Yuan to the U.S. Dollar. 20.48 Pesos to the U.S. Dollar. 131.55 Yen to the U.S. Dollar. And so on. It’s strong now, and it’s been strong all of your collective lives. Every foreign government wants the dollar. But why? Why is this the case? Why is there such demand for a dollar backed by nothing other than the full faith and credit of an insolvent government? This is not a trick question. And I’ve already given you the answer. Let’s review. The dollar is fiat money. Why does anyone use fiat money? We’ve covered this topic. Compulsion. That’s why.

Now it’s time for a little more history. We’ve already covered the part of the story where Nixon untethered of the dollar from gold. Think what you may about Nixon, but he was one smart dude. He was not necessarily nice. He was not necessarily agreeable. He was not necessarily ethical. But there’s no doubting his intelligence. And he was more than smart enough to know that untethering the dollar from gold left it adrift. Which left the country adrift. So he had fasten it to something else.

It took Nixon about two years to solve the problem. In 1973, Saudi Arabia – the world’s largest producer of crude oil – agreed to sell its oil exports exclusively in exchange for United States Dollars. Want Saudi oil? Be prepared to pay in United States Dollars, or hit the road. This was the birth of the petrodollar. And what did the Saudis get in exchange? Protection. We agreed to be their muscle. Our military would protect their country and its oil fields from any foreign threat. Which was a good thing. Since we were arming Israel to the teeth. The Saudis needed the protection. If you think this sounds a lot like a mafia-style “protection” arrangement, that makes you observant and smart. Whatever its moral standing, the petrodollar arrangement was effective. By 1975 the rest of OPEC followed along: oil for dollars only. And with only marginal exceptions, this remains the state of affairs today. Want OPEC oil? Fork up United States Dollars.

The petrodollar system means compulsion. No one tells any other sovereign country it needs to value the United States Dollar at all. But if for some weird reason a foreign nation finds itself in need of oil from OPEC, then it needs United States Dollars to pay for said oil. So it needs to buy dollars. This is straight-up compulsion, folks. Every Western country on earth is forced to buy dollars to feed its oil habit. As a related matter, large portions of foreign debt are denominated in U.S. Dollars – it turns out that creditors prefer to be paid in currency that can be turned into energy. Who knew? This downstream effect also generates demand for dollars. Gotta admit it. Nixon was smart. He knew how to keep the dollar strong and the imports cheap.

Part 2 is getting long. So I’ll wrap up here. The takeaways from Part 2 are: (1) the United States Dollar is backed by nothing; but (2) we have compelled use of the dollar by imposition of the petrodollar arrangement – thereby creating synthetic demand for the dollar; and (3) the aforementioned synthetic demand keeps the dollar artificially strong.