Prior to A.D. 1933, the paper dollar was backed by both gold and silver. That meant that if you had a paper dollar in your pocket, you could trade it for a silver dollar. If you had twenty paper dollars in your pocket, you could trade them in for an ounce of gold.
In A.D. 1933, President Roosevelt removed gold coins from domestic circulation and the domestic paper dollar was backed only by silver. Foreign-held paper dollars could still be redeemed with gold.
The government stopped redeeming domestic paper dollars with silver in A.D. 1968 and stopped redeeming foreign-held paper dollars with gold in A.D. 1971. At that point the dollar became pure fiat without any intrinsic value. We could’ve expected significant inflation (devaluation of the paper dollar) at that time, but the Nixon administration cut extraordinary deals with Saudi Arabia and then OPEC whereby both of those entities guaranteed to sell their crude oil for U.S. dollars only.
Net result? If any nation wanted to purchase crude oil on the international market, they had to use US dollars to do so. Given that most nations needed to purchase crude oil, most nations therefore needed fiat dollars. The resulting demand created the “petro-dollar”—US dollars that were no longer backed by gold or silver, but were implicitly backed by crude oil.
The petro-dollar scheme worked well for nearly 30 years. But in A.D. 2000, Saddam Hussein announced plans to start selling Iraqi crude for euros rather than fiat dollars. If Saddam’s plan were allowed to succeed, it would strip away some, most or even all, of the dollar’s standing as the world’s only petro-currency and “World Reserve Currency”.
The US government cooked up some cock-and-bull story about Weapons of Mass Destruction and invaded Iraq in A.D. 2003. The Iraqis received a big dose of “Shock and Awe” and the war was over in just weeks. Our attack was intended to serve as a warning to any other oil-producing nation. If they dared to sell their crude for anything other than petro-dollars, they could also expect a big dose of “Shock and Awe”.
Unfortunately, the “Shock” wasn’t quite shocking enough. The “Awe” wasn’t really awesome. The Iraqis and soldiers from foreign countries weren’t actually defeated in the first few weeks of our invasion and continued to resist for another eight years. The US military was shocked to discover that it was trapped in Iraq and awed by the enemy’s persistent refusal to surrender.
It became clear to the rest of the world that we were so bogged down in Iraq that we couldn’t start another war. Slowly, other oil-producing nations began to sell their crude for currencies other dollars. The value of the US dollar as measured on the US Dollar Index fell from 125 in A.D. 2000 to 80, today (a loss of nearly 40%). The US dollar’s standing as “World Reserve Currency” was also diminished.
The point to this stroll down memory lane is that the value and predominance of the “petro-dollar” was enforced by the threat of military invasion. If any nation dared sell crude oil for a currency other than dollars, we’d send in the US military and subject it to “Shock and Awe”.
Today, that military threat is no longer viable. We are therefore left to wonder what will support the perceived value of the fiat dollar that is no longer backed by gold, silver, petroleum or even the US military?
• Since WWII, the US has had the world’s mightiest military. In recent years, America has spent more on military power than all the rest of the world combined. Our military has been a source of international power and national pride. The military has become such a “sacred cow” that it’s been almost inconceivable that government would reduce its size.
Therefore it was surprising, even shocking, when The New York Times recently reported (“Pentagon Plans to Shrink Army to Pre-World War II Level”) that,
“Defense Secretary Chuck Hagel plans to shrink the United States Army to its smallest force since before the World War II buildup and eliminate an entire class of Air Force attack jets in a new spending proposal that officials describe as the first Pentagon budget to aggressively push the military off the war footing adopted after the terror attacks of 2001.”
The national government is going broke. It can no longer afford to invade foreign countries like Iraq or Afghanistan. We may still be able to bomb the stuffing out of them with drones and bombers, but we probably won’t see another, “boots-on-the-ground” invasion of another foreign country for the next generation.
The implications are considerable.
Reducing the Army to a size smaller that existed in the 1940s, is an enormous reduction. We’re not talking about cutting the Army back to pre-911 size or pre-Viet Nam size. We’re talking about reducing the actual number of Army personnel to less than that of pre-WWII 1940s—when the nation was still caught in the Great Depression.
Based on that proposed reduction, the US will be less able to invade foreign countries. Thus, the US will be less able to enforce or even support the fiat dollar’s status as petro-dollar and World Reserve Currency.
The Pentagon’s plans to reduce the size of the military should encourage other countries to trade in currencies other than dollars. Knowing they won’t get a dose of “shock and awe,” foreign countries will feel free to conduct business without US dollars.
As foreign countries increasingly trade in currencies other than dollars, the perceived value of the dollar should decline and we may increased and rising gold prices.
“The Pentagon’s proposal . . . takes into account the fiscal reality of government austerity [higher taxes and less benefits] and the political reality of a president who pledged to end two costly and exhausting land wars. A result, the officials argue, will be a military capable of defeating any adversary, but too small for protracted foreign occupations.”
Translation: No more “boots on the ground.”
“The officials acknowledge that budget cuts will impose greater risk on the armed forces if they are again ordered to carry out two large-scale military actions at the same time: Success would take longer, they say, and there would be a larger number of casualties. Officials also say that a smaller military could invite adventurism by adversaries.”
“Success would take longer”? Longer than what? What “success” are they talking about? The “success” in Iraq and Afghanistan? The “success” in Viet Nam?
The last time the U.S. military had a “success” (outright victory) was when we invaded Grenada in A.D. 1983. Our repeated failures win an outright victory in most of our conflicts since WWII are largely based on the fact that the U.S. military no longer fights wars, but instead fights “police actions”—which some believe are instigated on behalf of the UN rather than the American people.
“[O]fficials said that despite budget reductions, the military would have the money to remain the most capable in the world and that Mr. Hagel’s proposals have the endorsement of the Joint Chiefs of Staff. Money saved by reducing the number of personnel, they said, would assure that those remaining in uniform would be well trained and supplied with the best weaponry.”
“Budget reductions”? “Money saved”?
It’s all about the money. The government is broke. We can’t afford such a large military.
“Most capable [military] in the worlds”?
Probably true, since America currently spends more on military expenses than all the rest of the world combined. Thus, we can cut our military by half, and still have more military than any other nation on earth.
Nevertheless, reducing Army personnel to a pre-WWII level may result in a military that’s more efficient but it will also be less powerful.
Inevitably, if we have fewer soldiers, we’ll also have less soldiers to deploy into foreign countries. We currently have US military stationed in nearly 150 foreign countries. Some of those countries may only have a few dozen or a few hundred soldiers. Nevertheless, if the Pentagon succeeds in reducing total Army personnel to pre-WWII levels, it seems certain that the number of countries that have US military personnel might fall from 150 to less than 100, perhaps less than 75.
Result #1? The Pax Americana imposed upon the post-WWII world by the US military is ending.
Result #2? Reduced US military presence in foreign countries will certainly expose those countries to higher probabilities of civil wars or foreign invasions. The number of small, foreign wars will increase. The world will become less stable.
Result #3? Without the US to impose order and provide security for many of those foreign countries, their governments will seek the protection of other major powers. International power and influence will shift away from the US to foreign governments like those of China and Russia. Islamic revolutionary power may increase.
“The new American way of war will be underscored in Mr. Hagel’s budget, which protects money for Special Operations forces and cyberwarfare. And in an indication of the priority given to overseas military presence that does not require a land force, the proposal will—at least for one year—maintain the current number of aircraft carriers at 11.
“Over all, Mr. Hagel’s proposal, the officials said, is designed to allow the American military to fulfill President Obama’s national security directives: to defend American territory [but not defend the States of the Union against an invasion by illegal aliens, right?] and the nation’s interests overseas and to deter aggression — and to win decisively if again ordered to war.”
Ohh, please. “Win decisively”? Where? When?
Like we “won decisively” in Viet Nam, Iraq and Afghanistan?
The government’s chances of providing a military that’s much smaller but just as powerful, are just about as good as its chances of providing us with free (or even “affordable”) doctors’ visits with ObamaCare. What the government does, government screws up.
If we’re going to have a much smaller military, we’ll necessarily have a much less powerful military.
This new military may be more efficient but the Pax Americana—and the fiat dollar as World Reserve Currency—are heading for the exits. That show is over.
“Mr. Hagel’s plan would most significantly reshape America’s land forces—active-duty soldiers as well as those in the National Guard and Reserve.
“The Army, which took on the brunt of the fighting and the casualties in Afghanistan and Iraq, already was scheduled to drop to 490,000 troops from a post-9/11 peak of 570,000. Under Mr. Hagel’s proposals, the Army would drop over the coming years to between 440,000 and 450,000.
“That would be the smallest United States Army since 1940. For years, and especially during the Cold War, the Pentagon argued that it needed a military large enough to fight two wars simultaneously—say, in Europe and Asia. In more recent budget and strategy documents, the military has been ordered to be prepared to decisively win one conflict while holding off an adversary’s aspirations in a second until sufficient forces could be mobilized and redeployed to win there.”
Again, the Pentagon is planning to “decisively win” wars with a smaller Army when we haven’t “decisively won” a meaningful war since WWII.
“The Guard and Reserves, which proved capable in their wartime deployments although costly to train to meet the standards of their full-time counterparts, would face smaller reductions.”
On the face of it, a reduction in the size of the Army, National Guard and Reserve seem positive to those of us who are concerned with a growing police state. I.e., if the size of the domestic military in this country is reduced, there may be a correlative reduction in the government’s ability to impose a police state.
However, if government cuts the size of the Army, National Guard and Reserves at the same time that it increases the size and military capacity of Homeland Security, then we may have little reason to celebrate. A bigger, more efficient police state may still be heading our way.
“Mr. Hagel will take some first steps to deal with the controversial issue of pay and compensation, as the proposed budget would impose a one-year salary freeze for general and flag officers; basic pay for military personnel would rise by 1 percent. After the 2015 fiscal year, raises in pay will be similarly restrained, Pentagon officials say.
“The fiscal 2015 budget will also call for slowing the growth of tax-free housing allowances for military personnel and would reduce the $1.4 billion direct subsidy provided to military commissaries, which would most likely make goods purchased at those commissaries more expensive for soldiers.
“The budget also proposes an increase in health insurance deductibles and some co-pays for some military retirees and for some family members of active servicemen. But Mr. Hagel’s proposals do not include any changes to retirement benefits for those currently serving.” [At least, not yet.]
Every word or phrase that highlighted in the previous three paragraphs is all about the money. Government’s going broke. Therefore, it must cut costs—and, soon, raise taxes—and perhaps even seize pensions or bank accounts.
In this brave new world of fiscal austerity, who will volunteer for the military?
Maybe lots of people—if the nation is in an economic depression.
By reducing military pay, the government implies that: 1) it’s losing its access to credit and doesn’t expect to regain it anytime soon; and 2) an economic depression may be approaching.
If there’s no coming depression, then by cutting soldier’s pay, government won’t only reduce the number of Army personnel, it’ll also reduce the quality of the soldiers who are recruited. Who wants to fight for minimum wage? Only the most desperate and incompetent people.
You can’t run an efficient and effective military on minimum wages—except during a depression when people will take any job they can get—or except by restoring the draft and forcing Americans to serve in the military.
• On balance, I’m in favor of the proposed military cuts. They’ll cause problems, but they may also signal an end to the American audacity that pushed us into the invasions and exhausting occupations of Iraq and Afghanistan. With less soldiers, we’ll also see less US meddling in foreign countries. And that’s a good thing. We may even see a reduction in the police state in this country—another good thing.
But, good or bad, significant cuts in the U.S. military are coming if only because our economy is depressed and our government can’t sell its bonds because it’s increasingly perceived to be bankrupt.
If government is forced to reduce the size of the Army, what else is government prepared to reduce? Payments on the national debt? Pensions? So-So Security? Bank accounts? The value of the fiat dollar? Insofar as government is unable to borrow from legitimate creditors and the Federal Reserve has become the “printer of last resort,” we can expect more monetary inflation.
Our government can no longer use military power to force foreign countries to trade only by means of fiat dollars. That means the value of the fiat dollar must fall.
Insofar as the U.S. Army is growing smaller, so will the perceived value of U.S. fiat dollars. Those of you who choose to save your wealth in paper, dollar-denominated investment vehicles may want to rethink that choice. I suggest that you seek to preserve your wealth a medium of exchange like physical silver or physical gold.