Is the Value of the American Dollar Going to Drop to Zero?

I have two words for you. Land and ammo.

There’s a song called “Land and Ammo” that has the following hook in it:

“The Federal Reserve is out for its own

Eyes gone blind, can’t see where it's gone

Charlie Munger says fiat to zero

Land and Ammo

Land and Ammo

Land and Ammo”

Now, it’s a good song, but the first question you may have after hearing that, especially if you’re not familiar with the world of investing, is “Who is Charlie Munger and why does he think the fiat is going to zero?”

For those who aren’t familiar with him, Charlie Munger is a 98-year-old billionaire who’s famous for being the Robin to Warren Buffet’s Batman at Berkshire Hathaway. Of course, Munger has also written multiple books and has made a name for himself as a very savvy investor. Personally, I consider him to be an extremely sharp guy on everything related to money except cryptocurrency, which didn’t even come into being until he was 84 years of age and is totally incompatible with his style of investing.

In an interview earlier this year, Munger talked about inflation and the American dollar. Suffice it to say that his long-term view is extraordinarily pessimistic:

ANDY SERWER: I mentioned inflation, Charlie. And the stock market is down a bit this year, maybe because of inflation-- also the tensions in Russia and Ukraine, maybe we'll get to that in a second. But I want to ask you specifically about inflation. Are we looking at a prolonged decline in the markets because of inflation? Is inflation on the rise? And should we be concerned about it?

CHARLIE MUNGER: Well, let me take that in the reverse order. Inflation is a very serious subject. You can argue it's the way democracies die. When democracy dies in Latin America, inflation is a big part of it. So it's a huge danger.

Once you've got a populace that learns it can vote itself money, if you overdo it too much, you ruin your civilization a lot. And so, of course, it's a big long-range danger. If you look at the Roman Republic, even after they went to an empire with an absolute ruler, they inflated the currency steadily for hundreds of years and eventually the whole damn Roman Empire collapsed. So it's the biggest long-range danger we have probably, apart from nuclear war.

ANDY SERWER: Is it something investors need to be worried about, specifically when it comes to growth stocks right now?

CHARLIE MUNGER: Well, I think the safe consumption for an investor is that over the next 100 years, the currency is going to 0. That's my working hypothesis.

ANDY SERWER: Wow, well, that will be a different type of environment, won't it?

CHARLIE MUNGER: It's a very dangerous environment.

ANDY SERWER: And what about the fact--

CHARLIE MUNGER: What brought in Hitler was the combination-- what brought in Hitler was the combination of the Weimer inflation where they utterly destroyed the savings of the middle class in Germany, followed by the Great Depression. It was the one-two punch. And Hitler came in, crazy demagogue, with 40% of the votes, and pretty soon we had a dictator hell-bent for World War.

So the history is not pleasant. And Germany was a very advanced and civilized nation, the Germany that Hitler took over. I always say that the interesting thing about that was little Albert Einstein, a little Jewish boy, got his entire primary education with the insistence of the Catholic Church in Germany. Now, that is a very civilized nation.

So if you let your nation deteriorate too much, what you get is a Hitler. We proved it.

There’s good news and bad news here. Which do you want to hear first? Let’s start with the bad news.

The bad news is that Charlie Munger is almost certainly correct. Eventually, the value of the dollar is going to drop to zero. Why? Because those pieces of paper in your hand or marks on a digital ledger (more than 90% of our money supply only exists electronically) have no real value other than the minuscule amount it provides as toilet paper, a post-it note, kindling, etc.

Dollars used to be a representation of the amount of gold the United States had on hand, but that system started breaking down under the unrelenting financial pressure of the Great Depression. So, the government went off the gold standard to increase the money supply and make it easier to get the economy moving (It finalized going off the gold standard under Nixon). We’d all love to do that, right? “Gee, I only made 40,000 dollars this year and I’m having trouble paying my bills. Hey, I have an idea! What if I just print another $20,000? Then I can pay all of my bills, move into a nicer place and start going out to eat every weekend!” Our government has essentially been doing this for 90 years AND borrowing so much money on top of it that the current debt per US taxpayer is $247,882. It’s kind of hard to believe that our government can print its own monopoly money and STILL has to borrow more, but we’re pulling it off.

Still, knowing this might lead to a natural question. “If the government can print money, why do we need to pay taxes?” Of course, this is the rub. Fiat money is really supposed to just be a representation of goods, resources, and services that makes it easier for us to trade them with each other. If I’m a farmer and I want a Tesla Model X, I don’t need to give Tesla 120,000 dollars worth of livestock and crops for them to trade with someone else, I can just give them dollars. The reoccurring problem with this system throughout history has always been that governments have been the ones in charge of creating the money and they have an enormous incentive to put their thumb on the scale.

The more money flowing through the economy, the richer people are, the more prosperous the society becomes, and the more likely the politicians in charge are to stay in power. The flip side of that is that the more money that gets printed, the more unattached the actual value of fiat currency becomes from the resources backing it. Eventually, if the gap between the actual value of the resources a country has and the value of its money grows so great that this happens:

Coin Bureau @coinbureau

When Fiat fails, people start throwing money in the street. The latest scene from Venezuela is useless paper money on the streets... #Venezuela #fiat #inflation #crypto

Is that going to happen in the United States one day? Will you need the same amount of money that is used to buy beachfront property to buy a loaf of bread? Barring a radical shift towards financial responsibility that is hard to see happening in the foreseeable future in the United States, yes, it is going to happen. Fiat is going to zero. That’s the bad news.

The good news, such as it is, is that it is likely to be a “while” before that happens. What’s a “while?” Well, I’m 51 and I think there’s a decent likelihood that it will happen in my lifetime. In fact, it’s hard to see how in the world we’re going to put off this reckoning past the middle of this century with the enormous shortfalls we’re going to have in Social Security and Medicare when we’re likely to have to pay much higher interest rates in the future to get anyone to take our debt. Just to give you an idea of how bad it’s already starting to get, here’s CNN (during a Democratic presidency!!!) admitting that things are starting to get out of control:

During fiscal 2022 alone, the federal government made $475 billion in net interest payments, up from $352 billion the prior year, according to the US Treasury Department. For context, that’s more than the government spent on veterans’ benefits and transportation – combined. And it’s nearly as much as the $677 billion spent on education.

By 2025 or 2026, the United States may hit a bleak milestone: Federal interest payments could exceed the country’s entire defense budget, according to Moody’s Analytics. For context, defense spending stood at $767 billion in fiscal 2022.

...“Regardless of who wins the midterms or in 2024, there are really difficult decisions that will have to be made. This is really going to handcuff them,” said Moody’s Analytics economist Dan White.

Is this a fixable problem? Absolutely. We’d just need to dramatically cut Social Security, Medicare, and Defense spending while dramatically contracting the money supply, which would probably throw the economy and stock market into a depression for, who knows, 5 years? 10 years? 15 years maybe? I’m sure the American public would be willing to make that sacrifice for the good of the country, right? Oh… wait, that’s right. The second anyone tried to make the painful changes needed to genuinely fix this problem long-term, they’d be immediately voted out of office. Guess we’ll just wait until it’s way too late and we’re forced to start making those changes under duress in a futile attempt to save the country… yes, that sounds about right.

Again though, all of this is the GOOD NEWS. Because at least for the moment, there are enough other irresponsible nations out there that the United States looks like a “safe” place to park your money. Which is kind of like trying to stay in the shallowest part of the shark tank, rather than swimming in the alligator pen. Eventually, you’re going to get eaten either way. Still, is the dollar going to zero next year or by, let’s say 2030? Probably not. However, it is going to get there and when it does, you’re going to see widespread violence, crime, disorder, and chaos. At this point, Americans just seem to be hoping that their kids will be the ones dealing with this fully predictable nightmare after they’re dead. It feels like we should be aiming a lot higher than that in a country like America, but unless there’s a sea change in attitudes, all we can try to do is cross our fingers and prepare the best we can for an economic apocalypse so severe that no one alive can truly be confident that they can handle it.   

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