Why sanctions will kill the dollar and cause unprecedented inflation in the U.S.
[NOTE: Economics isn’t a sexy topic, but we all need to understand what’s coming to America very soon — and more important, why it’s coming. I’ve split this article into two parts because it will be easier to digest in chunks. Read Part One here].
If you live in America, your ability to feed your family, keep a roof over your head, and buy the things you use every day will likely change dramatically in the near future.
In Part One of this article, I explained why sanctions on Russia will hurt Americans as much (if not more) than Russians. But that’s only part of the story. Sanctions have also triggered a chain of events that will have a monumental impact on the standard of living of virtually every American for years to come.
It's extremely important to understand that we’re about to experience isn’t Vladimir Putin’s fault; sanctions have merely accelerated a crisis that was already coming to a head in the U.S. and has been slowly impoverishing Americans for generations.
1.Our standard of living has been eroding faster because our economy is nearing collapse
Surviving in America seems to get harder for each generation, doesn’t it?
The cost of everything we need — from food and housing to health care and education —becomes less affordable each year. And it happens no matter who wins the White House, who leads Congress, or what laws they pass.
This means that our declining standard of living isn’t a Left vs Right problem; it’s a systemic problem.
The inconvenient truth is that the U.S. economy has been on life support for decades. Its foundation has been slowly deteriorating without our knowledge, like the broken and rotten floorboards in a house. Eventually, a house in this condition will collapse. It’s inevitable. Our government knows this will happen; it simply hasn’t bothered to tell us.
In order to understand why our floorboards are giving way, and why sanctions are accelerating this process, we need to take a closer look at how our economy works.
Most Americans haven’t spent a lot of time thinking about our economy. As with nearly everything else that’s above our pay grade, we’ve left this to the “experts.” We’ve assumed that if there was a serious problem — if the economy were broken on a fundamental level— they would tell us, right?
It turns out this has been a big mistake. Instead of trusting “experts,” we should have been educating ourselves.
There are a few simple but very important things about the economy that “experts” have never told us. Once you learn them, you’ll know understand why we’ve all been working harder to keep what we have, why debt matters more than we’re told, and why our government is solely responsible for the impending collapse of our home.
Please understand that my intent isn’t to frighten you, but to educate and prepare you. Information is power, and it’s time for all of us to empower ourselves. It’s critical that we understand the roots of this crisis because the people responsible for it will expect us to look to them for “solutions.”
And we can't afford to give them the power to make the same mistakes again.
2.When the government creates money, it leads to inflation
The most important thing to understand about the economy is that there’s no such thing as “free” money, even when it comes from our government.
Whenever money is released into the economy, it increases the price of everything we buy. In other words, it causes inflation. The way our economy is set up, inflation is unavoidable; the only question is how high it will be.
The steady creep of inflation is why our parents had a higher standard of living than we do. And it’s why our children will have an even lower standard of living. This was the cost of living when I was in kindergarten:
These prices are unrecognizable to us now, right?
The people we elect love to create (and spend) as much money as they can without sending inflation so high that it scares us. How do they do this? Here’s a crude analogy to help you visualize the process:
Imagine that every time Congress sends out stimulus checks, bails out a bank, or starts a war, the dollars that are created are like water poured from a barrel and dumped on the floor.
In order to keep inflation under control, our government needs to keep the floor as dry as possible. In other words, it has to soak up the water, i.e. dollars. In order to do this, it needs something to absorb the water; it needs to create a demand for these dollars.
Think of the demand for dollars like fluffy towels the government uses to absorb the water on the floor. As long as investors, businesses, and other countries want dollars, they give the government towels.
When there’s heavy demand for dollars, the government has enough towels to soak up most of the water, and inflation stays low. (Keep in mind the floor will never be completely dry. The way our economy is designed, we’ll always have some inflation; the government just tries to keep it “manageable”).
But when there’s less demand for dollars, the government doesn’t have enough towels to absorb the water. Water starts to accumulate on the floor, prices go up faster, and we see a lot of inflation.
To recap:
More demand for dollars = less water on the floor = lower inflation
Less demand for dollars = more water on the floor = higher inflation
Make sense?
3. The U.S. has been losing its ability to “control” inflation, which has steadily lowered our standard of living
Once upon a time, the U.S. was able to keep inflation under control.
It had no problem creating demand for the dollars it printed because everyone in the world wanted them. In fact, demand for dollars was so high that by 1981 the U.S. had run up $1 trillion in debt with most Americans barely feeling inflation (Note: For our purposes, you can also think of dollars as debt).
But over the last 40 years, that’s changed.
The U.S. government has been creating dollars/debt at a staggering rate…
…but the demand for dollars hasn’t kept pace. As a result, inflation — and the cost of living — have increased significantly during this period.
Economists tell us that inflation isn’t so bad, and that it can even be good for us. What they don’t tell us is that inflation doesn’t affect everyone the same way. While people at the top of the income ladder barely feel it, inflation can be devastating for most Americans (at this point, anyone making less than $300,000 a year).
Take a close look at the chart below.
While the average income has kept pace with the cost of entertainment and some food items, you’ll notice this isn’t the case for essentials like gas, cars — and most important, housing.
So what happens when your income rises fast enough to meet some expenses, but falls WAY short of meeting other important ones? Your standard of living declines. This is what’s been happening in America for the past 40 years: our quality of life has been falling, but it’s happened so gradually that we’ve barely noticed.
Since the pandemic, however, it’s been falling much faster.
Over the past two years, the government has released trillions of “stimulus” dollars into the economy. To return to our analogy, it’s dumped an unprecedented amount of water on the floor in a very short time. In fact, nearly 1/4 of all dollars in existence were created since the pandemic hit.
At the height of the pandemic, desperate Americans didn’t give much thought to the consequences, but by last Fall these stimulus dollars sent inflation higher than it’s been in 40 years. This is why the cost of housing has gone parabolic and working class Americans are even being priced out of the mobile home market, why it’s almost impossible to find a hotel for less than $200 a night, why a smoothie costs $9.
In spring 2020, I warned that our government’s response to the pandemic would turn the class divide into an unbridgeable chasm. Now it’s happening. And our situation is about to get worse.
Imagine that someone is coming with dozens of barrels of water, and they plan to dump them on the floor all at once. Our towels are already soaked, and no one is giving us fresh ones.
This is what Russia is doing now, and other countries will follow suit.
4. How has the U.S. been able to create so much money/debt for so long? Because the dollar is “special”
Before we get into the role Russia plays in what’s coming, wrap your mind around this: even before COVID, U.S. debt stood at nearly $23 trillion. This begs the question: how has the U.S. has been able to print so much money for so long without throwing our economy into turmoil?
Throughout history, whenever countries have accumulated such extreme amounts of debt their economies have collapsed spectacularly. You may have seen pictures of Germans in the 1930s using wheelbarrows and baskets of money to buy food. That’s what happens when demand for a currency plummets and it rapidly loses value: inflation turns into hyperinflation.
Venezuela recently experienced hyperinflation in 2019 when inflation hit 10 million percent! (For perspective, as high as the cost of living is in America now, inflation is “officially” only 8.5%).
Yet the U.S. government seems to spend as much money as it wants without any concern of hyperinflation. How has it been able to dump so much water on the floor, yet always find enough towels (demand for dollars) to absorb it?
Because the U.S. enjoys a perk no other country does: the dollar is the world’s reserve currency.
What’s a reserve currency? Without getting into nitty gritty details, suffice it to say that it’s provided an extraordinary benefit that we, Americans, have taken for granted our entire lives.
A country with the reserve currency can dump more water on the floor than anyone else and always have enough towels to soak it up. Germany can’t do this. Russia can’t do this. Not even China can do this. But the U.S. can.
So why does the dollar have this special status?
Since World War II, the U.S. has been the strongest and most powerful country in the world, so its currency was considered the most stable and valuable. The dollar was in such high demand that it’s been used almost exclusively for global transactions for decades.
But that’s not all. The dollar has also been the currency tied to the most important resource in the world: oil.
If any country or business wanted to buy or sell oil, they could only do it with dollars. We’re not just talking about oil produced in the U.S.; even oil bought and sold through OPEC country required dollars.
Can you guess the effect this had on demand for the dollar?
That’s right. It created a constant, artificial demand for U.S. currency, even as the government produced insane amounts of money and debt. Requiring everyone on the planet to hold dollars in order to use the commodity we all need to live has allowed the U.S. to dump tons of water (dollars) on the floor and still keep it relatively dry, i.e. not send inflation to scary levels.
But those days are quickly coming to an end.
5. The dollar has been losing its reserve currency status for the past 20 years
When a country holds the reserve currency, everyone relies on it to retain its value. But as the U.S. has been spending like a drunken sailor, other countries have taken notice. They’ve been losing faith in the dollar.
Iraq was the first country to take action. In 2000, Saddam Hussein began selling Iraqi oil in Euros, not dollars. But less than a year later, the U.S. invaded in search of weapons of mass destruction (that turned out not to exist), and Iraqi oil sales were switched back to dollars.
In 2007, Iran, the world’s 9th largest oil producer, stopped selling its oil in dollars (which president Mahmoud Ahmadinejad called “a worthless piece of paper).” That same year, the U.S. and its allies determined that Iran was in violation of the Nuclear Proliferation Treaty and began implementing draconian sanctions.
By 2011, Muammar Gaddafi was quietly making plans to sell oil from Libya and other African countries for gold, not dollars. Within a few months, NATO launched a war to remove Gaddafi from power for “humanitarian” abuses, and the oil-for-gold plan hit a dead end.
Are you seeing a pattern? When any country has taken action that threatens the dollar’s reserve currency status, it hasn’t ended well.
But in the past few years, more countries have been plotting their escape. In 2016, India began purchasing oil from Iran in rupees, not dollars. In 2018, Venezuela announced it would sell its oil in Chinese yuan, not dollars. China, Brazil, and Pakistan are now trading oil and other commodities in their own currencies.
As you might guess, all of this has taken quite a toll on the dollar.
Demand has steadily declined, even as the U.S. has racked up tens of trillions for wars, bank bail outs (after the 2008 subprime crisis), and pandemic relief. Our government has been dumping more water on the floor than ever, and we’re running out of towels to soak it up.
And now we’re finally feeling the consequences. Inflation is ramping up. Fast. Even former Twitter CEO Jack Dorsey saw the signs of hyperinflation in October (before Putin started misbehaving).
The pressure on the dollar has been coming to a head for a long time, but sanctions are about to put it out of its misery.
6. Sanctions have prompted Russia to ditch the dollar, and more countries will follow
For more than a decade, Putin has been vocal about the need to ditch the dollar, accusing Americans of “living like parasites off… their monopoly” of the world’s reserve currency. Now Putin has been motivated to finally take action. And it’s not hard to see why.
The U.S. and its allies have done everything in their power to crash Russia’s economy. They’ve even taken the extraordinary step of freezing nearly $300 billion of Russia’s bank reserves, effectively keeping the country from making payments on its debt and ensuring it will default on loans. Can you imagine a bank locking you out of your account so you can’t pay your mortgage, and then preparing to foreclose on your home?
The Biden administration led this economic first strike on Russia, and now Putin is responding.
Two weeks ago, he announced that Russia will only sell oil and gas to “unfriendly” nations in rubles, not dollars. Keep in mind that Russia is the third largest producer of oil in the world, and U.S. dollars account for nearly 40% of Russian oil sales.
Imagine how this will affect demand for the dollar.
The rest of the world is watching these developments closely. The U.S. effort to obliterate Russia economically is making them wonder, “If this is how America treats a country that gets on its bad side, can it happen to us?”
As discussed in Part One, China, Brazil, India and other BRICs countries have been working together for years to decouple from the dollar, but recent events are prompting them to accelerate their efforts. India is finalizing a system to continue trade with Russia in rupees and rubles, not dollars. Last week, Saudi Arabia announced that it’s in talks with China to sell some of its oil in Chinese yuan, not dollars. Keep in mind that Saudi Arabia is the second largest oil producer in the world, and nearly 80 percent of global oil sales are priced in dollars.
Again, imagine how this will affect demand for the dollar.
I think the Biden administration already knows what’s coming. A few weeks ago, the White House warned that blowback from sanctions will trigger food shortages in the U.S. Now it's advising Americans to brace for “extraordinarily elevated” inflation.
Please understands what this means: our government knows that hyperinflation is coming to America.
Conclusion
Each day that sanctions continue pushes the U.S. closer to the point of no return: dollar decoupling en masse around the world.
It was inevitable, of course, that the U.S. would one day fall from its economic perch. But the decision to punish Putin will send our economy into crisis much sooner and faster than anyone expected. What many hoped would happen over the course of decades will now unfold in a fraction of the time.
Americans will soon be forced to ask themselves whether “defending freedom” in a country 6,000 miles away justifies sending tens of millions of Americans into sudden poverty.
If you’re not part of the 1%, there’s only so much you can do to insulate yourself from what’s coming, but these steps will help:
Focus on reducing or eliminating any debt with variable/adjustable interest rates (especially credit cards). As the dollar loses value, interest rates will rise, and so will monthly payments
Consider downsizing and reducing non-essential expenditures
Keep “real” things on hand to barter with (tools, seeds, automotive parts, clothes, etc).
Become as food self-sufficient as possible. Start a garden. Get a small coop and buy a couple of chickens; they pay dividends
Even as the dollar loses value, it’s advisable to keep some cash on hand. The White House and other agencies have warned of the increasing possibility of cyberattacks, in which case it will be critical to have enough money to meet basic needs for a short period
Start buying small amounts of gold or silver (they’re more likely to hold their value as the dollar falls)
Develop a network of people who can pool their resources and rely on each other
But the most important thing we can do now is educate others.
It’s critical that as many Americans as possible understand that Russia is not to blame for what’s coming. Because the same people who caused this crisis will claim to have the “solutions” when the time comes to "reset" the economy. We absolutely can’t give them the power to make the same mistakes again.
Yet there is hope, my friends. In every crisis, there is also opportunity.
The U.S. economy is failing spectacularly, but its collapse will give us something we haven’t had in centuries: the chance to remake it in a way that works for all of us, not just those at the top. If we’re armed with knowledge, if we understand who — and what — have brought us to the precipice, we can empower ourselves to build the better world we all want and deserve.
The choice is ours. Share this information widely.
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