Is a Decline or Even a Demise of the Dollar Really Possible?
We'll continue where we left off last time, with the possible decline or even demise of the US dollar. In Aftermath, Jim Rickards explains just what would cause this to happen.
But before we get to his explanation, let's consider this: Many people believe and have been taught that a currency loses value as a result of the government - or its central bank - "printing" too much of the currency. "Printing" is a general catch-all term to include all the various methods government have for creating currencies out of nothing. And that's the first key point to grasp: All currencies can be and are essentially created out of nothing.
This contrasts starkly with the entire history of sound money. We don't have time to give even a quick summary of the history of sound money in world history. Just know this: the medium that has been universally accepted, and therefore effectively served as safe, reliable money, has been gold, secondarily silver. For centuries, these were considered the only reliable forms of money. And when paper money has been employed, only those forms that could be exchanged on demand for gold and/or silver survived for any length of time as effective mediums of exchange.
That's no longer the case. No currency in the world today can be exchanged on demand for gold or silver. Sure, you can buy gold or silver with various currencies. But you would need an increasingly larger amount of paper or digital currency to purchase either. In the U.S. for example, you could buy an ounce of gold for about $200 in 2000. That same ounce will cost you between $1,400 - $1,500 now, in October 2019, depending on the dollar price of any given day.
In short, gold or silver have historically held their value in the form of purchasing power throughout history. Paper money - including the U.S. dollar - has not.
The creation of currencies out of nothing, with no fixed reference to those historically accepted stores of value has ultimately caused this loss of value - whether slowly or rapidly. But something happened that surprised just about everyone after the onset of the Great Recession. The central bank of the U.S., the Federal Reserve, created vast amounts of US dollars in amounts previously unheard of, and did so in short order. Everyone thought high, even dangerously high, inflation - defined as loss of purchasing power - would commence in parallel short order. It didn't happen.
Rickards, in his wisdom, explains why and we should all learn a lesson. Despite the belief that the quantity of money printed will result in inflation in prices - i.e., loss of purchasing power - that's not what causes the loss of purchasing power of a currency. It's not the quantity of money printed, but the loss of confidence in the currency that does the trick. Simply put, if everyone accepts the money in payment of goods or services, the money will work as a medium of exchange. And if no one is overly concerned that the dollars they accept today for the goods the produce or the services they provide will lose value, then the dollar's value won't take the ride into oblivion that comes with high or hyper-inflation.
But what about the fact that "everyone" knows that there's always some inflation? Heck, even the Fed touts the importance of having an inflation rate of around 2% per year. I suspect what's happened is this:
A good chunk of us - if not most of us - have no idea that until fairly recently gold (and to some extent silver) was considered the only safe, reliable form, money that would hold its value over time, money whose value could be relied upon to exchange for some quantity of goods whether now or in the future. So most of us think that the US dollar - in paper or digital form - that loses some percent of its value (2%, 3%, 4%, whatever) year to year is a perfectly normal state of affairs. Without some knowledge of monetary history, there seems to be no alternative to the US dollar. So we stick with it. We simply live with its slow but steady deterioration in value, as if there's nothing that can be done to alleviate the permanent loss of purchasing power. We're comfortable with what we consider "normal."
And there lies our vulnerability to a significant sudden loss of value of our money. It's not something many of us expect or even imagine. Well, if Rickards is right, it's time to start imagining.
As you might imagine, one of the antidotes to this loss of value that Rickards recommends is - you guessed it - buying some gold and/or silver.
There's a saying, "All that glitters is gold." But, as we'll see next time, not all that's called gold glitters the same.
But before we get to his explanation, let's consider this: Many people believe and have been taught that a currency loses value as a result of the government - or its central bank - "printing" too much of the currency. "Printing" is a general catch-all term to include all the various methods government have for creating currencies out of nothing. And that's the first key point to grasp: All currencies can be and are essentially created out of nothing.
This contrasts starkly with the entire history of sound money. We don't have time to give even a quick summary of the history of sound money in world history. Just know this: the medium that has been universally accepted, and therefore effectively served as safe, reliable money, has been gold, secondarily silver. For centuries, these were considered the only reliable forms of money. And when paper money has been employed, only those forms that could be exchanged on demand for gold and/or silver survived for any length of time as effective mediums of exchange.
That's no longer the case. No currency in the world today can be exchanged on demand for gold or silver. Sure, you can buy gold or silver with various currencies. But you would need an increasingly larger amount of paper or digital currency to purchase either. In the U.S. for example, you could buy an ounce of gold for about $200 in 2000. That same ounce will cost you between $1,400 - $1,500 now, in October 2019, depending on the dollar price of any given day.
In short, gold or silver have historically held their value in the form of purchasing power throughout history. Paper money - including the U.S. dollar - has not.
The creation of currencies out of nothing, with no fixed reference to those historically accepted stores of value has ultimately caused this loss of value - whether slowly or rapidly. But something happened that surprised just about everyone after the onset of the Great Recession. The central bank of the U.S., the Federal Reserve, created vast amounts of US dollars in amounts previously unheard of, and did so in short order. Everyone thought high, even dangerously high, inflation - defined as loss of purchasing power - would commence in parallel short order. It didn't happen.
Rickards, in his wisdom, explains why and we should all learn a lesson. Despite the belief that the quantity of money printed will result in inflation in prices - i.e., loss of purchasing power - that's not what causes the loss of purchasing power of a currency. It's not the quantity of money printed, but the loss of confidence in the currency that does the trick. Simply put, if everyone accepts the money in payment of goods or services, the money will work as a medium of exchange. And if no one is overly concerned that the dollars they accept today for the goods the produce or the services they provide will lose value, then the dollar's value won't take the ride into oblivion that comes with high or hyper-inflation.
But what about the fact that "everyone" knows that there's always some inflation? Heck, even the Fed touts the importance of having an inflation rate of around 2% per year. I suspect what's happened is this:
A good chunk of us - if not most of us - have no idea that until fairly recently gold (and to some extent silver) was considered the only safe, reliable form, money that would hold its value over time, money whose value could be relied upon to exchange for some quantity of goods whether now or in the future. So most of us think that the US dollar - in paper or digital form - that loses some percent of its value (2%, 3%, 4%, whatever) year to year is a perfectly normal state of affairs. Without some knowledge of monetary history, there seems to be no alternative to the US dollar. So we stick with it. We simply live with its slow but steady deterioration in value, as if there's nothing that can be done to alleviate the permanent loss of purchasing power. We're comfortable with what we consider "normal."
And there lies our vulnerability to a significant sudden loss of value of our money. It's not something many of us expect or even imagine. Well, if Rickards is right, it's time to start imagining.
As you might imagine, one of the antidotes to this loss of value that Rickards recommends is - you guessed it - buying some gold and/or silver.
There's a saying, "All that glitters is gold." But, as we'll see next time, not all that's called gold glitters the same.
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