According to Alasdair Macleod, we are not that way from a hyperinflationary collapse of fiat currencies. From Macleod at goldmoney.com:
Note: all references to inflation are of the quantity of money and not to the effect on prices unless otherwise indicated.
In last week’s article I showed why empirical evidence of fiat money collapses are relevant to monetary conditions today. In this article I explain why the purchasing power of the dollar is hostage to foreign sellers, and that if the Fed continues with current monetary policies the dollar will follow the same fate as John Law’s livre in 1720. As always in these situations, there is little public understanding of money and the realisation that monetary policy is designed to tax people for the benefit of their government will come as an unpleasant shock. The speed at which state money then collapses in its utility will be swift. This article concentrates on the US dollar, central to other fiat currencies, and where the monetary and financial imbalances are greatest.
In last week’s Goldmoney Insight, Lessons on inflation from the past, I described how there were certain characteristics of Germany’s 1914-23 inflation that collapsed the paper mark which are relevant to our current situation. I drew a parallel between John Law’s inflation and his Mississippi bubble in 1715-20 and the Federal Reserve’s policy of inflating the money supply to sustain a bubble in financial assets today. Law’s bubble popped and resulted in the destruction of his currency and the Fed is pursuing the same policies on the grandest of scales. The contemporary inflations of all the major state-issued currencies will similarly risk a collapse in their purchasing powers, and rapidly at that.
The purpose of monetary inflation is always stated by central banks as being to support the economy consistent with maximum employment and a price inflation target of two per cent. The real purpose is to fund government deficits, which are rising partly due to higher future welfare liabilities becoming current and partly due to the political class finding new reasons to spend money. Underlying this profligacy has been unsustainable tax burdens on underperforming economies. And finally, the coup de grace has been administered by the covid-19 shutdowns.
If humanity is ever to be free, money must be private, with government having no role in it at all. From Thorsten Polleit at mises.org:
The title of this article epitomizes what the Austrian economist Ludwig von Mises (1881–1973) called the “sound money principle.” As Mises put it:
The sound-money principle has two aspects. It is affirmative in approving the market’s choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system.
It is impossible to grasp the meaning of the idea of sound money if one does not realise that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of right.
Mises tells us that sound money is an indispensable line of defense of people’s liberties against the encroachment on the part of the state and that sound money is a kind of money that is not dictated by the state but is chosen by the people in the free marketplace. The world we find ourselves in is a rather different place. Our monies—be it the US dollar, the euro, the Chinese renminbi, the yen, or the Swiss franc—represent fiat currencies, monopolized by the state.
Fiat money is economically and socially destructive—with far-reaching and seriously harmful economic and societal consequences, effects that extend beyond what most people would imagine. Fiat money is inflationary; it benefits a few at the expense of many others; it causes boom-and-bust cycles; it leads to overindebtedness; it corrupts society’s morals; and it paves the way toward the almighty, all-powerful state, toward tyranny.
The world may be only months away from the collapse of fiat currencies, led by the dollar. From Alasdair Macleod at goldmoney.com:
Dollar-denominated financial markets appeared to suffer a dramatic change on or about the 23 March. This article examines the possibility that it marks the beginning of the end for the Fed’s dollar.
At this stage of an evolving economic and financial crisis, such thoughts are necessarily speculative. But an imminent banking crisis is now a near certainty, with most global systemically important banks in a weaker position than at the time of the Lehman crisis. US markets appear oblivious to this risk, though the ratings of G-SIBs in other jurisdictions do reflect specific banking risks rather than a systemic one at this stage.
A banking collapse will be a game-changer for financial markets, and we should then worry that the Fed has bound the dollar’s future to their fortunes.
The dollar could fail completely by the end of this year. Against that possibility a reset might be implemented, perhaps by reintroducing the greenback, which is not the same as the Fed’s dollar. Any reset is likely to fail unless the US Government desists from inflationary financing, which requires a radically changed mindset, even harder to imagine in a presidential election year.
Alasdair Macleod, the best monetary economist on the internet and probably on the planet, writes long articles that are well worth taking the time to read. In this one he explains how currencies collapse: slowly, and then very fast. From Macleod at goldmoney.com:
An unexpected destruction of fiat currency has been advanced by the monetary and fiscal response to the coronavirus. Financial markets have yet to discount the possibility of such an outcome, but in the coming months they are likely to awaken to this danger.
The question arises as to what will replace fiat currencies. In the past the answer has always been gold but today there are cryptocurrencies as well, whose enthusiasts are more aware than most of fiat money’s failings.
This article describes the basics about money, what it is and the role it plays in order to understand what will be required by the eventual replacement for fiat. It concludes that gold will return as the world’s medium of exchange, and secure cryptocurrencies, unable to provide the scalability and stability of value required of a medium of exchange will be priced in gold after the demise of fiat. But then the rationale for them will be gone, and with it their function as a store of value.
The destruction of fiat money
These are strange times. Circumstances are forcing governments to destroy their money by debasing it to pay for their obligations, real and imagined. If central bankers had a grasp of what money really is, they wouldn’t have got into a position where they are forced to use their seigniorage to destroy it. They are so ignorant about catallactics, the fundamentals behind economics, that they cannot see they are destroying the means of exchange they have imposed upon their citizens with far worse consequences than the abandonment of the evils they are trying to defray.[i]
The best monetary economist on the internet expounds on fiat currencies’ and gold’s prospects for the coming year. From Alasdair Macleod at goldmoney.com:
This article is an overview of the economic conditions that will drive the gold price in 2020 and beyond. The turn of the credit cycle, the effect on government deficits and how they are to be financed are addressed.
In the absence of foreign demand for new US Treasuries and of a rise in the savings rate the US budget deficit can only be financed by monetary inflation. This is bound to lead to higher bond yields as the dollar’s falling purchasing power accelerates due to the sheer quantity of new dollars entering circulation. The relationship between rising bond yields and the gold price is also discussed.
It may turn out that the recent extraordinary events on Comex, with the expansion of open interest failing to suppress the gold price, are an early recognition in some quarters of the US Government’s debt trap.
The strains leading to a crisis for fiat currencies are emerging into plain sight.
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Tagged Currency depreciation, Fiat currencies, Gold, Government debt