An idea emerged for me recently from the collision of themes in two books: This Time is Different by Reinhart and Rogoff, and When Money Dies by Adam Fergusson. I am afraid this will come across as a gold bug rant, but it is not about gold, more about humans and human systems.
Table 1.1 in This Time is Different documents different financial crisis types by time period going as far back as the year 1258. In every kind of crisis, fiat money proves far more disastrous than metal backed money. Here are the highlights showing the annual maximum % of currency change:
Inflation
1500-1913
173%
Inflation
1914-2008
9.73 E+26% (Hungary 1946)
Currency Debasement
1258-1913
-56.8%
Currency Debasement
1914-2008
-1.0 E+11% (Zimbabwe 2008)
The message of the table is clear. Before the rise of fiat currencies, financial crisis, inflation, and currency debasement occurred, but were much less severe. Currency debasement before paper currencies required physical debasement of metallic coins. That is both a slow and difficult process for kings, queens, and governments to perform. Hyperinflation never happened when physical metal was used as money. It is just not feasible. Modern debasement is often performed by simply lopping zeros from the end of currencies.
Human Flaws
Humans and human systems are flawed. Fiat currencies can work in theory, but where there is potential for abuse, that potential will be exercised. For a fiat currency to work over time, the people running the system must execute it perfectly. With a metal backed currency, the potential for abuse and therefore the actual abuse is less severe. That is one of the lessons from history in This Time is Different.
Most financial crisis have been caused by over expansion of credit, political crisis, war, or some combination. None of those goes away with a metal backed currency, but the aftermath of each is almost guaranteed to be less traumatic.
Wow, you have such great content on here and nobody posts comments. I would imagine that not a lot of people know how to really discuss these types of contents (as it is paradigm shifting).
ReplyDeleteI googled "DEBT vs GOLD" and found your R graph. I laughed, as I used R in my multiple regression stats class in college, and the correlation of .922 is unheard of. Usually, my teacher told me if numbers are that good they must be using phony data... I guess this data is just that strong....
I linked your picture as it was a great reference on my latest post in which I talk about the Dollar Index. I would appreciate your insight if I am misinformed on any subjects or if there is something especially juicy that I am missing out on. I know there is so much you can say about the dollar, but that is just it... its not the dollar.
Bottom line is we have had a flawed currency from 1971, as there was no way this can sustain itself....
Fantastic work, I will be linking your blog in the near future as I especially like your content.
Please let me know what you think about my article @
http://thehardrightedge.com/2011/01/21/the-dollar-index/
-
Cheers,
Scott J
Scott,
ReplyDeleteGlad you enjoy the content. You don't see a lot of comments because there aren't many readers :)
Your dollar index article looks like covers all the basic facts. Currencies are one piece of a large interlocking puzzle. The grand experiment of pure global fiat money started in 1971 has never been tried in history, and is looking a little shaky at the moment.
If the system does fall apart, the US has more gold than any other single country to reboot.
Hey Mate I've been following a couple of your blogs and they're brilliant. Much better than mine hah!
ReplyDeleteYour last comment though about gold. Correct me if I'm wrong but doesn't the US only have about $300 billion in gold reserves? Assuming its all still there?
And if you look at the amount of currency in existance today, to go back to a gold standard, wouldn't we have to revalue gold to $15,000 - $20,000 per ounce right now to cover all the additional currency that has been created since 1971?
Keep up the good work!
Cheers
Tormented,
ReplyDeleteThe US officially holds 8,133 tons of gold reserves. At today's market price, that is roughly $352 billion. With a 100% reserve ratio to the M1 money supply, gold would need to be priced at $7,150 and to cover the M2 money supply at $33,866.
However, I think the original Federal Reserve Act set the gold reserve ratio at 40%, and in that case, a price of $2,860 would cover M1.
Another twist is do you include Treasury debt obligations in the calculation? One way of looking at Treasury bonds is as dollars that mature and become part of the money supply at some future date. Depending on how you want to count the money supply, the number would range from big to very big!
Hey Tekewin cheers for the reply and some great research there. By the way I'm heavily invested in gold and silver mining stocks, and short US Treasuries. That there tells me that gold should be at least $2,860 an ounce right now and more than likely should be much much higher!
ReplyDelete