Dr. Robert D. CranePosted Mar 26, 2008 •Permalink • Printer-Friendly Version
When the Dollar Bubble Bursts: Lessons from Chaos Theory and Paradigmatic Revolution
by Dr. Robert D. Crane
Every so often, at most about once a century, the operation of the world turns on its axis. For almost a century, the axis has been the U.S. dollar as the global medium of exchange. The dollar has been propped up by the requirement that all oil be purchased in dollars. This has artificially created a demand for dollars. What would happen if oil were free for purchase in euros? This concerns policymakers who read forecasts entitled “Why the Dollar Bubble is about to Burst.”
The greatest trick since the invention of money to replace bartering has been the U.S. practice of printing dollars to pay for imports of goods. This means that, first, America avoids the inflation that has threatened many other currencies, and, second, that the rest of the world ends up as debtors to America since the exporters to America have nothing in exchange for their exports but a lot of potentially useless paper. Two-thirds of the world’s “wealth” is now in potentially useless dollars.
What can be done about it? The second greatest trick for the United States will be to convince the rest of the world not to shift too rapidly to the Euro in order to escape the collapse of the dollar. This may not be difficult in the short run, because the collapse of the dollar would in effect be a declaration of American bankruptcy and the elimination of two-thirds of the world’s paper wealth, all at the expense of the rest of the world.
The rest of the world is fully aware that it must somehow shift slowly without destroying all its wealth that now exists in dollars. The shift may already be occurring too fast. The Euro already has doubled in value since it was first issued less than a decade ago. If oil is now shifting to be sold in Euros, the shift may be unstoppable and highly destructive of paper wealth since the practice of buying oil with dollars has always kept the demand for dollars high. Once this artificial demand goes down the worth of the American dollar may plummet.
What are America’s fundamental policy options?
First, the United States might try to bully the rest of the world into sticking with the dollar as a global medium of exchange, perhaps by threatening or waging war. This, however, would have its own costs, which are incalculable and therefore to be avoided in any long-range planning.
Second, the United States might welcome the slow collapse of the dollar in favor of the euro, because this would make it easy for people using a strong currency like the euro (now supported in value because people need euros for the purchase of oil) to buy American goods. Such devaluation of currencies often is the only way to stimulate exports as a way to jumpstart failing economies. This happened to be a speciality of mine at Harvard Law School in studying the legal problems of international investment. Purposefully devaluing the dollar would bail out the American export industries, which are beginning to lose out in the global competition for the trillions of dollars of add-on wealth likely over the next few decades. It would also prevent inflation in America (as a bonus it would make it safe, for example, to print vast quantities of money to bail out the mortgage and derivative insurance industries).
Thirdly, the Fed could simply and suddenly declare national bankruptcy by refusing to honor any purchases with dollars. America could issue an entirely new currency, which would be based on the value of the U.S. economy. This would create a really sound system of money if it were based on what is called the real bills doctrine whereby money is issued only to purchase real goods, so that it is backed by real value rather than merely by government debt. This actually was the original intent of Section 13 of the Federal Reserve Act which created America’s central bank in 1913 to provide pure credit to finance industrial growth.
Except for those Americans who hold their assets in dollars and do not own any real assets, Americans would not suffer directly. Furthermore, an already fairly strong economy with managerial knowhow and skilled manpower would rapidly strengthen so that even those Americans who would lose out in the short run would more than make up for this in the long run. You can be sure that no millionnaires who own real assets would suffer, because the real assets might be worth more in the new currency than in the old dollar.
What would happen to the rest of the world? It might have to start over by declaring its own bankruptcy to the extent that it had not already converted to the euro. If the foreign central banks would shift to the real bills doctrine, as Switzerland and Japan began to do but stopped some years ago, then the rest of the world would recover just as America would.
What will really happen? Probably the first two scenarios will play out simply by lack of action to do anything else. Only if real global chaos results would any paradigmatic change occur, such as by recognizing that money is by nature a total fraud if it is based on debt and not on real asset-backed value.
What might happen in the best of all worlds. The best result of the current meltdown would be world bankruptcy and the creation of new money by central banks, or even by a new world central bank, which would limit the creation of money to financing productive assets owned broadly, for example, by the employees of the companies that borrow and by the residents of land-based cooperatives financed by pure credit to develop new productive enterprises. All Third World debt would automatically be canceled and all new infusions of wealth would be not in the form of loans but only as investments, with return only from a share of the profits.
In fact, in an ideal world, banks would no longer lend money, but would invest in their clients enterprises and earn a set percentage of the profits. Regional banks would issue money to the local banks on the same basis. The central bank would provide money to the regional banks and earn a similar set percentage of the regional banks profits. The central bank would orchestrate the money supply by setting the percentage of profits. It might lower its own profits by lowering the percentage take from investments in firms that are more than fifty percent owned by the employees.
Linking money to real assets in ways that remove the barriers to broadened capital ownership is the only way to reduce the growing wealth gap both within and among countries based on the wisdom that one must either own or be owned.
Failure to address this ticking time bomb of increasingly concentrated wealth will destroy civilization, as it has every civilization in human history. Perhaps the only compassionate solution to peace through justice will come by itself when all the other options have resoundingly failed. No-one has ever deliberately created a paradigm shift so fundamental as broadening capital ownership through perfecting the system of money and credit. Such fundamental or paradigmatic shifts come in their own time in accordance with the iron law of chaos theory, which applies in every field of hard science and probably in all the soft sciences as well. This is all in accordance with natural law, known variously in Semitic languages as the kalima or Word of God. Kun, wa yakun.