Gresham's law of money states that bad money drives out good, and in the history of humankind, fiat money systems, where money can be printed without any limits, have always ended up becoming bad money. What this implies is that when there is obvious distinction between a good and a bad currency available, people will sell their bad currency and buy up the good one, causing depreciation in the bad, which will eventually make the bad currency worthless.
Putting this into perspective of the U.S. monetary system and looking at the ways the Federal Reserves have been trying to pull the country out of debt, an uncanny resemblance to a runaway fiat money system comes to mind. Printing more money to increase spending is akin to robbing the poor and middle class to give to the rich. Because the rich usually gets the new money first, or even have the ability to create them before prices have risen while the poor and middle class will receive a downsized version of the same money as it trickles down the economy.
So why is the U.S. government able to get away with printing so much money without Gresham’s law coming into play? Because so far, U.S. is the number one reserve currency in the world, and that the Fed can flood the world with U.S. dollars and the federal government can borrow and spend far beyond its means with impunity! Mainstream economists support limitless printing of money by the Fed and bottomless deficits by the federal government, both unrestrained.
However, all of that is going to change as a few strong contenders and candidates of good currency are up and rising. One of them is the silver and gold coins that the UN plans to mint for use in international trade. Without the ability to create money out of thin air, as well as its worldwide recognition of value, this currency will drive the U.S. dollar down while people flood to it like bees to honey.
Second is China’s push to make yuan become a reserve currency like the U.S. dollar. It has recently received support from some of the developed countries for its proposal to launch the Asian Infrastructure Investment Bank (AIIB). This is a direct challenge to the Asian Investment Bank and World Bank, both led by the U.S. China has initiated the China International Payment System (CIPS) to compete directly against another international payment system called SWIFT, which is a key support of U.S. dollar hegemony.
Lastly, which also involves China is the BRIC bank in which Brazil, Russia, Italy and China teamed up to replace the International Monetary Fund and World Bank. The BRICS bank is viewed as the big start to break the dominance of the U.S. dollar in global trade, as well as dollar-backed institutions such as the International Monetary Fund (IMF) and the World Bank. This does not come as a surprise as BRICS nations have very little say within both U.S.-based institutions, driving them to create their own fund.
Finance and money should never be complicated by political agendas or mystified by fanciful modeling and hocus pocus to fool the uninitiated. Falling back to basics and looking at logic tells us how fragile the support for the dollar really is in the world. It only takes elementary school intelligence to know that one does not get out of debt by borrowing more money.
What happened to the PIIGS, Portugal, Italy, Ireland, Greece and Spain after the Big EZ fiasco should serve as an inspiration to the U.S. None of the PIIGS could print their way out of their problems and the governments could not borrow. The only way is to reduce regulations, cut spending and raise taxes to get their economies moving forward. Otherwise, the U.S. is on a steady road to decline.
