The Great Debasement

Authored by Keith Weiner via Acting-Man.com,

Fiat Money Woes

Monday was Labor Day holiday in the US. The facts are that the euro lost another 1.4%, the pound another 1.1%, and the yuan another 0.9% last week.

Assorted foreign fiat confetti against the US dollar – we have added the Argentine peso as well, as it demonstrates what can happen when things really get out of hand. [PT]

So, naturally, what is getting play is a story that Bank of England governor Mark Carney said the dollar’s influence could decline. This is somewhat ironic, because in true Keynesian fashion, Carney believes in a “savings glut” which he laments has caused “low inflation”.

Everyone should be bellowing from the rooftops, not about the greatly exaggerated death of the dollar, but that major currencies are dropping so fast! Analysts should be inquiring why they are falling, while their paradigm encourages them to think that it is the dollar which is, or should be, falling.

We think it is entirely appropriate to measure these currencies by the US dollar, as they are derived from the dollar. And we measure the dollar by gold. Since the recent peak, at 24.51 milligrams of gold at the beginning of May, the dollar has fallen 12% to 20.34mg. It now seems to be within striking distance of its all-time low set in 2011, about 16mg.

The global fiat money devaluation race against gold. [PT]

In gold terms, since that same date, the euro has fallen over 18%. We don’t know why Europeans aren’t screaming “bloody murder” at this not-so-subtle looting. And to a somewhat lesser degree, Americans should be right there yelling too.

Instead, gold owners in both currency areas are celebrating. That’s because they adhere to the dollar paradigm. Although they know that the dollar loses value, they measure the value of everything else in dollars. They think gold is going up.

We have a radical idea: the dollar’s loss can be measured in gold.

Source: Bloomberg

That means: if the price of gold doubles, the gold owner may have twice as many dollars but those dollars are each worth half as much. It is good to own gold, not for making profits but for avoiding the loss of the currency.

The dollar’s loss cannot be measured in consumer goods. That’s because every producer is constantly working to cut costs and prices. And every regulator, litigator, and taxinator is constantly working to add useless ingredients and drive up costs. Consumer prices are not stable.

It can be measured in gold. That’s because virtually all of the gold mined over thousands of years of human history is still in human hands. Gold has (by a country mile) the highest ratio of stocks to flows, and hence the greatest stability.

Consumer goods have rapidly declining marginal utility. Gold has non-declining marginal utility, which is why we continue to accumulate. The market continues to absorb gold mine production, despite having accumulated so much. There is no apparent limit, in contrast to wheat, or even oil, or even copper.

It is a crazy idea, using gold to measure value. Or so it seems — from the prevailing dollar / Quantity Theory of Money / purchasing power / inflation paradigm.

It was a fascinating week of price action. The price of gold dropped $7 — but the price of silver went up almost a buck (96¢). Read on to see if this move was due to leveraged speculators buying futures, or fundamental buying of silver metal.

It is worth noting that, despite negative interest rates, the collapse (we assume) of business in Hong Kong, trade wars and tariffs, and a likely credit crisis coming, there is no sign of backwardation in either metal. So there is no incipient gold or silver crisis.

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Dr. Keith Weiner is the president of the Gold Standard Institute USA, and CEO of Monetary Metals. Keith is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. Keith is a sought after speaker and regularly writes on economics. He is an Objectivist, and has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona.