Debunking 'Debunking Myths of a U.S. Monetary Collapse' Redux

by: Chris Ridder, CFA

I was surprised to find this article "Debunking Myths of a U.S. Monetary Collapse" in the macro view section last week. I recognized the title as being similar to an Instablog piece that I read and wrote a criticism of; which was published as an article, near the beginning of the year. Indeed, one can google “Debunking Myths of U.S. Collapse instablog” and look at the cache to see the original publication date was January 31, 2011.

Time to revisit the claims made again. The first go round caused quite a conflagration, with the author writing an ad hominem reply post, in my opinion; and me countering with an extremely long post dealing with the issues and facts. I don’t think most readers care about that spat, but I will address the issues & topics and refute / rebut them with reason and empirical evidence here. There are large parts of this article from the original, since the author did not update his writing except for a brief part. Here we go for another ride!

First, an irrefutable mistake was in the math example used under the heading, "Printing Money Will Cause the U.S. Dollar to Lose Reserve-Currency Status," the author writes:

Granted, China is growing at roughly 10% a year, and we are only growing at 3%. I get that. Let's do the math though and see if we should worry. If China is a $6 trillion economy, growing at 10%, they grow by $600 billion a year. If we are a $14 trillion economy growing at 3%, we grow by $420 billion a year. In this close to reality example, China is closing the gap at $180 billion a year. At this rate - it will take China 44 years to even match the US in GDP. Can they continue to grow at 10% a year, while their largest customer grows at 3% for 44 straight year? We are a far cry from no longer being the largest economy. The biggest economy in the world should be blessed with the reserve currency.

I took $14 trillion and grew it at a 3% rate in a spreadsheet and then took $6 trillion in a spreadsheet and grew it at 10% a year. One will find that if the 3% and 10% growth rates hold then in only 13 years (from a base year of zero) the Chinese economy would surpass the U.S. economy. This is much lower than 44 years, actually less than 30% of the time! It appears the author forgot to compound the growth rates but just used the difference in the first year to compute a timeline. One cannot get an accurate convergence time frame if one does does not compound the growth.

The author revisited this in his response and addressed the mistake I brought up in his compounding math. Let me be clear that I was not asserting a 10% growth rate for China and 3% for the US for the rest of time. I was only using the hypothetical specifics given and pointing out the flaw in reasoning.

What Mr. Ridder forgets to include in his argument was that I stated we are in fact China's largest customer.

Here I will rebut by using the mainstream understanding of GDP; the formula Y = C + I + G + (X-M) or GDP = Consumption + Investment + Government Spending + (Exports – Imports). The author has forgotten to include possibility of increases in China’s Consumption, Investment, or Government Spending to reach a hypothetical growth rate of 10%, even if their “largest customer” is growing slower. The author’s reply states,

He missed the forest for the trees in that the U.S. is possibly decades away from being overtaken and losing reserve currency status.

I would rebut that I wrote, “the OECD showed that the EU-27 had a larger economy than the U.S. in 2009.” in response to his claim,

“The biggest economy in the world should be blessed with the reserve currency”;

and this point, about when all 27 nations would adopt the Euro, was not addressed in the author’s reply. Finally, in May the web site Zero Hedge had a post about the World Bank believing the US dollar will lose its sole reserve currency status by 2025. Again, this is much closer than 44 years.

"Printing Money Does Not Create Wealth.” Here, the author attempts to rebuff this reasoning by writing:

How will the 'wasted' money get into the hands of the wealth creators? If the new ear pickers go into their communities and spend it at local businesses, the printed money goes from useless employees, into the accounts of productive businesses (of course the producers get less after layers of tax bites). So the act of spending printed dollars itself will get those dollars into the hands of businesses who are able to create wealth.

This appears an attempt to defend against criticism of the earlier thought exercise to,

… start a useless government agency … that hires 10,000 people to do nothing more than pick their ear and report on their experience.

Quickly, I pointed to Japan, which has tried printing over 20 years and seems not to have created much wealth as measured by the Japanese stock market. On the face of it, this is a Keynesian solution, just like paying people to dig ditches and fill them back in again. One source to explain the Keynesian fallacies, and provide logic for its arguments, is the book, "The Failure of the New Economics: An Analysis of the Keynesian Fallacies."

In attempt to counter my argument, that no wealth was made in the last 20 years in Japan as measured by their stock market, the author replied:

If Mr. Ridder some how thinks that stock prices are the only measure of wealth creation, he misses the point of what businesses do.

I used the stock market because this web site, where the discussion takes place, is named “Seeking Alpha”! Look at the US example of how over a period from 1973 to 1996, 23 years, the real Dow Jones index climbed while real average hourly wages fell. How would an investor like to give their money to a bank/asset manager to invest in the whole stock market, and have that whole stock market decline about 75% over 20 years, like Japan, and then be told you have “gained wealth” since the economy grew? (A more expansive rebuttal was in my long reply.)

Next up it is stated:

You will realize Dick Cheney got it right when he said "Deficits don't matter," (at least while there is a capacity utilization gap - once that gap is filled, then they will matter) and will rest well knowing the US will not default through non-payment, nor hyper-inflation. Worry about the deficits once factories are at capacity.

The economist Murray Rothbard (Columbia PhD) in the book, Making Economic Sense, rebuts this thinking when he writes:

Myth 1: Deficits are the cause of inflation; deficits have nothing to do with inflation.

In recent decades we always have had federal deficits. The invariable response of the party out of power, whichever it may be, is to denounce those deficits as being the cause of perpetual inflation. And the invariable response of whatever party is in power has been to claim that deficits have nothing to do with inflation. Both opposing statements are myths.

Deficits mean that the federal government is spending more than it is taking in taxes. Those deficits can be financed in two ways. If they are financed by selling Treasury bonds to the public, then the deficits are not inflationary. No new money is created; people and institutions simply draw down their bank deposits to pay for the bonds, and the Treasury spends that money. Money has simply been transferred from the public to the Treasury, and then the money is spent on other members of the public.

On the other hand, the deficit may be financed by selling bonds to the banking system. If that occurs, the banks create new money by creating new bank deposits and using them to buy the bonds. The new money, in the form of bank deposits, is then spent by the Treasury, and thereby enters permanently into the spending stream of the economy, raising prices and causing inflation. By a complex process, the Federal Reserve enables the banks to create the new money by generating bank reserves of one-tenth that amount. Thus, if banks are to buy $100 billion of new bonds to finance the deficit, the Fed buys approximately $10 billion of old Treasury bonds. This purchase increases bank reserves by $10 billion, allowing the banks to pyramid the creation of new bank deposits or money by ten times that amount. In short, the government and the banking system it controls in effect "print" new money to pay for the federal deficit. Thus, deficits are inflationary to the extent that they are financed by the banking system; they are not inflationary to the extent they are underwritten by the public.

I think events of the last month make it obvious that the risk of nonpayment from the US Government have increased since the beginning of the year. One can also look at the empirical data of the United States of capacity utilization and rate of inflation to refute the belief that there can be no high inflation as long as there is an "output gap". High inflation of 14%, occurring in 1980 to my eyeball, is something I believe most reasonable people would consider a bad thing. Notice too that capacity utilization was lower at this point when compared to the other period of double digit inflation that occurred earlier in the 1970s.

click to enlarge


Again, Rothbard concludes with regards to the relation of the output gap and inflation:

It follows from this analysis that monetary inflation and greater spending will not necessarily reduce unemployment or idle capacity. It will only do so if workers or machine owners are induced to think that they are getting a higher return and at least some of their holdout demands are being met. And this can only be accomplished if the price paid for the resource (the wage rate or the price of machinery) goes up. In other words, greater supply or use of capacity will only be called forth by wage and price increases, i.e., by price inflation. (Link for full explanation)

"If Money Printing is Good, Then Just Print Enough To Give Everyone $1 Million," is another heading and then tries to protect the money printing position, which starts as follows:

If printing is not a big deal, then why not just print away? The doom and gloomers jump to the conclusion that if I think printing won't cause the collapse of America, it must be a good thing. So why not seek more of that good thing?

The author then continues on about how he is not calling for everyone to get a huge lump sum and therefore his money printing position is okay.

If the economy gets to maximum production, then new money in the system via demand will cause the rise of prices across the board.

So, the US economy is okay as long as there is an “output gap” appears to be what is being said. The critique about capacity utilization again applies here. Left unanswered is what is the "right" amount of money to print, and how exactly does it get distributed?

Rothbard provides a more thoughtful analysis of this type of situation in his book, The Mystery of Banking, where he introduces the Angel Gabriel analogy:

To show why an increase in the money supply confers no social benefits, let us picture to ourselves what I call the "Angel Gabriel" model. The Angel Gabriel is a benevolent spirit who wishes only the best for mankind, but unfortunately knows nothing about economics. He hears mankind constantly complaining about a lack of money, so he decides to intervene and do something about it. And so overnight, while all of us are sleeping, the Angel Gabriel descends and magically doubles everyone's stock of money. In the morning, when we all wake up, we find that the amount of money we had in our wallets, purses, safes, and bank accounts has doubled.

What will be the reaction? Everyone knows it will be instant hoopla and joyous bewilderment. Every person will consider that he is now twice as well off, since his money stock has doubled. In terms of our Figure 3.4, everyone's cash balance, and therefore total M, has doubled to $200 billion. Everyone rushes out to spend their new surplus cash balances. But, as they rush to spend the money, all that happens is that demand curves for all goods and services rise. Society is no better off than before, since real resources, labor, capital, goods, natural resources, productivity, have not changed at all. And so prices will, overall, approximately double, and people will find that they are not really any better off than they were before. Their cash balances have doubled, but so have prices, and so their purchasing power remains the same. Because he knew no economics, the Angel Gabriel's gift to mankind has turned to ashes.

But let us note something important for our later analysis of the real world processes of inflation and monetary expansion. It is not true that no one is better off from the Angel Gabriel's doubling of the supply of money. Those lucky folks who rushed out the next morning, just as the stores were opening, managed to spend their increased cash before prices had a chance to rise; they certainly benefited. Those people, on the other hand, who decided to wait a few days or weeks before they spent their money, lost by the deal, for they found that their buying prices rose before they had the chance to spend the increased amounts of money. In short, society did not gain overall, but the early spenders benefited at the expense of the late spenders. The profligate gained at the expense of the cautious and thrifty: another joke at the expense of the good Angel. (Pages 45-46)

In the update of the text, the author writes about grain prices,

Looks to me like the proof a few months later is in the pudding. Farmers - seeing higher prices for corn - are planting much more corn, thus crushing the price of corn. So much for never ending higher corn prices for the rest of our lives.

This is in relation to his hypothesis that grain prices will move lower. However, the USDA just released its latest report on August 11, 2011. It shows estimated world grain stocks/use ratio lower than the last 2 years for the 2011/12 crop year (page 8).


Total Supply


Total Use

Ending Stocks




































The CME Group had this commentary about corn on Friday, August 12th:

The USDA pegged corn production at 12.914 billion bushels, 168 million below trade expectations and down 556 million from last month. … This results in a stocks to usage ratio of 5.4%, which is the second lowest on record (since at least 1960). … World ending stocks were adjusted lower to 114.53 million tonnes from 115.66 million tonnes last month, which was already a 5-year low. World stocks/usage is just 13.2% which is the lowest since 1973.

The article's conclusion jumped the gun at the very least for this crop year; a trader can follow the ETF CORN which tracks corn futures. (I have written several articles about the corn market.)

The fallacy of the labor theory of value was reintroduced while attempting a discussion of real wages:

The U.S. Dollar Has Lost 96% of its Purchasing Power - Thus Printing Makes Us Poorer. This argument only covers one side of the story. While each individual dollar buys less goods, the argument is incomplete. To bust this myth, we just need to look at how much time it requires to pay for those goods. Instead of looking at how many dollars it takes to buy a candy bar today compared to 30 years ago, I would challenge you to instead value the candy bar in hours of labor to obtain it.

I was almost at a loss as how to respond to the labor theory of value appearing to pop up again. I think one can go to any of today’s basic economic textbooks and have that fallacy addressed. I hoped the article was intending to discuss real wages and unfortunately used poor wording that accidentally came out as in favor of the labor theory of value. However, the author pressed the point and did not relent in subsequent postings.

The real price of everything, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it.... But though labor be the real measure of the exchangeable value of all commodities, it is not that by which their value is commonly estimated.... Every commodity, besides, is more frequently exchanged for, and thereby compared with, other commodities than with labour.

- Adam Smith, The Wealth of Nations, 1776

The interesting thing is the beginning of this exact quote is used by Murray Rothbard in his examination of the fallacies of Adam Smith:

It was, indeed, Adam Smith who was almost solely responsible for the injection into economics of the labour theory of value. ... Side by side and unintegrated with Smith's cost-of-production theory of the natural price lay his new quantity-of-Iabour-pain theory. Thus:

"The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What every thing is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people. What is bought with money or with goods is purchased by labour, as much as what we acquire by the toil of our own body... They contain the value of a certain quantity of labour which we exchange for what is supposed at the time to contain the value of an equal quantity." (Adam Smith)

Thus goods exchange on the market for equal quantities which they 'contain' of labour hours, at least in their 'real', long-run prices. Immediately, Smith recognized that he faced a profound difficulty.

Adam Smith's doctrine on value was an unmitigated disaster, and it deepens the mystery in explaining Smith.

(From: “An Austrian Perspective on the History of Economic Thought: Volume 1” by Murray Rothbard pages 453, 448)

I know it is funny for a trader to think that the beloved economist Adam Smith had an incorrect value theory. However, Rothbard continues to dissect and expound his analysis, and includes comments and analysis by other economists and scholars. The section on the analysis of Adam Smith’s theory of value is ten pages and readers are encouraged to go to the original source if they have further interest (found on pages 448-458).

Another falsehood of the article is this statement:

As a whole, our nation, over the past 3-4 decades of being off the gold standard, has seen wages outpace the loss of purchasing power.

Well known investor Jeremy Grantham, chief investment officer of GMO, refutes this in his most recent market outlook (.pdf),

Today the artificial sugar-coating of increasing debt has been removed and we must live with the reality that an average hour’s work has not received a material increase for 40 years. [And this is shown even using government data!]

Source: - report "Danger: Children at Play" 8/09/2011

In the article the case is made for investing in companies rather than “things” by such statements as

Don't buy oil itself, but Exxon or Chevron. Don't buy wheat or soybeans, buy fertilizer companies...Do not invest in gold alone, forsaking investments in companies that create wealth by taking resources that are worthless, and turning them into things that are valuable.

There was no investment horizon time frame given, but here are the returns investing on the close the day after the original blog post, February 1, 2011, for most of the securities discussed. Forex analysis was left out but it has not been a pretty 7 months for the US dollars vs the Swiss Franc; however, other currencies such as the Euro have been less poor and it remains to be seen if Europe will fall into a greater currency abyss than the US.


Price Feb 1

Price Aug 12

% Change

































So far it looks okay for “things” compared to companies, but without a time horizon it is difficult to have a “hard science” comparison. However, for a trader or an investor doing tactical asset allocation, 6 months might be considered a long time. I wrote an article back in June about going long gold and not gold miners, for instance. There are just times a trader wants to be long things and not companies.

Finally, the author writes:

I want the reader to know though, you can rest confident knowing that tonight the U.S. will not collapse by the time you wake up in the morning. Sleep well because the U.S. Dollar will not be worthless when you wake up ... Fear for the collapse of America is unwarranted and rooted in misunderstanding of the monetary system in which we live under today. We are not Greece. Or Weimar. Or Zimbabwe.

I never mention doom and gloom, hyperinflation, or bond market collapse. One can further research, if one so desires, my other articles and posts on Seeking Alpha to verify. The author made claims in his previous reply that Rothbard and I do not understand the current monetary system. This claim is in error as I showed in the analysis above and my long reply. The article did not include basic empirical research that refutes its assertions; especially since the real average hourly wages in the US could be shown to have declined. The US Government paying people to pick their ears will not lead to wealth creation as claimed.

I would caution the reader that the article "Debunking Myths of a U.S. Monetary Collapse" has numerous fallacies and mathematical inaccuracies; it is a retread over 7 months old. A need for clearer and more thoughtful thinking is needed to analyze the monetary and fiscal policies of the U.S. I do recall a while ago that the central bank head of Zimbabwe said his bank was just doing the same thing the Fed was:

I've been condemned by traditional economists who say printing money drives inflation … But once the IMF advised America to print money, I decided God was on my side and had come to vindicate me. (reference)

In 2001, I visited Zimbabwe, and it is a beautiful country. However, economically it is not the type of neighborhood I would like to take even a short visit to.

Victoria Falls, Zimbabwe

Victoria Falls

Disclosure: I have option positions in XOM, USO, GLD, FXE and corn futures. I receive no compensation to write about any specific stock, sector or theme.