Why currencies are doomed
The 54-year fiat currency era is coming to an end. Even their users will lose faith in them rendering them valueless, which is why valued in gold they are beginning to collapse.
Alasdair Macleod
It is the changing value of a currency that matters.
And a decline in a currency’s value, largely due to loss of faith in it is reflected in higher prices for gold, and all non-monetary goods.
The causes of rising prices are poorly understood.
Modern economic theories are badly disingenuous in this respect, leading to an almost total lack of awareness about the economic and monetary dangers we face, even among economists.
These dreadful errors are now hastening the demise of today’s fiat currency system.
A little theory
Carl Menger in the 1870s was the first economist to properly explain the subjective price theory with which we are familiar with today.
Put simply, in any transaction there is a subjective and objective value.
The goods or services being exchanged are the subject of negotiation between buyer and seller: in other words, their value is a matter of opinion or is the subjective element in a transaction.
Meanwhile, the currency in which they are priced is seen to have the same value by both buyer and seller — that’s the objective value.
It can only be this way.
After all, to be the objective value is the function of a medium of exchange.
But it colours our view.
When we see prices rising, we naturally think that goods and services are getting more expensive, because in transactions they are always subjective.
It doesn’t occur to us that it is the currency losing value as a medium of exchange.
The error is not confined to the man in the street; it is also common to economists who invariably describe inflation as a rise in prices, not a debasement of the currency.
Grasp this nettle and a new world of understanding opens up to us.
When central banks such as the Peoples Bank of China are buying gold, that is how it is seen by commentators.
But if you understand that they are selling dollars it puts a new complexion on the PBOC’s actions.
For the PBOC, gold is the objective value and the dollar, which is a foreign currency to it is the subjective.
This is why the correct way to look at it from the PBOC’s viewpoint is that it is the dollar losing value, confirmed in the following chart:
Now we can understand what the PBOC sees.
Officials in charge of the official reserves will have asked themselves, “when is this going to stop?”.
Clearly, there is no end to it and furthermore the rate of decline is accelerating.
It is a view shared by increasing numbers of central banks, which is why as a cohort they have been selling dollars and other fiat currencies for gold for a number of years.
The decline in fiat currency values is becoming more widely noted, and though there are no statistics available sovereign wealth funds are reportedly following suit.
The decline in value of fiat currencies relative to gold is no surprise to Carl Menger’s followers in the Austrian school of economics.
Indeed, Ludwig von Mises battled to explain to Austria’s politicians how to stop the slide in the Austrian crown’s value following WW1 and the breakup of the Austro-Hungarian empire.
Eventually they took his advice, saving the crown from a complete collapse in its value in early 1923, a fate that befell Germany’s reichsmark later that year.
But not before Austria’s crown had lost almost all of its purchasing power.
With respect to currencies, the ultimate objective value is gold.
The Roman’s first defined it in law through the findings of three jurors — Gaius, Ulpian, and Paulus — in the second and third centuries AD, subsequently incorporated in Justinian’s Pandects in 530 AD and for the Eastern Empire in the Basilica in 892 AD.
These rulings are the basis of the common laws with respect to money and credit in the Roman Empire’s successor nations, which then colonised most of the world.
A nation which detaches its currency from gold frees its value to decline relative to it.
All fiscal discipline is removed, leading to its inevitable and eventual destruction.
In the dollar’s case, the decline from 1971 when under the Bretton Woods Agreement it was fixed at $35 to the ounce has been over 99%.
And as the chart above shows, the decline is now accelerating.
It is not hard to understand why.
Government spending in all G7 nations has spiralled out of control, and the depressive consequences of social democracy and government intervention increasingly suppress economic activity.
Government debt is now entrapped in a doom loop of unaffordable borrowing costs leading to yet higher borrowing costs.
The finances of the US government, the EU, Britain, and Japan are teetering on the edge of collapse.
Their central banks are all technically insolvent, being deeply in negative equity.
Yet they are expected to provide the currency backing for government spending, which is expected to continue rising unabated.
They have already fuelled an unsustainable credit bubble, which has inflated asset values and can only result in a collapse of value, just as all credit bubbles have in the past.
Almost certainly, the trigger for the collapse will be the next rise in bond yields.
The valuation between bonds and equities is already more stretched than it has ever been, illustrated in the next chart:
It is over twice as extreme today than at the time of the dot-com bubble (both arrowed).
It is partly fuelled by excessive margin debt, which has increased to well over a trillion, when the norm is perhaps a fifth of that:
The implosion of this credit bubble, which is increasingly imminent, is bound to take currencies down with it as bad debt risk accelerates, and the US government attempts to stabilise both asset values and the underlying economy.
Other G7 nations face similar problems.
In the face of this ever-increasing financial commitment and declining confidence in the currency’s value, the purchasing power of the dollar and other currencies are bound to decline catastrophically.
The declines will be reflected in soaring prices.
Political priorities point to the certainty of subsidies and price controls as desperate solutions.
History and reasoned analysis tell us that these actions will makes things considerably worse, leading to starvation in the cities, further debt escalation, and yet more currency debasement.
This is what a collapse of the fiat currency system will look like.
It is a slippery slope which we are just beginning to slide down.
The only escape is to get out of credit and into real money without counterparty risk, which as the Romans discovered and legislated is metallic — principally gold.
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