Decades ago I came to the conclusion that America was on an unsustainable economic course.  Eventually, the system had to collapse.

Long term trends are sometimes ignored because of the “forest for the trees” effect.  Because we are so close to events, and the long-term process happens so gradually, we don’t see what’s coming, or think about it.

Let’s review my version of the economic history of the past 100 years in the United States.

As warned by our Founding Fathers, government tends to expand at the expense of personal freedom.  The political types are ambitious.  They want more control.  They tend to exaggerate their own importance.  They are elitists, believing they, alone, can make the “right” decisions.  The masses cannot be trusted to make decisions on their own.  They lack the correct perspective.  They don’t look out for the common good.

For example, a governmental body must establish zoning restrictions to oversee the development of the local community.  Otherwise: Chaos!  At least that’s what is “sold” to the local community.  A few challenge this concept, but most go along.  A few elected officials have now taken partial control over private property that belongs to others.  And, of course, this process is multiplied many times over at all levels of government throughout the country.  Government advances – freedom retreats.

The Founding Fathers anticipated this power grab and tried to restrain it through the checks and balances built into the structure of government, and through a constitution that places limits on the power of the Federal Government.  However, over the past hundred years those restraints built into the Constitution have been gradually eroded, until we have reached the point where a combination of ambitious individuals in the U.S. House of Representatives, the Senate and the White House are ignoring constitutional restraints and are riding roughshod over individual rights.  Given the pretext of an economic crisis, financial institutions and manufacturing companies are being effectively nationalized.  The country is fighting two wars, and the military is acting as world policemen.  A crisis caused by excessive debt is being addressed by exponentially increasing the debt of the Federal Government.

In 1913, the Federal Reserve was established to provide a stable currency and help eliminate financial panics.  I’ll let you decide how that has worked out.

In 1934, President Roosevelt intervened in the economy, extending the Great Depression, devaluing the dollar and making it illegal for U.S. citizens to own gold.  (Where does that fit into the Constitution?)

In 1971, President Nixon intervened in the economy, establishing wage and price controls, and totally eliminating the convertibility of dollars to gold – we were now on a purely fiat currency, with no restraint on the printing of paper money.

Throughout the first 140 years of our country, we had inflation and deflation.  But, on balance, the dollar retained its value.  An 1800 dollar was worth about the same as a 1900 dollar.  However, a 1900 dollar was worth many times as much as a 2000 dollar.  During the twentieth century, the political types took control of our currency, and look what they have done with it!

Much has been written recently regarding how we got into this economic mess.  There is no question in my mind as to who is primarily responsible.  Excessive government spending, coupled with government policies that encourage consumption and debt and discourage savings and investment put this country on an unsustainable economic path.  But the common view is that we are just in a recession that is more severe than most, but we seem to be emerging from it.  Everyone looks forward to business as usual.  They don’t see the forest for the trees.

Well, not everyone sees the world this way.  Especially our creditors.

Since coming off the gold standard in 1971, the value of the dollar has been plummeting.  Even given government statistics regarding inflation, this is not a pretty picture.  But, in my opinion, government statistics have been drastically under-reporting inflation for decades.  The dollar’s collapse has been much more dramatic.

Since World War II, the dollar has served as the primary medium of exchange between the nations of the world.  As the U.S. has run current-account deficits, we have imported manufactured goods and exported dollars.  Foreigners have accepted these dollars in exchange, and have lent them back to us by buying U.S. Treasury securities.  That is changing.

Foreign governments, in particular, observe the behavior of our Federal Government with grave concern.  Faced with huge federal budget deficits, our government revs up the printing presses, sending out checks to everyone from individual citizens to banks to car companies.  Faced with huge federal budget deficits, our government proposes massive new spending programs to nationalize health care, auto production and alternative energy programs.  Faced with huge federal budget deficits, our government just keeps creating more fiat currency.

Would you lend money to anyone who behaved like this?  Well, neither will our creditors.

Foreign governments are meeting to establish alternatives to using dollars in international trade.  China has proposed creating a new international currency.  China, Russia, India and Brazil recently met to work on this project.  The U.S. was not invited to this meeting.

Now, imagine this scenario: As the U.S. Treasury continues to finance its massive spending program, demand for Treasury securities dries up, as foreigners no longer are willing to lend us money.  They are spending their dollars (as China is) to purchase hard assets, raw materials and land.  They are no longer willing to hold dollars – they don’t trust their continuing value.

As the Treasury has no choice, they must continue to sell securities.  Who is going to buy them?  The Federal Reserve Bank.  And how does the Federal Reserve Bank pay for these securities?  They create dollars.  Out of thin air.

Dollars in circulation grow dramatically in supply.  No longer acceptable to settle international transactions, the demand for dollars is dropping dramatically.  Let me see if I remember my basic economics: Increasing supply; decreasing demand.  I remember!  Plunging price!

What does “plunging price” mean with respect to a national currency?  It means that all other currencies rise relative to the dollar.  It means that anything purchased from other countries becomes much more expensive.  Think manufactured goods from China.  Think oil from the Middle East.  Think natural gas and wood products from Canada.  Think about how we now live in a world economy, with each country dependent upon goods and services originating in other countries.

A plunging dollar translates into exploding prices.  As the dollar sinks, lenders of dollars demand a higher return on their loans, as they realize they will be paid back with dollars that have less purchasing power than the dollars they lent.  Interest rates will skyrocket.

All holders of dollar-denominated assets will see the value of their savings plummet.  The dollar is only as good as the full faith and credit of the U.S. Government, and we are now witnessing how good that is!

So, what should you do with your investments?

Rule number one is to get out of dollar denominated assets – bonds, CDs, promissory notes, bank accounts of all kinds.

Rule number two is to get into hard assets – assets that will hold their value over time because people desire and need them.  Gold and silver have traditionally served this purpose, as has real estate.  Gold and silver coins might serve a purpose as a medium of exchange in an environment in which dollars are no longer acceptable. 

What type of real estate makes sense in this scenario?  As all non-essential economic activity would be expected to collapse, one needs to be selective.  Understand that many sources of income might dry up, as increasing numbers of participants in our economy become unable to meet their obligations.  Luxury retailers will be unable to pay their rent in a shopping center, for example.

Everyone will give priority to what they must have.  We can’t live without food, and we must have a place to live.  

I maintain that the best investment you can make in this economic environment is farmland.  That is the case because all Americans need to eat, but also because citizens of other countries might be experiencing increasing living standards even though the U.S. economy is in shambles.  With a cheap dollar, food exports might be a thriving industry.

So, here’s the opportunity: You own dollars.  Dollars have no intrinsic value.  They can be printed at the whim of the Federal Government.  They are in excess supply at a time when demand is expected to decline.  You, like creditor nations throughout the world, would like to dispose of these dollars before they become worth even less.

You are faced with an alternative investment to dollars – farmland.  Farmland is in limited supply, and can only be created with considerable effort and expense by converting other types of land to farmland.  Farmland is experiencing increasing demand, as world population increases, and as more world citizens increase their wealth and demand better diets.

High risk, declining supply/demand relationship.  Low risk, favorable supply/demand relationship.  Your choice. 

Can you think of a more solid investment in a time of economic turmoil than farmland?