Friends and clients who are just beginning to understand the truth that is Austrian economic theory are starting to ask me what I think the economy will look like over the next several years as the dollar inevitably declines. Whether the dollar lives and merely loses its status as the world’s reserve currency or actually dies via an “orderly” or sudden death, I think the result will be the same. For some period of time, perhaps weeks, perhaps years, dollars within the United States will resemble cigarettes in a prison camp—very valuable inside the camp, almost worthless outside the camp. The reason, of course, is that the dollar is just paper. Since August 15, 1971, it has been backed not by gold or silver, but by two things: (1) oil producing countries’ agreement to accept it, to the exclusion of all other paper currencies, for oil; and (2) the federal government’s power to tax. United States Treasury debt is attractive to investors, like China , only as long as both legs of this two-legged stool remain strong.
The Arab oil-producing countries announced this week that they intend to establish a new currency, called the Gulfo, that will be the new exclusive currency for buying Arab oil. I believe this represents Western central planners pulling out one leg of the two-legged stool. It is a very significant event and in a real world would have been front page news on every newspaper.
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