The prosperity of a nation depends upon the collective wealth of its citizens as a whole. Prior to the Bretton Woods Agreement in 1944, when the U.S. dollar became the de facto world reserve currency, the American public had significant savings. Since then, the savings rate has decreased significantly, with the most protracted decline following the abandonment of the gold standard in 1971. We have gone from the wealthiest creditor nation in history to the largest debtor nation by orders of magnitude.
Economic Voodoo
Austrian economic principles are based upon centuries of history, rooted in the logical foundations of what drives economic activity, along with human nature. However, the teachings of Austrian economics are effectively banned within the United States, especially at Ivy League universities. After all, if the truth goes against your agenda, tell a lie so often that it becomes the truth.
The economics taught today are based on Keynesian economic principles, named after the father of all things economically imaginary—John Maynard Keynes. They tell a story of consumer spending driving growth, rather than savings and investment. They also portray the dangerous false realities that deficit spending doesn't matter and that a government with the ability to print its own currency cannot go bankrupt. In the author's view, this is not economic science; it is a social experiment doomed to fail, akin to voodoo or socialism. It may sound great on paper, but it defies all logic and historical precedent.
A Viable Economy
As previously mentioned, overall prosperity is dependent upon the accumulated wealth of a nation's citizens. This is best achieved by a nation of production—one that produces more goods and services than are necessary to sustain itself while exporting the excess at a profit.
The blueprints for healthy growth shown by both the First and Second Industrial Revolutions in the United States paint an entirely different picture from our economy today. During both of those timeframes, the government stayed away from overregulation. People saved their money and either deposited it into banks, which made loans to companies developing machinery to greatly improve production, or invested their savings directly into such companies. Savings and investment, along with a noninterfering government, are the keys to promoting ingenuity and the advancement of society.
An Economy of Consumption
In the United States today, our economic activity is based on 70% consumption and 30% production—quite the opposite of what fosters growth. Whenever there is a recession, the talking heads speak of the need to reduce interest rates—below what the free market demands—to spur further spending (essentially, credit spending). At a time when people are already suffering, they are encouraged to borrow more instead of cutting spending. In essence, they are being goaded into going further into debt instead of saving or investing for the future.
Most Americans, especially those born after 1971, have never experienced anything other than the failing economic model we are currently experimenting with. They are accustomed to "buy now, pay later" and instant gratification with a credit card or by tapping their phones on a payment terminal. They want something, so they use credit—whether it is to buy a pair of shoes, pay for dinner, or make an online purchase they don't need. This is a privilege not experienced anywhere else in the developed world, and the days of such privilege are surely numbered.
The Transition
After the financial hardships incurred globally during the Second World War, a vast group of nations sought stability in the economic order and turned to the United States. Although the U.S. itself ran up significant debt during WWII, it also flourished by selling arms and supplies to the nations at war long before the attack on Pearl Harbor. The industrial capacity of the U.S. was astounding, and the Treasury's coffers were lined with gold.
The U.S. dollar was "as good as gold," and nations could convert U.S. dollars to gold at any given time at a fixed rate of $35 per ounce. The dollar was now the gold standard for global trade, with no sovereign-issued currency able to compete.
It didn't take long before the U.S. Treasury Department realized the unlikelihood of nations actually wanting to convert their dollars back to gold—"a barbarous relic" (that's what the economically ignorant father of modern economics, Keynes, called it). The U.S. began to spend like there was no tomorrow.
France suspected that the U.S. was spending beyond its actual gold reserves and successfully repatriated over 3,300 tons of gold from the Treasury by returning its dollars. Other nations began to follow suit. On August 15, 1971, Richard Nixon suspended the convertibility of dollars into gold, and the U.S. dollar became a debt- and faith-based system.
Since the gold-backed standard required disciplined spending, its removal has allowed the U.S. government to recklessly spend newly printed money and essentially extract productivity from other nations. This charade continues today only because there has not yet been a national currency able to compete with the dollar.
Newly created dollars have to be absorbed into the economy. The creation of new money diminishes the value of every other dollar in existence. This causes prices to rise, which is the most visible symptom of inflation. Since dollars are the global reserve currency, this inflationary pressure is exported all over the world rather than confined to the U.S. itself.
New dollars are created from nothing, requiring other countries to buy them since the dollar is the reserve currency. The creation of more dollars diminishes the value of previously existing dollars, forcing other countries to buy more of them. Their citizens are producing the products that we are consuming—for much less than they would in a free market—so their countries can buy dollars for international trade.
To rephrase that, our consumption comes at the expense of laborers globally. We export inflation to them, and they send us goods in exchange for currency that came from nothing. It's only a matter of time before they wake up to this lopsided arrangement.
Imagine this scenario: There is a tribe with a gluttonous king. The people work tirelessly to gather food, water, and firewood. The king sits by a warm fire all day and night and eats so much food that there are just enough resources left for the rest of the tribe to sustain a bare existence. It is only a matter of time before the tribe realizes how much better off they would be if they removed the king from the equation.
Conclusion
A nation that consumes more than it produces is a nation in terminal decline. Expecting others to continually provide goods and services in exchange for currency created from nothing is beyond all sense of logic. The rest of the world consists of the tribe folk, and we are the king—for now.
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