“The US” transition from more-or-less free country to police state is accelerating. The NSA’s Utah data mining facility, ever-tighter restrictions on offshore accounts, the Internet “kill switch”, the Patriot Act’s many assaults on the Bill of Rights, the militarization of local police, the spread of drones for domestic surveillance; each has a role in the high-tech updating of a very old idea: that the state is paramount and the individual a slave to public order and national power.

But why is this happening now, rather than in 1950 or 2050? The answer is that we’re reaping the whirlwind that always accompanies fiat currency. We created a central bank in 1913 and freed it from the constraint of gold in 1971. Give the government or the big banks the power to create money out of thin air and you eventually get a dictatorship. “Eventually” just happens to be now.

Laissez Faire Books’ Wendy McElroy covers some of the theory behind this idea in a recent review:

Paper Money = Despotism
“Fiat” is money with no intrinsic value beyond whatever an issuing government is able to enforce. When it enjoys a monopoly as it is devastating. The personal freedoms that we know as “civil liberties” rest upon sound money.

In his classic book The Theory of Money and Credit (1912), the Austrian economist Ludwig von Mises argues, “It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically, it belongs in the same class with political constitutions and bills of rights.”

A key reason Mises viewed sound money as a necessary protection of civil liberties is that it reins in the growth of government. When a government prints money without the restraint of competing currencies — even if the restraining “competition” is a gold standard — runaway bureaucracy results. Wars are financed; indeed, it is difficult to imagine the extended horrors of World War II without governments’ monopoly on currency. A white-hot printing press can finance the soaring numbers of prisons and law enforcement officers required to impose a police state.

Floods of currency can prop up unpopular policies like Obamacare or the War on Drugs. That is why government holds onto its monopoly with a death grip. In The Theory of Money and Credit, Mises observes, “The gold standard did not collapse. Governments abolished it in order to pave the way for inflation. The whole grim apparatus of oppression and coercion, policemen, customs guards, penal courts, prisons, in some countries even executioners, had to be put into action in order to destroy the gold standard.”

Another way a currency monopoly threatens civil liberties is by permitting government to monitor virtually all transactions through the financial institutions with whom it maintains an intimate partnership. Total surveillance is a prerequisite to total control, which is what the government wants to establish as quickly as possible. For example, prior to establishing the Suspicious Activity Report (SAR) in 1996 — a form that financial institutions submit to the U.S. Treasury — banks were required to automatically report any transaction over $10,000. Now any activity deemed “suspicious” is vulnerable.

The monopoly facilitates a vicious attack on privacy and has become a main building block of the American surveillance state. As libertarian Mark Hubbard stated, “Civilization is a movement toward privacy, a police state the opposite, and tax legislation has become the legislation of our new Big Brother states.”

Much of the tracking is a pure money grab, but it is also an attempt to ferret out and punish “unacceptable” behavior, like dealing in drugs or politically dissenting. Indeed, it is criminally naive to believe the government will not use these massive and valuable data to target its critics. Thus, people can be discouraged from speaking out. Controlling the information, however, means controlling the currency. Otherwise, anyone could mint gold coins in the middle of the night and release them covertly into the wild.

Some thoughts
I was going to start this article with a sentence like “Every time you turn on the news there’s another story about the growing intrusiveness of the US surveillance state.” But that’s not actually true. When you “turn on” the news, which is to say watch it on TV, you see little or nothing about this. It seems that all those “corporate media” complaints are accurate. America’s evolving police state infrastructure is one of the biggest stories of this lifetime, yet the mainstream news organizations seem to be ignoring it.

Now that we’ve created the infrastructure, all that remains is for some desperate/corrupt future leader to flip the switch. From that moment on, every communication in and out of the US will be captured, logged and mined, and each citizen will have a growing file that details their social, professional and financial activities. The state will set about silencing all emerging threats through intimidation, financial pressure (our hyper-complex tax code will be weaponized and turned on anyone who speaks out), and, when all else fails, the designation of dissenters as terrorists and their imprisonment without trial. All the tools are there, just waiting to be used.

In this scenario, social media will  be useless as a counterweight to Big Brother. When every communication is monitored, an attempt to organize a protest via Facebook will just create a list of people to be rounded up.

Can dystopia be avoided? Short of electing Ron Paul on a platform of tearing it out by the roots, it’s hard to see how. But McElroy does have one suggestion that’s aimed at the heart of the fiat currency dictatorship: end the state money monopoly and let other currencies circulate:

Yet the best solution to the harms caused by fiat is often dismissed even by staunch free market advocates; namely, allow the private issuance of money that freely competes with fiat as currency. This would involve removing all prohibitions, other than fraud, abandoning monetary controls such as legal tender laws and all reporting requirements. In turn, this might well eliminate the Federal Reserve, although people would be free to accept whatever money they wished.

The currency monopoly is vital to both the rise of a police state and the targeting of individual civil liberties. In arguing for a free market in currencies, it is important to claim the moral high ground by stating and restating what should be obvious: Civil liberties require sound money. And nothing ensures the quality of a commodity as surely as competition.

About

DollarCollapse.com is managed by John Rubino, co-author, with GoldMoney’s James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street (Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.

Looking for an interesting currency idea among the developing nations (exotics as they are sometimes referred to)? Strategically, these two nations seem to be on completely different glide paths. The nation on the upward glide path is Turkey; the one on the downward glide (potential crash landing) path is South Africa. (A good general summary on South Africa you can find in The Wall Street Journal this morning.) 

Playing the lira against the rand is not a cross-rate available in the spot market for retail investors, but you can create this by creating your own cross. Buy USD/ZAR (South African Rand) and sell USD/TRY (Turkish Lira); with the magic of math, the USD cancels out and you have created a synthetic cross. 

Take a look at the chart below showing the Turkish lira-South African rand cross daily: Looks like the bottom is in, and may be tracing out an impulse pattern higher…

Sometimes we find technical charts very useful in divining the immediate outlook for markets. Clive Maund’s excellent latest gold market update (click here) highlights the potential for a dollar rally over the next few weeks and shows how the professional currency traders have unwound their euro positions in preparation.

From a fundamental perspective you can understand why they are doing this. Stock markets are perilously high for such a dismal economic outlook. When stocks fall the US dollar and US bonds rally. It is as automatic as the conversion of shares into cash.

Important lesson

Mr. Maund’s analysis cleverly takes this a stage further and concludes that this will be a false or at least very short rally for the US dollar. After that the dollar plunges off the edge of a cliff, fiscal or not, and into the abyss of QE3 money printing.

So if you cash out of stocks this month you should not stay in cash. Where should you put your money if you’re worried about the dollar and T-bonds? What other option except gold and silver do you have?

But be careful, gold and silver prices could also get quite a whack from a falling stock market, so wait for your moment, advises Mr. Maund, though we wonder how much the rotation from cash to precious metals will support prices during this sell-off.

This could be the final cue for the real lift-off in precious metal prices as a currency that nobody can print in an age of central bank money printing. They are all at it in a race to debase their currencies before their economies implode with debt. Those implosions are about to start.

Gold and silver will soar in value in this phase of their bull market. Most other assets will struggle and some will fall very badly.

China, Russia, and the End of the Petrodollar. 

Say you’re an up-and-coming superpower wannabe with dreams of dominating your neighbors and intimidating everyone else. Your ambition is understandable; rising nations always join the “great game”, both for their own enrichment and in defense against other big players.

But if you’re Russia or China, there’s something in your way: The old superpower, the US, has the world’s reserve currency, which allows it to run an untouchable military empire basically for free, simply by creating otherwise-worthless pieces of paper and/or their electronic equivalent. Russia and China can’t do that, and would see their currencies and by extension their economies collapse if they tried.

So before they can boot the US military out of Asia and Eastern Europe, they have to strip the dollar of its dominant role in world trade, especially of Middle Eastern oil. And that’s exactly what they’re trying to do. See this excerpt from an excellent longer piece by Economic Collapse Blog’s Michael Snyder:

China And Russia Are Ruthlessly Cutting The Legs Out From Under The U.S. Dollar

China and Russia are not the “buddies” of the United States.  The truth is that they are both ruthless competitors of the United States and leaders from both nations have been calling for a new global currency for years.

They don’t like that the United States has a built-in advantage of having the reserve currency of the world, and over the past several years both countries have been busy making international agreements that seek to chip away at that advantage.

Just the other day, China and Germany agreed to start conducting an increasing amount of trade with each other in their own currencies.

You would think that a major currency agreement between the 2nd and 4th largest economies on the face of the planet would make headlines all over the United States.

Instead, the silence in the U.S. media was deafening.

However, the truth is that both Russia and China have been making deals like this all over the globe in recent years.  I detailed 11 more major agreements like the one that China and Germany just made in this article: “11 International Agreements That Are Nails In The Coffin Of The Petrodollar”.

A few of the things that will likely happen when the petrodollar dies….

– Oil will cost a lot more.

– Everything will cost a lot more.

– There will be a lot less foreign demand for U.S. government debt.

– Interest rates on U.S. government debt will rise.

 -Interest rates on just about everything in the U.S. economy will rise.

So enjoy going to “the dollar store” while you can.

It will turn into the “five and ten dollar store” soon enough.

Some thoughts
Snyder goes on to note that both China and Russia are accumulating gold, which will protect them from the coming currency crisis and give the ruble and yuan greater legitimacy in global trade. In Jim Rickards’ book Currency Wars, he tells the story of financial war games conducted by the US military, in which one of the scenarios was a Russian gold backed currency that challenged the dollar. We’re apparently not far from that plan becoming feasible.

The US spends a big chunk of its $700 billion a year defense budget on dominating the Middle East in order to force the trading of oil in dollars. Let that trade be diversified into several currencies and the demand for petrodollars goes way down. Central banks and global corporations will sell part of their dollar holdings, sending the dollar’s exchange rate into a tailspin. This in turn will make it harder for the US to finance its military empire/welfare state.

The net result: America becomes Spain, no longer able to simply whip out the monetary credit card to cover its overspending. We’ll have to live within our means, cutting maybe $3 trillion a year in government largesse (including the growth in unfunded entitlements liabilities).

Cuts on this scale can’t be accomplished smoothly, as Europe is discovering. So in this scenario the coming decade will be even messier than the last one, with “Occupy” movements shutting down cities and every election producing incumbent massacres. A combination of higher prices for necessities and lower wages will demote much of the middle class to “working poor.”

Meanwhile, China and Russia will reap the rewards of stronger currencies, and will divide (or share) control over their part of the world. It’s hard to know who to feel sorrier for, Americans who thought they could depend on government programs for a middle class lifestyle, or the neighbors of China and Russia who will see the relatively light hand of the American empire replaced with something far more atavistic.

About DollarCollapse.com

DollarCollapse.com is managed by John Rubino, co-author, with GoldMoney’s James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street (Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.

Note: “Hyperinflation is essentially a political event. Weimar Germany was triggered by war reparations, Zimbabwe by confiscation of property accompanied by capital flight (including human capital), and Iran by US and European embargoes (a clear act of war)” – via Hyperinflation Hits Iran; Monthly 70% Inflation Rate; Reflections on Economic Warfare by MISH’S Global Economic Trend Analysis

Ed Note: You’d think that a Government of a Hyperinflation hit, rioting populace might be eager to to distract their population with, oh….. say a Nuclear Bomb? – THINK TANK: PATH TO IRAN NUKE WARHEAD 2-4 MONTHS

Currency Collapse Has All the Markings of a Full-Blown Crisis

by Dr. Kent Moors, Global Energy Strategist

Matters are beginning to come to a head in Iran.

Iran’s currency, the rial, has collapsed. 

Riots have begun. Its government has rapidly lost its authority. And the Iranian economy is unraveling.

This has all the markings of a full-blown crisis. 

It will have an uncertain impact on the region and the wider oil market. This could get very unpredictable and very nasty. 

Iran Takes Defensive Action

While attention is currently focused on the recent sharp drop in the rial’s value, the problem has been recurring for over a year. To combat it, Tehran established a Forex Trade Center (FTC) on September 23 to prevent a continuing drop against foreign currencies, providing dollars to importers of essential foodstuffs, medicine, and fuel at a fixed price. 

In less than the first week of FTC operations, the currency’s effective market rate declined by more than 30 %.

……let Dr Moors explain further HERE

Hyperinflation Hits Iran

by Steve Hanke, Professor of Applied Economics at Johns Hopkins University

Hanke has also been following the Iranian currency crisis. He wrote these thoughts yesterday:

“For months, I have been following the collapse of the Iranian rial, tracking black-market exchange-rate data from foreign-exchange bazaars in Tehran. Using the most recent data, I now estimate that Iran is experiencing a monthly inflation rate of nearly 70%, indicating that hyperinflation has struck in Iran.”

Here is a chart and commentary from his blog Hyperinflation Has Arrived In Iran

“Since the U.S. and E.U. first enacted sanctions against Iran, in 2010, the value of the Iranian rial (IRR) has plummeted, imposing untold misery on the Iranian people. When a currency collapses, you can be certain that other economic metrics are moving in a negative direction, too. Indeed, using new data from Iran’s foreign-exchange black market, I estimate that Iran’s monthly inflation rate has reached 69.6%. With a monthly inflation rate this high (over 50%), Iran is undoubtedly experiencing hyperinflation.

When President Obama signed the Comprehensive Iran Sanctions, Accountability, and Divestment Act, in July 2010, the official Iranian rial-U.S. dollar exchange rate was very close to the black-market rate. But, as the accompanying chart shows, the official and black-market rates have increasingly diverged since July 2010. This decline began to accelerate last month, when Iranians witnessed a dramatic 9.65% drop in the value of the rial, over the course of a single weekend (8-10 September 2012). The free-fall has continued since then. On 2 October 2012, the black-market exchange rate reached 35,000 IRR/USD – a rate which reflects a 65% decline in the rial, relative to the U.S. dollar.”

The rial’s death spiral is wiping out the currency’s purchasing power. In consequence, Iran is now experiencing a devastating increase in prices – hyperinflation.  As Nicholas Krus and I document in our recent Cato Working Paper, World Hyperinflations, there have been 57 documented cases of hyperinflation in history, the most recent of which was North Korea’s 2009-11 hyperinflation. That said, North Korea’s hyperinflation did not come close to the magnitudes reached in the recent, second-highest hyperinflation in the world, that of Zimbabwe, in 2008, nor has Iran’s hyperinflation – at least not yet.