Comments on: The Age of the Fiat Currency: A 38-year experiment in inflation http://www.creditwritedowns.com/2009/04/the-age-of-the-fiat-currency-a-38-year-experiment.html Finance, Economics and Markets Fri, 10 Feb 2012 00:37:00 +0000 hourly 1 By: Anonymous http://www.creditwritedowns.com/2009/04/the-age-of-the-fiat-currency-a-38-year-experiment.html#comment-58095 Anonymous Thu, 14 Jan 2010 21:36:00 +0000 http://www.creditwritedowns.com/?p=8107#comment-58095 Japan should have lowered taxes long ago. That would provide them with a better recovery than all the stimulus combined. No wait! They'd have an even bigger deficit! Well, boo hoo! What do you want? Would you like government to a) raise interest rates and cut budget or b) provide some sort of leftist job guarantee? The first might worsen the GFC, the second might lower the impact of the crisis. The point is: government spending finances private saving. It doesn't need savings to spend, doesn't need taxes to spend, and last but not least, doesn't need to issue public debt. Not for nothing, it is called 'fiat currency'. Japan should have lowered taxes long ago. That would provide them with a better recovery than all the stimulus combined. No wait! They’d have an even bigger deficit! Well, boo hoo!
What do you want? Would you like government to a) raise interest rates and cut budget or b) provide some sort of leftist job guarantee? The first might worsen the GFC, the second might lower the impact of the crisis.
The point is: government spending finances private saving. It doesn’t need savings to spend, doesn’t need taxes to spend, and last but not least, doesn’t need to issue public debt. Not for nothing, it is called ‘fiat currency’.

]]> By: Stephen http://www.creditwritedowns.com/2009/04/the-age-of-the-fiat-currency-a-38-year-experiment.html#comment-58093 Stephen Thu, 14 Jan 2010 21:10:00 +0000 http://www.creditwritedowns.com/?p=8107#comment-58093 Yes - very interesting. Question - does one think that the human race in general, broadly speaking would ever advanced as far as we have in terms of business, personal or otherwise without the credit we have received? and without this credit would we still be writing with the chisil and marking the stone in Egypt ? How would have gold fitted in then? Yes – very interesting. Question – does one think that the human race in general, broadly speaking would ever advanced as far as we have in terms of business, personal or otherwise without the credit we have received? and without this credit would we still be writing with the chisil and marking the stone in Egypt ? How would have gold fitted in then?

]]> By: Anonymous http://www.creditwritedowns.com/2009/04/the-age-of-the-fiat-currency-a-38-year-experiment.html#comment-58091 Anonymous Thu, 14 Jan 2010 17:56:00 +0000 http://www.creditwritedowns.com/?p=8107#comment-58091 Whether the US dollar remains the top dog is irrelevant. Many countries are over-leveraged, and producing inflation. The real value all currencies will depreciate over time compared to all goods. Creating inflation only makes things worse for the real economy. Government debt spending removes credit from business. Low interest rates means low yielding dollar, and loose credit will likely be used for less productive activity. Loose credit expands consumer demand, which is the point of it. It's the perpetual repetition of insanity. Whether the US dollar remains the top dog is irrelevant. Many countries are over-leveraged, and producing inflation. The real value all currencies will depreciate over time compared to all goods. Creating inflation only makes things worse for the real economy. Government debt spending removes credit from business. Low interest rates means low yielding dollar, and loose credit will likely be used for less productive activity. Loose credit expands consumer demand, which is the point of it. It’s the perpetual repetition of insanity.

]]> By: Nick Field http://www.creditwritedowns.com/2009/04/the-age-of-the-fiat-currency-a-38-year-experiment.html#comment-56305 Nick Field Wed, 29 Apr 2009 20:13:00 +0000 http://www.creditwritedowns.com/?p=8107#comment-56305 This article is right on. For a graphic illustration of this point, you can see the real impact of expansionary monetary policy in the inflation rate of the dollar -V- gold since the US left the gold standard. See the current gold dollar price and relative inflation rate of paper dollars at : www.brettonwoodsdollar.com Cheerio, N This article is right on. For a graphic illustration of this point, you can see the real impact of expansionary monetary policy in the inflation rate of the dollar -V- gold since the US left the gold standard. See the current gold dollar price and relative inflation rate of paper dollars at :

http://www.brettonwoodsdollar.com

Cheerio,

N

]]> By: Attitude_Check http://www.creditwritedowns.com/2009/04/the-age-of-the-fiat-currency-a-38-year-experiment.html#comment-56297 Attitude_Check Tue, 28 Apr 2009 20:07:00 +0000 http://www.creditwritedowns.com/?p=8107#comment-56297 I've recently come to the conclusion we will have (and are beginning to have) SIMULTANEOUS asset deflation with consumable/commodity inflation. We actually had the inverse for over a decade (we erroneously attributed asset inflation to economic growth however - doooh!!). We will now have the reverse to rebalence the economic value of production and consuming parts of the world economy. Of course we will almost certainly overcorrect in the process. I'm not sure what the best "inflation hedge" will be since typically the use of tangible assets will be deflating. Maybe the best hedge will be in consumable(s) production (e.g. food/farms, necessity products, transportation, green (e.g. domestrically sourced) energy, etc.) I’ve recently come to the conclusion we will have (and are beginning to have) SIMULTANEOUS asset deflation with consumable/commodity inflation. We actually had the inverse for over a decade (we erroneously attributed asset inflation to economic growth however – doooh!!). We will now have the reverse to rebalence the economic value of production and consuming parts of the world economy. Of course we will almost certainly overcorrect in the process.

I’m not sure what the best “inflation hedge” will be since typically the use of tangible assets will be deflating. Maybe the best hedge will be in consumable(s) production (e.g. food/farms, necessity products, transportation, green (e.g. domestrically sourced) energy, etc.)

]]> By: Stevie b. http://www.creditwritedowns.com/2009/04/the-age-of-the-fiat-currency-a-38-year-experiment.html#comment-56291 Stevie b. Tue, 28 Apr 2009 06:28:00 +0000 http://www.creditwritedowns.com/?p=8107#comment-56291 @ Rob Parenteau - re the challenges you mention. Completely agree with your question as to which dummies (apart from C.Bs) are actually going to buy any of this Govmt. stuff, especially notes and bonds. I like your ideas for investment and I like your thought-provoking idea of an inflationary depression - i.e. I don't like the sound of it at all! You can be absolutely sure that you're missing nothing & policy-makers in particular have not thought-through the consequences of their current actions. They couldn't care less about tomorrow - they just need to get through today and will worry about tomorrow when it comes. We will see on-going, knee-jerk responses with no defined long-term strategy whatsoever. @ Rob Parenteau – re the challenges you mention. Completely agree with your question as to which dummies (apart from C.Bs) are actually going to buy any of this Govmt. stuff, especially notes and bonds. I like your ideas for investment and I like your thought-provoking idea of an inflationary depression – i.e. I don’t like the sound of it at all!

You can be absolutely sure that you’re missing nothing & policy-makers in particular have not thought-through the consequences of their current actions. They couldn’t care less about tomorrow – they just need to get through today and will worry about tomorrow when it comes. We will see on-going, knee-jerk responses with no defined long-term strategy whatsoever.

]]> By: Robert Agans http://www.creditwritedowns.com/2009/04/the-age-of-the-fiat-currency-a-38-year-experiment.html#comment-56289 Robert Agans Tue, 28 Apr 2009 03:15:00 +0000 http://www.creditwritedowns.com/?p=8107#comment-56289 Hello again Edward, I just finished reading your two posts – Fiat Currency: A 38-year Experiment, and A New World Order. I found them very interesting and informative, but I wonder if you are familiar with the way that the Bible describes the times and circumstances during this coming period of world economy and government? The foremost reference to this period can be found in the thirteenth chapter of the book of Revelation. Someone I think you would find it very interesting to talk to is Gary Kah, a man with a very similar background as yours. He has a brief description on his home page at www.garykah.org. He has written a fascinating book called En Route To Global Occupation describing his experiences and findings as a high-government liaison during the 1980s, hope you have time to examine it or contact Gary. In appreciation, Robert Agans Hello again Edward,
I just finished reading your two posts – Fiat Currency: A 38-year Experiment, and A New World Order. I found them very interesting and informative, but I wonder if you are familiar with the way that the Bible describes the times and circumstances during this coming period of world economy and government? The foremost reference to this period can be found in the thirteenth chapter of the book of Revelation.
Someone I think you would find it very interesting to talk to is Gary Kah, a man with a very similar background as yours. He has a brief description on his home page at http://www.garykah.org.
He has written a fascinating book called En Route To Global Occupation describing his experiences and findings as a high-government liaison during the 1980s, hope you have time to examine it or contact Gary.
In appreciation,
Robert Agans

]]> By: Rob Parenteau http://www.creditwritedowns.com/2009/04/the-age-of-the-fiat-currency-a-38-year-experiment.html#comment-56288 Rob Parenteau Tue, 28 Apr 2009 01:56:00 +0000 http://www.creditwritedowns.com/?p=8107#comment-56288 Edward: Probably best to remember it is not just fiat currency systems that can end in disaster. A gold standard was in place going into the Great Depression, and the first countries that came off of it recovered better than those who remained on it. It is not just fiat currency systems that fail, in other words - commodity currency systems also have a way of derailing. Barry Eichengreen has done some work on this, but he is not the only one. http://www.econ.berkeley.edu/~eichengr/research/risefall.pdf Also, there are competing renditions of the history of money and the basis of fiat money which may be of interest. Consider the possibility that fiat currency is "backed" not by some amorphous full faith and credit of the government, but rather by the capacity of the state to impose a liability on its citizens, otherwise known as a tax, and to define what is required to extinguish that liability. http://www.cfeps.org/pubs/wp-pdf/WP45-Tymoigne-Wray.pdf Finally, seems to me we get into some challenges long before fiscal and monetary stimulus brings any kind of final product price inflation roaring back. With goverment bond yields pulled down to historical lows by zero nominal policy rates and quantitative easing operations, what private agent is going to be willing to accumulate the huge government bond issuance a) knowing the yield on the bond will barely cover any capital loss if and when Treasury yields rise or renormalize and b) the purpose of QE is to force investors to accumulate riskier assets by trashing cash yields and suppressing Treasury, MBS, and even some higher rated corporate debt yields? In other words, if QE is to be successful, government bonds are unlikely to be the asset of choice. Plus, few pension funds or baby boomer households are going to find a 2.75% yield on 10 year US gets them where they need to go after suffering the largest wealth loss since the Great Depression. Central banks may end up being the key (only?) bidders at the government bond auctions. As their balance sheets balloon with government bond acquisitions, you may get more investors putting on inflation hedges by accumulating long energy, precious metal, industrial metal, and ag or ag land positions. As those prices rise on stronger investor demand, not stronger end user demand, you introduce adverse shocks to supply curves, as these are generally inputs to final goods production. You also put up the price of essential items like food and energy for consumers. Hard to see how either of these side effects will enhance economic growth. More like a stagflation dynamic, or in the extreme, an almost unthinkable and certainly mindboggling inflationary depression environment. Not sure policy makers or professional investors have thought all the way through this, but maybe I am missing something. cheers, Rob Parenteau, CFA MacroStrategy Edge Richebacher Letter author Edward:

Probably best to remember it is not just fiat currency systems that can end in disaster. A gold standard was in place going into the Great Depression, and the first countries that came off of it recovered better than those who remained on it. It is not just fiat currency systems that fail, in other words – commodity currency systems also have a way of derailing. Barry Eichengreen has done some work on this, but he is not the only one.

http://www.econ.berkeley.edu/~eichengr/research/risefall.pdf

Also, there are competing renditions of the history of money and the basis of fiat money which may be of interest. Consider the possibility that fiat currency is “backed” not by some amorphous full faith and credit of the government, but rather by the capacity of the state to impose a liability on its citizens, otherwise known as a tax, and to define what is required to extinguish that liability.

http://www.cfeps.org/pubs/wp-pdf/WP45-Tymoigne-Wray.pdf

Finally, seems to me we get into some challenges long before fiscal and monetary stimulus brings any kind of final product price inflation roaring back. With goverment bond yields pulled down to historical lows by zero nominal policy rates and quantitative easing operations, what private agent is going to be willing to accumulate the huge government bond issuance a) knowing the yield on the bond will barely cover any capital loss if and when Treasury yields rise or renormalize and b) the purpose of QE is to force investors to accumulate riskier assets by trashing cash yields and suppressing Treasury, MBS, and even some higher rated corporate debt yields? In other words, if QE is to be successful, government bonds are unlikely to be the asset of choice. Plus, few pension funds or baby boomer households are going to find a 2.75% yield on 10 year US gets them where they need to go after suffering the largest wealth loss since the Great Depression.

Central banks may end up being the key (only?) bidders at the government bond auctions. As their balance sheets balloon with government bond acquisitions, you may get more investors putting on inflation hedges by accumulating long energy, precious metal, industrial metal, and ag or ag land positions. As those prices rise on stronger investor demand, not stronger end user demand, you introduce adverse shocks to supply curves, as these are generally inputs to final goods production. You also put up the price of essential items like food and energy for consumers. Hard to see how either of these side effects will enhance economic growth. More like a stagflation dynamic, or in the extreme, an almost unthinkable and certainly mindboggling inflationary depression environment.

Not sure policy makers or professional investors have thought all the way through this, but maybe I am missing something.

cheers,

Rob Parenteau, CFA
MacroStrategy Edge
Richebacher Letter author

]]> By: Edward Harrison http://www.creditwritedowns.com/2009/04/the-age-of-the-fiat-currency-a-38-year-experiment.html#comment-56278 Edward Harrison Mon, 27 Apr 2009 14:32:00 +0000 http://www.creditwritedowns.com/?p=8107#comment-56278 Stevie, I am not convinced the dollar will be top dog either. I tend to see it as a weak currency longer term. Over the medium-term, yes, the dollar could rally and stay stronger. However, over a longer time horizon, the structural weaknesses will become more important - and that's as true for the Pound as it is for the dollar. I actually would have thought the dollar would have declined by now. However, its resiliency is testament to its preeminent position as a reserve currency and the U.S.'s dominant economic role. Stevie, I am not convinced the dollar will be top dog either. I tend to see it as a weak currency longer term. Over the medium-term, yes, the dollar could rally and stay stronger. However, over a longer time horizon, the structural weaknesses will become more important – and that’s as true for the Pound as it is for the dollar.

I actually would have thought the dollar would have declined by now. However, its resiliency is testament to its preeminent position as a reserve currency and the U.S.’s dominant economic role.

]]> By: Stevie b. http://www.creditwritedowns.com/2009/04/the-age-of-the-fiat-currency-a-38-year-experiment.html#comment-56277 Stevie b. Mon, 27 Apr 2009 13:59:00 +0000 http://www.creditwritedowns.com/?p=8107#comment-56277 Ed. Great post - thanks! Seems to echo the discussion we had with hbl on your post about Stephen Roach here: http://www.creditwritedowns.com/2009/03/stephen-roach-is-still-bearish-no-recovery-until-2010.html However, I'm unconvinced that the dollar is somehow going to emerge as some sort of top dog, thriving in a vacuum & by some sort of default whilst the rest of the world goes to hell in a handbasket. The dollar could be relatively strong, but eventually it wouldn't mean much if prices were going up just a tad less in the U.S. than elsewhere - and surely this will be the ultimate end-result when interest rate rises (whichever year they come about) will perhaps just be a token gesture in a futile attempt to pretend to be dealing with the rampant global inflation that will occur - just like they're inadequately pretending to deal with deflation now (so far anyway...) As we've also discussed before here: http://www.creditwritedowns.com/2008/04/new-world-order.html we do need some sort of clear, fresh parameters for new currencies, but my guess is that before this happens, the current system will be destroyed, including of course all remaining savings. I selfishly hope they can just stretch it all out long enough for me to survive financially til the end of my days, but suspect that one ordinary day in the future and maybe sooner than I'd like, something trivial will occur that will be the last straw for the camel's back etc, and the whole thing will just blow-up in our faces. Ed. Great post – thanks!

Seems to echo the discussion we had with hbl on your post about Stephen Roach here:

http://www.creditwritedowns.com/2009/03/stephen-roach-is-still-bearish-no-recovery-until-2010.html

However, I’m unconvinced that the dollar is somehow going to emerge as some sort of top dog, thriving in a vacuum & by some sort of default whilst the rest of the world goes to hell in a handbasket. The dollar could be relatively strong, but eventually it wouldn’t mean much if prices were going up just a tad less in the U.S. than elsewhere – and surely this will be the ultimate end-result when interest rate rises (whichever year they come about) will perhaps just be a token gesture in a futile attempt to pretend to be dealing with the rampant global inflation that will occur – just like they’re inadequately pretending to deal with deflation now (so far anyway…)

As we’ve also discussed before here:

http://www.creditwritedowns.com/2008/04/new-world-order.html

we do need some sort of clear, fresh parameters for new currencies, but my guess is that before this happens, the current system will be destroyed, including of course all remaining savings. I selfishly hope they can just stretch it all out long enough for me to survive financially til the end of my days, but suspect that one ordinary day in the future and maybe sooner than I’d like, something trivial will occur that will be the last straw for the camel’s back etc, and the whole thing will just blow-up in our faces.

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