Guest Post: Caution - Falling Currencies

Tyler Durden's picture

Submitted by Keith Weiner

Caution: Falling Currencies

In 1913, the US Congress authorized the creation of the Federal Reserve.  Its mandate was limited, but it grew over time to become the central planner of all things monetary.  In 1933, President Roosevelt outlawed the ownership of gold.  In 1944, the soon-to-be-victorious allied powers signed a treaty at Bretton Woods, agreeing to use the US dollar as if it were gold.  Their central banks would hold dollars and borrow dollars, and pyramid credit in their own currencies on top of the dollar.

The US dollar was redeemable by foreign central banks, and so this was effectively a scheme for various currencies to have a fixed exchange rate between each other and to gold.  It, at least, had the virtue of limiting credit expansion, as there was still this one tie to gold and hence to reality.

The problem with fixing the price of one thing relative to another is that whichever one is undervalued is hoarded and whichever is overvalued is dumped.  The US government set the price of gold too low, and so foreign central banks were increasingly demanding delivery of gold.

By the time President Nixon was in office, something had to be done.  In 1971, he defaulted on the gold obligations of the US government.  This had the effect of severing gold from the monetary system, plunging us into the worldwide regime of irredeemable paper money.  One consequence was that the exchange rates of the various paper currencies were allowed to “float” against one another.

This was the prescription of Milton Friedman, monetary quack.  He actually said:

“If internal prices were as flexible as exchange rates, it would make little economic difference whether adjustments were brought about by changes in exchange rates or equivalent changes in internal prices. But this condition is clearly not fulfilled. The exchange rate is potentially flexible in the absence of administrative action to freeze it. At least in the modern world, internal prices are highly inflexible.”

And that’s why we have volatile foreign exchange markets today, because Friedman and his followers wanted to compensate for labor law and other regulation that make certain prices ratchet only upwards, but never downwards.

This fraudulent, unworkable, and dishonest scheme of floating exchange rates certainly did not fix the problem of wage and other price inflexibility.  It did cause several others.

One side effect was to loot people’s savings and thereby teach them not to save, because the word ”floating” is disingenuous.  The paper currencies all sink.  There is no mechanism, nor desire on the part of the central bank, to increase the value of the currency.

The floating currency regime is a regime of sometimes-slower and sometimes-faster currency debasement.  Each government engages in a race to zero.  Sometimes one currency is sinking relative to the others, and sometimes others are sinking relative to it.  This is enormously destructive.

The never-ending process of currency devaluation has a follow-on effect: reduced investment.  This of course reduces growth.  This premise must be taken to its logical conclusion.

Savings, as such, is not possible using irredeemable paper.

When saving, the wage earner sets aside a portion of his wage; he consumes less than he produces.   His basic intent is to hoard this value until he retires and needs to exchange it for food and other goods when he can no longer work.  It is advantageous to lend to a productive enterprise to increase his quantity of money, but this is not essential to the concept.  The key is that he can carry value over time.  Gold and silver do this, but paper does not.

Fundamentally, paper currency is a loan to the government.  Unlike a productive enterprise, government is not borrowing to increase production.  Government does not produce anything; it consumes.  Government is borrowing to consume with neither the intent nor the means to ever repay.  And therefore the “loan” is counterfeit (  It will not be repaid.

Gold and silver are positive values.  One can hoard them, as one can hoard any tangible commodity.  Paper currency is a negative value.  It is debt.  There is no way to “hoard” it, its value is always falling, and in the end it will default to zero.

The government’s paper scrip loses value gradually, and then suddenly.  We are in the gradual phase now.  This phase will end without much warning (other than permanent gold backwardation:

Savings, under irredeemable paper is perverted into speculation.  People are forced to crowd into one asset bubble after another.  Those who blindly follow always end up transferring wealth to those who lead.  People who bought houses between 2004 and 2008 in the USA still have not recovered.  At least those who deposited dollars into a bank account have not lost as much, yet.  When the markets finally become aware that the banking deposits are backed by mortgages on homes which are worth 25% to 50% less than their mortgage values, bank depositors will lose more.

Eventually, people will discover that they cannot save in terms of dollars (those who don’t figure it out will be rendered economically irrelevant as their wealth is removed from their hands).  Savings is a necessary prerequisite for investment.  Investment is necessary for companies to grow, to develop new technologies, products, and markets.  Growth is necessary to hire new workers.

As existing companies achieve higher productivity of labor, and do not need as many workers to perform the same work, they lay off unneeded people.  In a free market, the unemployed would quickly be hired by growing companies that expand and develop new businesses.  But today’s structurally high unemployment can be traced back to Friedman’s quack prescription (among other government interference).

Weakening the currency not only discourages savings, it also weakens businesses who have to keep the currency on their balance sheet and who have to import some of their inputs.

When a currency loses value, then all who hold it incur a loss.  It is not possible to employ workers and run a business in a country without holding significant amounts of its currency.  Currency debasement therefore imposes constant losses on enterprises that try to operate in such an environment.

Combined with the fact that imported supplies, ingredients, parts, software, and other inputs are constantly rising in cost in terms of the falling currency, and one can see another reason why Friedman’s assertion is false.  In many cases, especially modern products, the cost of the labor input into a product is a small percentage of total cost.

Save your lunch money in gold and silver, the best way to protect yourself against our mad regime.  If you want to speculate, make sure you risk only your beer money.

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LawsofPhysics's picture

I'd argue that if you invest beer money in actual beer that you don't drink, you still have a very liquid asset of value for barter.

Pladizow's picture

"Suspicion towards a currency, once awaken, develops insomnia" - James Dines

SilverTree's picture

Putting a Silver round under your pillow helps.

I have three monster boxes under my bed and sleep like a baby.

SilverTree's picture

Why do you want to snuggle in bed with me and my 500 pound wife or are you joking about  taking what I have worked so hard for?

Pladizow's picture

Silver only, you and the heafer will have to look elsewhere for the 3-way!

Comay Mierda's picture

"The surest way to destroy a nation is to debauch its currency... Give me four years to teach the children and the seed I have sown will never be uprooted."

- Lenin

Ying-Yang's picture

Kudos Keith..... One of the best articles I have read on ZH, thank you! I will pass this on to many friends and relatives as the information is a basic understanding of where we have been and where we are heading, written in plain English!

falun bong's picture

I keep wondering what happens when everybody debases at the same time, like now. Nobody gets new competitive wage or price advantage...but everyone gets Partial Global Jubilee (PGJ). That may not be so bad. With all currencies unhinged from gold now it's like a party where they keep putting more booze in the punchbowl...we can all get drunker and drunker!

SemperFord's picture

lucky you, I used to do the same thing and woke up one morning to find out it was "Vaporized" :(

Dr. Engali's picture

I sleep with a 9mm under my pillow and a AR at the side of my bed.

Silver Dreamer's picture


You must be a terrorist.  Even the NRA suggests your weapons be in a safe, separate from the ammunition, trigger locked, and unloaded.  Sheesh! 

/sarc off

I must admit though that my Sig sits next to me while I sleep, and it's only there to give me time to get to a long gun.

hairball48's picture

I live alone. My .357 is by my head...loaded. The .12g pumpgun in my avatar is loaded up with 3" 00Buckshot rounds...with one in the chamber. Shitheads breaking my place won't be hearing that "rackin one in" sound like on TV.

akak's picture

At close range, #1 buckshot will actually inflict more trauma on a human target. 

Just sayin'.

hairball48's picture

I use 00 since I also occasionally use it for close range deer hunting in areas around here where rifles aren't allowed. 00 is easier to find in most of the stores around here too. Spendy too at $5.99-$6.99/box of 5 :(

akak's picture

Good points hairball --- it is similar to what many people do around here, with bears frequently paying visits (with slugs often loaded as rounds #3 and #4).  My comment above was thinking strictly about home defense against (human) intruders.

Yeah, it is getting kind of spendy to do a lot of routine practice shooting with ammo being at such prices, isn't it?  I know the rifle range near me is MUCH less quiet than it used to be eight or ten years ago.

quasimodo's picture

Excellent choices both. I also keep the Centurion multi defense in house, as well as my favorite-Winchester supreme elite PDX. Both are always happy in the Remington tactical 12 ga.

Always fun to practice on watermelons or other items that explode.

MsCreant's picture

Beer has an expiration date.

t_kAyk's picture

Whiskey doesn't   ;)

dark pools of soros's picture

can we see the S&P priced in scotch?

Manthong's picture

You need a graph that is adjusted to the price of the scotch of your choice starting in 1971 constant scotch dollars..


WmMcK's picture

Long Johnny Walker, Gold, of course

Silver Dreamer's picture

I stockpile whiskey even though I do not drink much of it.  It's not stored under my bed, but it certainly helps me sleep more soundly.

Long-John-Silver's picture

That's why you invest in the equipment to make Beer. While you are investing in Beer making equipment you also purchase an alcohol still. Both produce liquid currency that are invaluable in a barter (Black Market) system.

BeerBrewer09's picture


adding to the brewhouse all the time.

V in PA's picture

For taste but not effect

DOT's picture


Looks like a hedge on water and bread. Make that "Bread and Water"

narnia's picture

so do humans if they don't drink water or eat / sungaze.

Al Huxley's picture

Why would I risk my beer money?  That seems like an extraordinarily dangerous thing to do.

AbelCatalyst's picture

no worries - the US President is on ESPN right now picking b-ball teams for the NCAA tourney... keep drinking your liquid assets everything will be fine... amazing how much this guy knows about each team and how little he knows about economics - comforting!! When will the adults come home and lead this country out of the darkness??

Conrad Murray's picture

Someone should remake Surfin' Bird into Usurupin' Turd. BA BA BA BA BA BA BA O-BA-MAO MAO MAO MA MAO O-BA-MAO MAO MAO MA MAO

Zymurguy's picture

can only give you one up-tick, sorry... your post deserves +1000

Red Raspberry's picture

Beer is a barbaric relic I covet.

Silver Dreamer's picture

Keeps better?! It gets better the longer you keep it.  That's the case for whiskey at least.  8-)

Silver Bug's picture

Save your hard earned money in a hard earned currency. Gold and Silver.

sIewie the pi-rat's picture

one thing i will not do is put my beer money at risk ...urp!

Comay Mierda's picture

TPTB plan:
step 1) weaken currencies, guide the flock of sheep into equities
step 2) stock market crashes when the sheep realize that solvency cannot be cured with liquidity, no matter how much fiat bullshit is printed
step 3) sheep buy PMs
step 4) govt's declare PM ownership a terrorist activity, throw the sheep into fema camps
any questions?

SilverTree's picture

Why not just skip to step 4?

Silver Dreamer's picture

You shear sheep before you slaughter them?

EBR MOD 0's picture

NO questions on my part, have you got a plan?

Comay Mierda's picture

gold, guns, food, getaway plan

merizobeach's picture

Solid principles.  I might revise the order to say GTFO first, then build your castle (with farm).

Silver Dreamer's picture

I highly recommend the same.  Planning to "bug out" is a very poor plan.  Bugging out should be a last resort and one you never want to take.  Move now while you still have the resources available.