Fiat Currency Should NOT Be Blind Belief
Governments worldwide are creating currency, “Fiat money”, out of thin air to pay the bills; which historically leads to inflation.
In a recent interview Urs Vrijhof-Droese explained:
“Worldwide government spending programs,…pushed inflation even higher and is taking a toll.
…. In the long-run I believe, the EU and US government spending behavior will have a severe impact on their credibility, affecting the value of their currencies.
Accordingly, to protect their competitiveness, they might be forced at some point to look for alternative currencies that reveal more stability.“
Wikipedia explains:
“Fiat money is a type of currency that is not backed by a commodity, such as gold or silver.
It is typically designated by the issuing government to be legal tender. …. Fiat money was quite rare until the 20th century. ….
Fiat money generally does not have intrinsic value and does not have use value.
It has value only because the individuals who use it, as a unit of account – or, in the case of currency, a medium of exchange – agree on its value. They trust that it will be accepted by merchants and other people.“
Trust – Belief???
Adam Smith tells us, “All money is a matter of belief.” Today, no country is on the gold standard; all currencies are decreed/authorized by government regulation. All currencies today are nothing more than political promises.
Gold is considered “real money”, yet it generally produces no income. I hold gold as insurance protection against government-caused, high inflation of the USD.
| Gold is of great value when a major event takes place and the world dumps fiat money, scrambling for gold. In the meantime, it sits patiently waiting for its calling. |
Alternative currencies?
We once sold a home to a businessman from Argentina who explained inflation was destroying his wealth. As quickly as he could, he was dumping Argentine pesos for assets denominated in US dollars.
Currency diversification is considered a good inflation hedge. Unlike gold, trading one fiat currency for another is betting on/against the government of another nation. In essence, our Argentine buyer, dumping his Argentine pesos for dollars, was saying he had more faith in the US government than the government of his homeland.
Friend Frank Trotter, who has a home in Argentina, explains:
“In Argentina the USD is king. Prices in USD are fairly stable but the peso is decimated – down 97% since we started going there. When we started going to Argentina the peso was 8:1 USD. Now the street rate is near 300:1. Do the sad math. It’s funny how we want to hedge against the USD while others use the USD for stability.”
Today, the US is on the brink of what could turn into a catastrophe; we could easily go the way of Argentina.
Friend Chuck Butler is a recognized expert in world currency markets. I went to him for some help.
DENNIS: Chuck, once again, thank you for your time in helping our readers. I need your thoughts on something that concerns me.
We see what is going on in the US and the world, governments creating money out of nothing, no gold-backed currencies left. Why does a once rich country like Argentina go from one of the wealthiest, most prosperous countries in the world, to one where the rest of the world has zero faith in the value of their currency?
So here goes.
While I don’t pretend to be an expert on US history, I did stay awake in class.
In the early days, government taxes covered expenses, the founding fathers did not want to create a lot of government debt. The US borrowed to fight wars, primarily by borrowing from citizens (I remember War Bonds), and paid off those debts over time.
The gold standard restricted government spending. Nixon surprised the world when he proclaimed: (Emphasis mine)
“I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except…(when) in the interest of monetary stability and in the best interests of the United States.
Now,…what does it mean for you? Let me lay to rest the bugaboo of what is called devaluation. …. If you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today. The effect of this action, in other words, will be to stabilize the dollar.”
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Temporarily suspend? Bugaboo of devaluation? Stabilize the dollar?
There’s a reason he was called, “Tricky Dicky!” Since his “temporary suspension,” the politicians have run our country into historic debt, and the dollar is not stabilized.
| “There are two ways to conquer and enslave a country. One is by the sword. The other is by debt.”
— John Adams |
As always, politicos become more concerned about their political power than the citizens. They make expensive campaign promises but don’t have the courage to raise taxes to pay for them. They look for other sources for money; generally borrowing.
While government deficit spending grew after the Nixon surprise, inflation stayed low. Citizens and governments were willing to lend us money, believing the USD was King.
Since the 2008 bank bailout, government spending and borrowing continues to skyrocket. It was reported our national debt has increased by $1 trillion in the five weeks since the recent debt ceiling increase.
Lenders stopped lending at interest rates the government wants to pay. To make up the shortfall, the Federal Reserve created money out of thin air (gold out of straw?), and that became the tipping point. For each new unit of currency, they devalued the existing currency held by the nation.
Here is the current tally:
Call this what it is – money the political class has created out of nothing, because they don’t have the courage to cut spending or raise taxes.
Chuck, whether it is wars, welfare, social programs, environmental issues – makes little difference. Governments can spend wherever their citizens wish, as long as they have the money to pay for it.
If the politicians had the courage to raise taxes, borrow money at a free market rate, and/or cut spending, wouldn’t inflation still be under control?
Am I missing something?
CHUCK: No, Dennis, you’re not missing anything here…
I was taught in Economics class that Money Supply equals inflation… The U.S. Gov’t, and others worldwide, increased Money Supply by Trillions and then sat back and watched inflation grow because…. They need inflation to deal with their sins of the past, I mean, debt… As you point out, the spending shows no signs of slowing down.
DENNIS: While the Fed is raising rates, and says it will slowly roll the money off the books, aren’t they really taking their monetized debt, trying to get others to borrow it with real money?
While that may slow the rate of inflation, will prices ever come back down; particularly groceries, medical costs; things which we buy regularly?
CHUCK: Dennis, I really don’t think that prices will come back down, maybe a little, but not much. Just look at the grocery bills from 30 years ago, compared to now, and you can see that once prices went up, they never came back down… Sure, Housing prices have shown that they can go up and down depending on supply and interest rates, but not the stuff that we buy and use every day in our lives… They simply do not come back down.
Even if the Fed gets inflation down to zero, that is the inflation rate. They are trying to slow the rate of inflation, but don’t forget their stated goal is 2%. Some prices may come down, but the Fed is just trying to slow down the pace of increases.
And there is no guarantee they won’t crumble under pressure and start monetizing debt again, causing inflation.
DENNIS: Wow! If the Fed caves under pressure and starts monetizing more debt, inflation is likely to be even worse.
How do we as a nation fix this before we become Argentina, and, in addition to owning gold, how do we, as individuals, protect ourselves like the Argentine businessman who bought my home in Tampa?
CHUCK: Congress must stop deficit spending; just STOP! A Balanced Budget would do wonders for this mess we’re in, not just today, a responsible Balanced Budget from now till the end of time! That means adult, hard choices; what real leaders do.
When the Gov’t deficit spends, that means new currency has to be issued, and this is an increase in Money Supply, plain and simple… As my economy professor taught me years ago!
I’ve seen estimates that, should the government just cut spending back to 2019 levels, which is a lot – taxes have gone up and we could have the budget under control in a few short years. Dennis, our elected representatives need to be working together. I’ve never seen our government so polarized…
One way besides the metals of Gold & Silver to reduce the deadly effects of inflation on your investment portfolio is with foreign currencies… Not just any foreign currency, but ones that meet your criteria and stick with them!
Dennis here. Chuck and I discussed this for quite some time and decided to split the interview in two parts. We felt readers need to understand what is causing inflation.
Fiat currency is not blind belief, we must protect ourselves. Stay tuned next week as Chuck shares his thoughts on how we can hedge our currency bets safely.
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On The Lighter Side
Grandson Brock went swimming and commented how hot the water was (90 degrees). For much of his visit, we did our best to stay out of the heat.
I read that Phoenix just set a record (for large metropolitan areas) for consecutive days over 110 degrees and 90-degree plus nights.
The article mentioned Death Valley, CA once had an 84-day streak of 110-degree temperatures and a 47-day streak of nights where temperatures were over 90 degrees.
Records work both ways. As a youngster, I managed to get frostbite on my ear due to record-setting cold temperatures in Chicago. In a cold wind it still hurts.
Our Phoenix weather was forecast for a high of 116 and a low of 91. We showed Brock, all we had to do was take a short drive up to Flagstaff (around 7,000 feet), and the numbers were 92 for a high and 57 at night.
Whether it is Eskimos living in igloos made of frozen ice or Indians living in the extreme heat of the desert, the human species adapts and survives, and is likely to do so for centuries more. Modern-day heating and air conditioning certainly makes it more tolerable.
Quote of the Week….
“The only way government bureaucrats know of keeping prosperity going is to inflate some more – to increase the deficit or to pump more money into the system.”
— Henry Hazlitt
And Finally….
Jo sent a video commenting, “I had no idea”. I have not verified any, but wrote down some which are pretty interesting:
- Fire doesn’t have a shadow
- Like humans, cows have regional accents
- Blue whales can eat half a million calories in a single mouthful
- In the US there are more public libraries than McDonald’s
- Lemons float in water, limes sink
- Placing ripe bananas next to fruit will ripen them
- Real diamonds don’t show up on an x-ray machine
- Every two minutes we take more pictures than all of humanity in the 19th century
- Alaska is the only state that can be typed with one row on your keyboard
(bet you tried this like I did!)
When they zapped my tongue cancer, they also got my salivary glands. The next one sounds very believable to me:
- Your mouth produces about 1 liter if saliva every day
Until next time…
Dennis Miller
“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken
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