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The year was 1971. We were in a recession. President Richard Nixon responded by taking the country completely off the gold standard and declaring famously, “We are all Keynesians now.” The result? We entered a new era of "irredeemable debt," as Professor Antal E. Fekete (of Sapientia University in Romania) calls it in his article for Patrick Wood’s The August Review.

Irredeemable debt is created by printing fiat dollars: dollars that are backed by nothing other than legal tender laws and the willingness of the public to use them. Since they are not backed by anything, the U.S. Treasure Department and the Federal Reserve are free to print as many as are believed needed to create supposed prosperity and, of course, pay the government’s mounting bills.

Since 1971, the dollar has lost around 96 percent of its value. Meanwhile, the national debt has skyrocketed to around $9.5 trillion; families of four have an indebtedness level of five and sometimes six figures. Debt has become a way of life.

Professor Fekete presents a compelling argument that our period of irredeemable debt is entering its twilight phase. The idea that an economy can continue indefinitely on a foundation of irredeemable debt is a fantasy — on a par with that of the hippie on psychedelic drugs who believes he can fly. The only difference is, the consequences of irredeemable debt take longer to materialize.

Irredeemable debt interferes with productivity, although it can create a persistent illusion of such. As Professor Fekete explains, “The increase in GDP brought about by the addition of $1 of new debt to the economy is called the marginal productivity of debt. That ratio is the only one that matters in judging the quality of debt.” Before Nixon took us off the gold standard, the introduction of $1 of debt would increase the GDP by $3 or more.

But when we went off the gold standard, this ratio began to decline. At first, the decline wasn’t noticeable, but as time passed, the negative effects began to set in for those who knew what to look for. In 2006, the ratio finally went negative (and it is interesting that this was the year the Federal Reserve stopped publishing its M3 figure).

Hence the financial crisis that was just beginning to erupt that year, and has worsened ever since, with huge banks such as Bear Stearns having to be bailed out. Irredeemable debt causes capital destruction, not production. It displaces real capital, causing genuine production to suffer.

Under such conditions there may be, for a time, a sense of great economic activity, but in reality what is being built up is a house of cards. Think of the Greenspan economy of the late 1990s. The stock market reached record heights; there was a sense that (as one of my best friends back then put it) “times are good!” This sense increases the temptation to worsen the cycle of borrowing and spending, borrowing and spending—all of which only adds to the debt. It also causes malinvestments (as the Austrian economists call them). Irredeemable debt interferes with the proper allocation of resources throughout the marketplace. It encourages irresponsible business activity — as seen when the dot-com boom of the 1990s became the dot-com bust of the 2000s.

Some would argue that by many standards, large numbers of Americans are prosperous. They have a large house (if it hasn’t been foreclosed on), two large automobiles in the garage, and can take vacations every year. But they also have five and possibly six figures of debt. The federal government, too, is running up expenses at an ever-increasing rate, and paying its bills with irredeemable fiat money. At least part of the increasing food and fuel costs can be attributed not to increased demand but to the collapsing purchasing power of our dollars. This is just one of the unintended side effects of printing unbacked dollars.

The edifice of irredeemable debt is growing into a “fantastic debt tower,” actually an “inverted pyramid … balanced on a tiny and ever-shrinking gold foundation” and threatening to topple at almost anytime. We are, moreover, in uncharted waters. “The construction,” Fekete tells us, “has no precedent in history, and no place in theory… As a matter of fact, no one is analyzing the process.”

Nature, of course, operates according to fixed laws such as the law of the conservation of matter and energy. These laws set the parameters on the economically possible. Perhaps the most obvious application of the above, except to the majority of professional economists, is: you can’t get something from nothing. The corollary in economics is that it is impossible to pull genuine wealth and prosperity out of thin air by printing dollars. Eventually, you have to pay the piper.

Whether or not we are in a recession is currently a topic of debate. If Fekete is right, the situation is considerably worse. Today we are skating on rapidly thinning ice — and deluding ourselves in thinking we can continue on our present route without crashing through into very cold economic waters. Continuing on our present course will eventually precipitate an economic calamity of unprecedented proportions as it will be global, not local. This calamity only awaits the right catalyst such as unintended consequences from another terrorist attack, an unprovoked attack on a nation such as Iran, a massive famine caused by diversion of badly needed foodstuffs into biofuels, a sudden outbreak of a communicable disease, or even another Hurricane Katrina.

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