Thursday, October 7, 2010

Silver vs. Dollar

In 1486 the Germans started using a 1 oz silver coin. It was very popular as the other types of coins had been debased and people no longer liked using them. In 1497 Spain defined their silver pieces of eight  to match the German thaler. After America's independence they defined the US dollar as 1 oz of silver to match the "Spanish dollar". Today silver is about $23/oz. So compared to silver the dollar has only gone down by a factor of 23 in more than 500 years. But really all of this drop is in the last 75 years. The Fed is printing paper dollars a thousand times faster than they did 75 years ago (printing a trillion per year instead of a billion per year). Paper money is being debased a thousand times faster and silver is only 23 times as expensive. Hum.

Time to use Occam's Razor, "the simplest explanation is usually the correct one". It could be the value of the dollar is going down. Or it could be there are simultaneous bubbles in copper, wheat, cotton, oil, gold, iron, rice, silver, etc.  Which explanation is simpler?

All these things look like they are in bubbles because the value of the dollar is going down. The dollar is going down because they are printing too many and because it is becoming less loved as an international reserve currency (in large part because it is being debased).

Also, we could be getting closer to a crack-up-boom where people bail out of paper money into commodities and other real things.

Recommended Reading

I think this article by Doug Casey does a really good job of discussing the situation we are in and what is coming.  Well worth reading.  I  disagree on some small details, like which things count as deflationary.  But it is well written and I think very accurate.

Wednesday, October 6, 2010

Just a question of when...

Predicting that a fiat currency will die is no big prediction, all will eventually.   Gold coins from a government that failed 2,000 years ago are still worth at least $1,340/oz today, but fiat money from a government that failed is worthless.  So the big question is when a particular fiat money will fail.   Is it 100 years from now, this month, or when?

The Dollar Index has dropped about 13% in a few months.  At some point people are going to be unhappy holding dollar bonds that pay 1% per year.  Foreigners will notice exchange rates but even dollar users will notice the price of commodities going up about as fast as the dollar goes down.   With commodities going up double digits in a few months,  bonds look like a poor investment.

Just a few moments ago the Dollar Index was 77.7 and it made me think.  The S&P hit 666, you know, 66.6 would be a fitting time for the dollar to go to hell.   :-)

Sunday, October 3, 2010

How Fiat Dies

With this economic mess I have been reading lots of stuff. I have been writing up what I find interesting in    I would like to get more feedback and so have started this blog.   As I put in new sections I will post here.

The latest stuff is related to MMT.  In particular Chartalism, Hyperinflation in MMT Terms, and Common Errors in MMT.

The name of this blog, "How Fiat Dies" is referring to Hyperinflation which is a big theme in my stuff.  Hyperinflation is how fiat money makes the transition from normal money to money nobody will take.

Hyperinflation seems to come after a government that can print money gets deficits to over 40% of spending for a few years.  First people move into short term bonds, then they stop buying  bonds.  At this point the government has to print money to cover both the full deficit and all bonds coming due.    The government is forced to print money fast as the short term bonds come due very rapidly.   This causes 3 things.  An increased money supply,  people spend their money faster to minimize the loss between when they get it and when they spend it, and it hurts the economy.  All 3 of these effects combine to cause prices to go up in a non-linear way.   Since a large part of the population depends on the government for support, as prices go up the government is forced to print more and more.   This all spirals out of control, as taxes can not possibly be raised enough to cover all the bonds coming due or the deficit.

We live in interesting times, the kinds of times when fiat money dies.