Up until 1971, the United States was required to back its paper currency with gold, using a system called the gold standard. It was in 1971 that President Nixon implemented several policy changes that would take the United States, and the rest of the world off the gold standard. This profoundly changed the world’s economic practices. No longer were the currencies of the world backed by gold, which meant more currency than gold could exist. This allowed governments to print money on-demand, because having $1 billion dollars of gold and $4 billion dollars of currency no longer mattered. This behavior devalues your money because there is more currency than actual value (gold is the actual value to back up the currency). In the case I mention above, your currency would be worth 25% less than if there were the same amount of currency as gold reserves.
If gold is no longer backing the United States currency, then what is? Oil.
After the final nail was put into the gold standard’s coffin, the only thing backing the currency was the promise of wealth and economic growth. The only way to continually have both economic growth and wealth is through the use of more oil. The availability of cheap, easily abundant oil has spoiled us. It has allowed consistent economic growth for years, but as oil becomes more expensive and more challenging to extract, the ability to grow has also become more challenging. Oil was easy to come by around 1971 so no one thought otherwise. Oil could easily drive the economy and could easily create wealth, because as the fiat currency was inflated the economy grew, thanks to cheap oil. Aside from the short lived oil embargo of 1973, wealth came easily to many because manipulating the currency would allow more wealth. This seems counterintuitive at first glance, but the truth was that printing more money equated to boosting wealth and power. It was as if the currency was not controlled by physics, then came $140.41/barrel oil in 2008. Again, we were reminded that currency manipulation can only go so far.
Since 2008 economic growth has slowed and both wealth and power has diminished. The typical solution, manipulation of the currency, has not worked. It appears that the currency manipulation has actually aggravated the problem, because oil is no longer cheap and easily obtainable. Oil has never really been “cheap” since 2008 and as the economy begins to show signs of life, oil prices increase. It would appear that a growing economy is effected by physical properties, not just man’s counterfeit economical properties. Unlike the counterfeit properties many have grown accustomed to, the physical properties are not changeable. The unchangeable physical properties that dictate our world are over powering the ability to continually print more money, accumulate more debt, and constantly grow an economy.
How can anything continue to exponentially grow? It can’t.
What we are seeing is the reality that oil is the backer of our currency, our live styles, and our power. For a long time the physical properties did not seem clear because obtaining more oil was just a matter of more money. Manipulating the physical properties seemed no different than manipulating the man-made counterfeit economics. Fiat currency systems are based on the idea that wealth, power, and growth will continue for ever. Physics dictates that this is not true. At some point you will reach a plateau, a point were you can no longer pump enough oil out of the ground in order to feed the desire of man to continually expand. Man has become arrogant and has ignored the fact that the ONE thing the entire economical and political system is based on, oil, can not continue to be manipulated. Unlike currencies, oil can not be printed on demand.
For more information on fiat currency systems check out U.S. Dollar Is The Next Financial Shoe To Drop on Forbes.com.