Sunday, February 07, 2016

OK. I get it now.

History shows that every form of paper currency eventually becomes worthless.  After World War I, European currencies like the German mark and the Italian lira plummeted in value, requiring governments to print larger and larger denominations just to facilitate the simple act of buying food.

In American history we have the examples of the Continental currency and Confederate States dollar becoming worthless during wartime. It will be no different for the yen, the euro, or the dollar, as the central banks in these modern countries have been printing new money at an accelerating rate since the financial crisis of 2008.

A 2,500 year old Lydian gold coin, on the other hand, is just as valuable in terms of its gold content today as a newly minted 2016 American Gold Eagle coin.  The relative staying power of gold compared to paper is nearly infinite.

For a while the U.S. dollar was actually tied to gold. Anyone with a $20 bill could, in theory, walk into a bank and exchange the paper for one ounce of gold.

However that's not the case today.  In 1971 the U.S. government ended the dollar's connection to gold altogether.  From that point on the dollar only had value because Americans and foreigners alike were in the habit of trading with it, and because nearly every foreign bank in the world backed its local currency with the (formerly gold-backed) dollar.  Now that the Fed is gearing up for a fourth round of Quantitative Easing money printing, the dollar's days as the world standard are coming to an end.

I'm convinced that the citizens of the First World will soon have the same reaction that Auda Abu Tayi did in the movie Lawrence of Arabia; they will realize that they've been working all of these years to earn worthless pieces of paper and ephemeral electronic numbers which the Federal Reserve and other central banks can ceaselessly create out of thin air.

1 comment:

Cathy said...

That video from Lawrence of Arabia is humorously appropriate. (If one can find humor in this disaster)
Gold went way up today.
We appreciate your solid advice.
Good as gold.