by MN Gordon, Acting Man:
Fiat Currency Rankings – From Bad to Worse
Today, as we step into the New Year, we reach down to turn over a new leaf. We want to make a fresh start. We want to leave 2019’s bugaboos behind. But, alas, lying beneath the fallen leaf, like rotting food waste, is last year’s fake money. We can’t escape it. But we refuse to believe in its permanence.
This is what “monetary stability in the Fed-administered fiat money regime looks like: in the year the Fed was established it took $3.80 to buy what $100 buy today – provided the government’s CPI data are actually a valid gauge of the dollar’s purchasing power. [PT]
Victorian economist William Stanley Jevons, in his 1875 work, Money and the Mechanism of Exchange, stated that money has four functions. It is a medium of exchange, a common measure of value, a standard of value, and a store of value.
No doubt, today’s fake money, including the U.S. dollar, falls well short of Jevons’ four functions of money. Certainly, it comes up short in its function as a store of value.
Hence, today’s money is not real money. Rather, it is fake money. And this fake money has heinous implications on how people earn, save, invest, and pay their way in the world we live in. Practically all aspects of everything have been distorted and disfigured by it.
Take the dollar, for instance. Over the last 100 years, it has lost over 96 percent of its value. Yet, even with this poor performance, the dollar has one of the better track records going. In fact, many currencies that were around just a short century ago have vanished from the face of the earth. They have been debased to bird cage liner.
This graphic is slightly dated by now (we downloaded it almost 20 years ago), i.e., a few more fiat currencies have joined the expired contingent by now. It also excludes a number of historical paper currency experiments in China, which failed without exception. Still, it can be estimated that no more than 20% of the paper currencies created so far still exist – and the strongest one of them has lost “only” 96% of its value! [PT]
Who Will Buy All this Debt?
The failings of today’s dollar are complex and multifaceted. But they generally stem from the unsatisfactory fact that the dollar is debt based fiat that is issued at will by the Federal Reserve. How can money function as a store of value when a committee of unelected bureaucrats can conjure it from thin air?
After President Nixon “temporarily” suspended the Bretton Woods Agreement in 1971, the future was written. The money supply has expanded without technical limitations. This includes expanding the Fed’s balance sheet to buy Treasury debt. In a practical sense, Fed purchases of U.S. Treasury notes are now needed to fund government spending above and beyond tax receipts (i.e., fiscal deficits).
As an aside, the Fed’s charter prohibits it from directly purchasing bills issued by the U.S. Treasury. So to bypass this restriction, dealers – i.e. preferred big banks – purchase Treasury bills upon issuance and then several days later these same Dealers sell them to the Fed. What’s more, for providing this laundering service the Dealers pocket an unspecified markup. These indirect money printing operations have been going on for well over a decade, and last occurred about a week before Christmas – to the tune of nearly $23.7 billion.
According to the Congressional Budget Office, the federal budget deficit for the first two months of fiscal year 2020 is $342 billion. At this rate, Washington is going to add over $2 trillion to the national debt in FY 2020. Who will buy all this debt?
Not China. Not Japan. Not Saudi Arabia. Not American citizens. Instead, the Fed will buy it via balance sheet expansion. Of course, there are natural consequences for these underhanded practices – and you will pay for them, you already are…
About a decade before Jevons outlined the four functions of money, he elaborated the idea of marginal utility. That the utility – the satisfaction or benefit – derived by consuming a good or service changes from an increase in the consumption of that good or service. This change in utility influences how goods and services are priced within the economy.
Stanley Jevons, Carl Menger and Leon Walras worked out the law of marginal utility independently from each other at roughly the same time. It revolutionized price and value theory, but evidently many people fail to grasp it to this day. For instance, the Wikipedia article on marginal utility is chock-full of arrant nonsense and has proved utterly resilient to correction since we first laid eyes on it ten years ago (here is an example illustrating that the author of the article simply does not know what he or she is talking about. Listing alleged “exceptions” to the law of diminishing marginal utility they write: “[…]marginal utility of a good or service might be increasing as well. For example: bed sheets, which up to some number may only provide warmth, but after that point may be useful to allow one to effect an escape by being tied together into a rope.” This is incorrect, for the simple reason that “bed sheets tied together into a rope” are a different good than bed sheets. As soon as they are tied together into a rope, they are no longer bed sheets, but a rope. The concept of marginal utility then applies to similar ropes. The rope’s previous incarnation as bed sheets is irrelevant. One would think this is obvious, but apparently it isn’t on Wikipedia, which one should definitely not rely on as a source for anything). [PT]