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Everything is a 'fiat' currency

RobertBrusca's picture




 

There seems to be a lot of interest in currency regimes with the failings in EMU and concerns about what might happen there next. The US and the dollar have become part of this dialogue as the dollar has over the years lost value and gold bugs are quick to propose gold as an alternative that would be better at preserving capital.

I don’t think there is really much doubt about that.

On a gold standard a country commits itself to fix its currency value to a certain price of gold. But such a link has its costs as a peg to gold eliminates flexibility. And, I know that to many that is a great benefit or even the point of having a gold-based system. But even a gold-based system uses currency, as we did under Bretton Woods. Gold cannot be the coin of the realm. It may back the coin of the realm but gold is not used in transactions.

When gold and other precious metal coins did circulate as ‘money’ there was always someone making an attempt to undermine the integrity of the circulating coin. Some people would shave them others might clip them, depriving them of intrinsic value. In today’s world we have heard of gold bars that are filled with titanium, another form of debasement.

Gresham’s Law describes the result of these sorts of antics on a precious metal circulating coin: ‘bad money drives out the good’. This is the earliest statement that I know of that referred to a phenomenon we have come to be call ‘adverse selection’. When you can’t know the value of something you are transacting for (or with) markets tend to drive the price down to its worst-case value.

So even with gold there can be problems. Gold does not circulate well. In light of this I would like to re-open the notion of what fiat currency means to make these sorts of risk more apparent. Economists refer to paper currency unbacked by a pledge to link it to another asset’s value as a fiat currency. A Fiat currency is backed by the law of the land and has no intrinsic value. This is supposed to be different from a gold backed currency or a silver backed currency and so on. But is it?

In looking at the expression I would like to focus on the fact that the fiat aspect relates to all currencies however they may be backed. Since a dollar put on the gold standard only has the implied value of gold as long as the governments stick to the gold standard gold also has a fiat element to it. . Essentially I think all currencies except those that actually circulate coinage made of precious metals are fiat currencies.

Gold bugs like to point out the fragility of the fiat currency system by pointing out that in history no fiat currency has survived (so far). I take their point. Maybe they should also take mine. It is that while many nations have been on gold standards no one in the history of the world has pegged to gold and stayed with it. No one? So does gold have any better record?

Adopting a gold backing for your currency is doing the one thing that you can be just about sure of that will come to an end. Gold standards are not flexible and they put government in straitjackets that they refuse to stay buckled into. Gold standards fail.

And as much as a gold bug might say that is why we need it, I will assert, again, the fact that its inflexibility is why it is impractical and why it is eventually rejected.

All currencies are fiat currencies in the sense that the value a currency has stems from the decision of a government to imbue that currency with certain features (a link to gold or not, for example). A nation’s money needs to fulfill the role of being a store of value, satisfying speculative demands and transaction demands. Modern fiat currencies are able to do those things.

I would urge anyone who is truly a gold bug to get off their high horse and realize that government is not in the preservation of value business. You will not replace the capriciousness of government by linking your currency to gold. When the government adopts a currency people in that country are free to invest as they like in the stocks and bonds of domestic companies that will be denominated in the currency or in the financial paper of foreign economies that will be denominated in another sort of paper. Or investors can invest in hard assets or gold.

In the end it is not a question of whether a country has preserved the value of its currency. It is whether the currency has helped to promote the business within that country. Business is the objective not the preservation of value. A currency that is sufficiently elastic for business may not hold its value relative to gold. That does not make it a bad currency. Indeed, I see one of the big problems with EMU as being that countries are undergoing all sorts of pain to preserve a currency while that currency is doing nothing for them but causing them pain. EMU has it backwards. Setting an economy up on gold might preserve the currency values but might do it at a cost of growth and higher unemployment.

On balance I think gold bugs take the arguments that are beneficial to them too quickly. No fiat currency system has lasted in the history of the world and that includes a system in which government fiat decreed that it would peg its currency value to gold.

The international community has become very fluid with new nations emerging and some ‘old ones’ running very high rates of growth. It would be hard to sustain a system like this with everyone stuck to gold. Gold is oversold by its advocates who are uninterested in looking the problems that gold standards have faced over the years. The problems are so great that they have caused every single country that adopted gold ultimately to reject it. Gold is no panacea. It might fix one problem you don’t like today but it would introduce many constraints that would impede us in the future. Better to have a fiat currency system and to let investors know that they have to manage their own risks to preserve their capital because that is true even in a gold-based system, it’s just that everyone assumes a gold-based system will not break down so that when it does everyone is completely unprepared. Is that really better?

 

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Tue, 05/15/2012 - 22:15 | 2430016 Ranger4564
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There's nothing inherently wrong with that.  Banks hold money of individuals who authorize the banks to lend out their money to other trustworthy individuals who would pay a fee for the loan, the bank would take a (SMALL) percentage and we have no FRB.

Tue, 05/15/2012 - 20:43 | 2429725 Angus195
Angus195's picture

You know what...very good point.  I like the idea of each of the 50 U.S. States having their own currency.  If each state were allowed to issue their own currency (tied to state GDP among other things) i.e. if a states GDP were say 1 Trillion on the close of the calendar year December 31, they would be allowed to issue through their state legislature for the next fiscal year a budget of say 25% of that amount with credits for assets on reserve and unemployment and corresponding debts for local inflation ... irresponsible states like California would be forced to bring their budget 'in line' with state GDP etc. and would be statutorily forbidden from exceeding these fiscal levels, responsible states would have very attractive currencies and states like California would not.   Business would migrate to those responsible areas and reward the local populations with jobs and a vibrant economy.  Good idea ..... the Feds should be entirely removed from this process thus shrinking their power over states rights ....

Wed, 05/16/2012 - 14:40 | 2432510 valkyrie99
valkyrie99's picture

I agree this would be better system.  It would require a consitutional change to work as you say (the states are restricted from coining money and this power is issued to Congress currently - even though its' been usurped by private and central bankers), or it could be done through state-owned banking institutions.

Tue, 05/15/2012 - 18:39 | 2429327 akak
akak's picture

Cut the putrid and deadly umbilical cord between government and the issuance of money, and 90% (at least) of our problems would be solved.  A widespread public dialogue needs to be instituted advocating the separation of money and state, just as most developed nations accept the separation of church and state.

Tue, 05/15/2012 - 18:47 | 2429352 LawsofPhysics
LawsofPhysics's picture

Are you retarded? The Federal Reserve (a PRIVATE bank) is paid by the American taxpayer to coin the money. My god, wake the fuck up and get your facts straight. The U.S. Government does not control the money. The banks do, they bought YOUR representative, that is the problem moron.

Wed, 05/16/2012 - 14:44 | 2432521 akak
akak's picture

It is hardly "retarded" to acknowledge that the Federal Reserve is both a creature of the federal government, and effectively a branch of the same.  Your description of it as "private" is a distinction without any real distinction.

Tue, 05/15/2012 - 20:55 | 2429756 HamyWanger
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"The U.S. Government does not control the money."

It does, indirectly, because the Federal Reserve is under the reach of federal law. 

Tue, 05/15/2012 - 18:45 | 2429350 Angus195
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Make no mistake, I agree 1000% but how do you do build such a system and still avoid the inherent problems in the barter system.  The medium of exchange, what ever it is, has to come from somewhere or be produced by some enity.

Tue, 05/15/2012 - 18:26 | 2429256 LawsofPhysics
LawsofPhysics's picture

LMFAO! Can you say "resource and capital mis-allocation and mal-investment?". I knew you could. Bob you are a worthless shill. This will continue to be the problem so long as there are no fucking consequences for bad business models and bad behavior. Stop avoiding the truth and prosecute the fraud asshole.

Tue, 05/15/2012 - 18:22 | 2429233 jus_lite_reading
jus_lite_reading's picture

Bob, you speak like a true bought and paid politico.

What you fail to see is that the game is already over. There is no more time to chat about what to do next. The here and now is just the global ponzi running on fumes because despite every elite member of the clown posse knowing good and well that the music has stopped, nobody wants to be the first to take public action... that would be the end of the game. But soon...

And Bob, for fucks sake! The people that are buying gold are not buying gold because they JUST discovered the US dollar is a fiat ponzi!! They are buying gold because, in short, they know this won't "end well."

 

 

Tue, 05/15/2012 - 18:21 | 2429228 OneLessZombie
OneLessZombie's picture

"Gold standards are not flexible and they put government in straitjackets"

Uh, hello Bob.

 

In a world where fiats are intrinsically worthless are pm's intrinsically priceless?

Tue, 05/15/2012 - 18:40 | 2429332 LawsofPhysics
LawsofPhysics's picture

Pointing out the contradictory statements of any modern eCONomist is fun isn't it? All the while they avoid the issue of moral hazard and fraud and the consequences thereof.

Tue, 05/15/2012 - 18:19 | 2429219 Terrorist
Terrorist's picture

Allow currencies to compete.
Who says we have to have just one.
Free market solutions are best.

Tue, 05/15/2012 - 21:06 | 2429792 disabledvet
disabledvet's picture

terrorist indeed...

Tue, 05/15/2012 - 18:27 | 2429206 DavidPierre
DavidPierre's picture

 

 

GATA’s friend, Jim Willie, sent the following today, which reflects on the above…

After a seeming tough messy but productive week in the gold trading trench warfare, my reliable gold trader source offered a summary with more expressed satisfaction than ever conveyed in all the years we have been in contact.

It is not completely over as a war, but the Battle of the Bulge and Battle of Midway seem concluded, each a major victory. This message is of chest pounding with a foot atop a dead victim.

The gold price is surely depressed, but the gold cartel is reportedly mortally wounded.

The path upward might be cleared to the point of ending this latest round of price suppression. The Good Guys have finished a mission for this round. The gold trader has a keen knowledge of WW2 and hardened experience of Russia. He wrote...

"This is great. The market is cleaned out when it comes to physical.  

The purchases to drain the cartel are 1000 MT [metric tons] per shot/transaction. The Boyz are illiquid and have to sell at budget bargain prices. The ones they used to patronize and torment are now screwing them back using a telephone pole up the hind quarters with the tip wrapped in razor wire. No prisoners are being taken. I have never seen such merciless executions to that magnitude in my entire career. The target banks call for help and protection, not knowing that they are actually confronted with their executioners. It must be a lonely feeling when the only thing they sense is their own warm blood running down their bodies. They know they are done. It is like the final scene in Enemy at the Gates where Vassili Zaitsev, the legendary Russian sniper, out-maneuvers the German Major Konig sharpshooter. The major takes of his cap, looks at Zaitzev who put a bullet right between his eyes. The real players know when it is game over."

This note is encouragement to the extreme for investors to stay in the game, hang onto the gold & silver bars, and wait for the rise like a phoenix in precious metals price since the resistance by the cartel has been significantly removed to the point of assuring victory with a heap of confidence.

The Eastern Coalition has transferred over one quarter of a $trillion in gold bullion in under three months from the Western gold cartel camp and munitions cache. They are left defenseless in New York, London, and Western Europe, unable to stop what comes, which in plain terms will be a rise in the gold price that zooms past $2000/oz and finds its rightful level based on value and equilibrium free from the tight grip of suppression. The Jackass cannot promise a date when the historical phoenix rise will occur, but it is on this side of the horizon. The outcome is assured.

It is unclear what the laurels will look like or what the air will be like relaxing and healing from the battle waged, sitting on the porch sipping ice tea or whisky sours.

Details on the denouement are not at all clear.

http://www.lemetropolecafe.com

......................................................

A long and passionate interview with Craig The 9/11Turd last Friday.

http://www.tfmetalsreport.com/podcast/3782/tfmr-podcast-19-jim-willie

 

 

Tue, 05/15/2012 - 19:07 | 2429427 Al Huxley
Al Huxley's picture

Jim's colorful as hell, gets very worked up, and takes the whole situation very personally, it seems.  But he's been a way better source of info when it comes to anticipating price moves in gold than the MSM and the usual suspects (Nadler, Gartman, Roubini, etc.......)

Tue, 05/15/2012 - 18:15 | 2429205 Stuck on Zero
Stuck on Zero's picture

The Author forgets that the main advantge of gold over a fiat paper currency is that it gives the populace the ability to control the government.  If the government is fair and just and beneficial to free markets and good business then the gold circulates freely i.e. there is a high currency velocity.  If the government becomes corrupt and a cancer on the land the people horde their gold and the government starves to death.  If government can print more currency at will it no longer needs to respond to the will of the people.  It can become ultimately cruel and evil.

 

Tue, 05/15/2012 - 19:10 | 2429451 DonutBoy
DonutBoy's picture

Exactly.  The author is also mangling Gresham's law.   Bad money driving out the good occurs because people hoard the good money to try to perserve some wealth in the face of corrupt governments.  This does not "tend to drive the price down to its worst-case value", on the contrary, it drives prices up because people know they are getting bad money for what they're selliing.

Representative government, fiat currency, price stability.  Pick 2.

Tue, 05/15/2012 - 19:09 | 2429446 valkyrie99
valkyrie99's picture

Please name an example of a economy using gold that did not become 'ultimatly cluel and evil' torwards the end of it's reign - really, I'd love to investigate the historical backing for your belief.  I am afraid I can think of none, ever, regardless of what form of currency was used, save for a few civilizations conquered by others prior to reaching this point.

Tue, 05/15/2012 - 21:12 | 2429801 Stuck on Zero
Stuck on Zero's picture

I'll give one example: Rome.  As the Empire became cruel and evil Roman citizens began to horde their gold.  Much of the hording was simply burying the gold coins to wait for good times.  As the gold disappeared the government shaved the coins and added more base metals.  Thanks to this activity stashes of Roman coins have been discovered all over Europe.  A boon to coin collectors.

Tue, 05/15/2012 - 20:47 | 2429744 BigJim
BigJim's picture

Mind, you not many governments have even started out not being cruel and evil.

Tue, 05/15/2012 - 18:11 | 2429196 HD
HD's picture

Print more gold and silver and we'll talk.

Tue, 05/15/2012 - 19:09 | 2429431 Al Huxley
Al Huxley's picture

And while you're at it, print up a whack of oil, and maybe a bunch of food too.

Tue, 05/15/2012 - 19:20 | 2429487 HD
HD's picture

I'm trying, I'm trying....

CTRL+P is working fine. All my money loses value and food and gas go higher.

Unfortunately CTRL+G  CTRL+O and CTRL+F do nothing!

Tue, 05/15/2012 - 18:06 | 2429187 orangegeek
orangegeek's picture

The USD is fiat. 

 

So why is the USD going up?  And why is gold going down?

 

USD closed at 81.221 today.

 

http://bullandbearmash.com/chart/usd-index-daily-11-2012/

Tue, 05/15/2012 - 19:47 | 2429572 LawsofPhysics
LawsofPhysics's picture

LOL, based on one day.  How has that gold trade been working for the last ten years, 20 years, 50 years?  LMFAO!!

Tue, 05/15/2012 - 18:21 | 2429238 ruffian
ruffian's picture

If past is prologue, the baseless currencies of developed economies will eventually be subjected to asset monetization. Greece could solve its debt problems tomorrow if it sold Mykonos for $400 billion and the US could halve its Treasury debt if it sold Alaska for $8 trillion. However, such asset sales seem far more unlikely (and in Alaska’s case, impossible – who could buy it?) than simply revaluing an asset already held in official hands -- the asset monetary issuers have always used; the only monetary asset on their balance sheets that can be re-valued higher against the currency they manufacture; (one might say the “traditional” one): gold………………….

Tue, 05/15/2012 - 19:48 | 2429577 LawsofPhysics
LawsofPhysics's picture

More importantly, how might the people of alaska feel about being sold down the river by some paper pushers?  Moral hazard anyone?

Tue, 05/15/2012 - 20:47 | 2429739 BigJim
BigJim's picture

I, for one, welcome our new Chinese/Russian/Saudi overlords.

Tue, 05/15/2012 - 18:06 | 2429186 BandGap
BandGap's picture

Consider this, Bob - has the value of gold ever been zero?

How many currencies over the span of man's existence have come and gone? Why is it, then, that gold remains?

When you can answer these questions you will have your answer.

 

Tue, 05/15/2012 - 19:05 | 2429417 valkyrie99
valkyrie99's picture

Yes, in most precolinized central and south american economies,raw gold was worth nothing (gold refined into jewlery had some neligible trading value based of costs of craftsmanship). Other things such as jade and cocoa beans were monetized. I'm sure you weren't looking for an answer, but the truth is that gold didn't have much value until rulers gave it such and then happened to win the wars needed to maintain their version of currency.

Tue, 05/15/2012 - 19:33 | 2429515 batmonk
batmonk's picture

Long time lurking, but very few comments from me until now, but have you ever seen some of the grave goods pulled out of 4000 year old egyptian tombs? Of Pharohs? Supposed living Gods? Sorry. but t'was gold, even if beer was the currency of the slaves. And bullshit on your pre-columbian Americas assertion, too. I'd call your attention to the many artifacts replete with gold and lapis/turquise/emerald insets. For the nobles. Or in Africa, when Akan gold was traded (i.e., money) for goods in what is now Ghana and the Ivory Coast. Going back to before Portugese colonization in the 1400s. Ever hear of the Gold Coast? No, I think you're full of it on this assetion. Gold has always been a store of value and money...for nobility. When your boot is on the neck of the common man, why on earth would you let them have access to gold. And don't even get me started on the Vikings and silver...

 

Tue, 05/15/2012 - 20:47 | 2429738 Race Car Driver
Race Car Driver's picture

> And don't even get me started on the Vikings and silver...

Oh, do go on....

Tue, 05/15/2012 - 18:21 | 2429229 XitSam
XitSam's picture

Thank you, BandGap. I just realized this was Brusca again. 'Nuff said.

Tue, 05/15/2012 - 18:07 | 2429184 TJ00
TJ00's picture

To sum up, a Gold standard is only good if it is stuck to, which it never is because governments never stick to what is required to maintain it. The question I have is surely that is an argument against government not an argument against a Gold standard?

Tue, 05/15/2012 - 18:49 | 2429364 GeezerGeek
GeezerGeek's picture

It suddenly struck me: a gold standard is like abstinence. Both work as long as they are the only paradigms.

Tue, 05/15/2012 - 22:04 | 2429985 Ranger4564
Ranger4564's picture

No!  You're both missing the fundamental nature of money and currency... it's not what you imbue it with, it's what others will allow you to claim it's imbued with.  So it's not at all abstinence, it's really whether others will prevent you from partaking.  As long as others restrain you, you're living in real money.  As soon as others fail to restrain you, you're living in Fiat.

With assets like Gold, it's much easier for others to restrain you.  With assets like Whim, it's very difficult for others to restrain you unless they threaten you with embargos, blockades, raids, expulsion, excommunication, assault, etc. 

So if you happen to be the big bully with the biggest Whim, it might work for a long time, until the others realize, they need to acquire their own bigness to overwhelm your bullyishness.  That's when they work together to defeat the imperial Goliath. 

That's what you see happening all over the world.  That's why the EU became the EU. That's why China Russia India Iran Brazil and others agreed to use other money and threatened to wage war if the Bully attacked anyone who rejected the overinflated Whim.  We'll see what happens.

Tue, 05/15/2012 - 18:02 | 2429175 Gene Parmesan
Gene Parmesan's picture

Too much "flexibility" is largely what got us into this mess in the first place.

Tue, 05/15/2012 - 19:03 | 2429410 Big Ben
Big Ben's picture

Exactly! We have had 3.5 years of government "stimulus" during which time our national debt has exploded, but where is the recovery?

"Investing" in solar energy companies that immediately go bankrupt doesn't produce permanent jobs. Most of the government''s stimulus programs are just schemes to misallocate resources into unproductive areas.

 

Tue, 05/15/2012 - 18:23 | 2429251 Seer
Seer's picture

Beat me to it!

"On a gold standard a country commits itself to fix its currency value to a certain price of gold. But such a link has its costs as a peg to gold eliminates flexibility."

It's like: Sobriety is meaningless, as it doesn't allow me to become a falling down drunk!

Tue, 05/15/2012 - 20:40 | 2429615 BigJim
BigJim's picture

God, it's depressing to see these canards repeated over and over and over again...

 On a gold standard a country commits itself to fix its currency value to a certain price of gold.

Yes, which is why most of us want free market money, because that way the government can't suddenly decide 'on behalf of its citizens' that your dollar is suddenly worth 69% less (FDR, 1933).

But let's defend the gold standard anyway, at least against specious 'criticisms'

 Gold cannot be the coin of the realm. It may back the coin of the realm but gold is not used in transactions.

Yes, it can, for transactions where at least a quarter ounce (or so) is required. Does that limit its use as a form of cash for smaller transactions? Yes, obviously. But there's always silver or copper. And besides, going back to commodity money doesn't mean we have to abandon electronic payments systems like debit cards. It's just that whatever money is being transferred is backed by gold rather than the IRS (and the US military keeping various OPEC satraps in power, but that's another subject, perhaps to be deployed when Robert tells us of the US' love of spreading 'democracy')

 When gold and other precious metal coins did circulate as ‘money’ there was always someone making an attempt to undermine the integrity of the circulating coin.

Yes, it's called debasement. But we have the same problems today with counterfeiting... not to mention people like Bernanke creating vast amounts of the stuff out of thin air.

 It is that while many nations have been on gold standards no one in the history of the world has pegged to gold and stayed with it. No one? So does gold have any better record?

Yes, because the fiat systems all collapse, whereas the gold standard merely prevents our masters from waging war without having to raise taxes to punitive (and thus unpopular) levels. Big difference. All the subsequent gold standard monetary systems after WWI failed either because countries' currencies were re-pegged at pre-war rates (ie, failed to take into account war time inflation), and/or counted foreign reserves as gold (ie, the gold was re-hypothecated), or, in the case of Bretton Woods, the US inflated to pay for guns and butter and saw its gold reserves drain.

Gold standards are not flexible and they put government in straitjackets that they refuse to stay buckled into.

Well, here we have to decide whether, in a democratically-elected republic, we allow our government to debase our currency so it can hide the costs of its programs from us. I would say anyone who understands the situation, and isn't a high-ranking FIRE industry heirophant, would vote 'no'.

 I would urge anyone who is truly a gold bug to get off their high horse and realize that government is not in the preservation of value business.

Indeed, governments are in the preservation of government business. Which is why the issue of monetary reform is so closely linked with how people wish their polity to be organised.

 The international community has become very fluid with new nations emerging and some ‘old ones’ running very high rates of growth. It would be hard to sustain a system like this with everyone stuck to gold.

Completely wrong. You clearly do not understand how exogenous monetary systems are self-correcting when it comes to balances of trade.

 The problems are so great that they have caused every single country that adopted gold ultimately to reject it.

'Countries' don't reject the gold standard. Governments do, because it limits their ability to wage aggressive war. Maybe you think governments should be able to do whatever they like... well, there's a place for people like you - it's called HuffPo.

Gold is no panacea.

No one says it is. No monetary system is going to be perfect. What we have to decide is which is the best system, not the perfect system.

Better to have a fiat currency system and to let investors know that they have to manage their own risks to preserve their capital because that is true even in a gold-based system, it’s just that everyone assumes a gold-based system will not break down so that when it does everyone is completely unprepared.

Really? Please give us a list of all the gold-based systems that have 'broken down', vs, say, fiat.

Adopting a gold backing for your currency is doing the one thing that you can be just about sure of that will come to an end. ... Gold standards fail.

No, gold standards are brought to an end by the calculated decisions of avaricious governments. Fiat systems are brought to an end by reality, when central planners' attempts to suppress price discovery inevitably come to a sticky end.

Can't see the difference, clownshoes? Hope you're better at your day job than you are at monetary theory.

Tue, 05/15/2012 - 22:54 | 2430109 Titan Uranus
Titan Uranus's picture

When gold and other precious metal coins did circulate as ‘money’ there was always someone making an attempt to undermine the integrity of the circulating coin.

Yes, and the founding fathers had very specific ideas on how to deal with them.

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