The Upside-Down World of Currency
The comments below are an edited and abridged synopsis of an article by Alasdair Macleod
The gap between fiat currency values and that of legal money, which is gold, has widened so that dollars retain only 2% of their pre-1970s value, and for sterling it is as little as 1%. Yet it is commonly believed that currency is money, and gold is irrelevant.
As the product of statist propaganda, this is incorrect. Originally established in Roman law, legally gold is still money and debauched currencies are not; they are only a form of credit. As set out in this article, the major western central banks will be forced to embark on a new round of currency debasement, likely to put an end to the matter.
Central to this thesis is that commercial bank credit will contract sharply in response to rising interest rates and bond yields. This retrenchment is ending the everything bubble in financial asset values, is beginning to undermine GDP and, given record levels of balance sheet leverage, makes a major banking crisis almost impossible to avoid. Central banks that are already in a perilous state will be tasked with underwriting the entire credit system.
In discharging their responsibilities to the status quo, central banks will end up destroying their own currencies.
So, why do we persist in pricing everything in failing currencies, when that will almost certainly change?
When the difference between legal money and declining currencies is finally realized, the public will discard currencies, entirely reverting to legal money. That time is being brought forward rapidly by current events.
Up for discussion: Why do we impart value to currency and not to money; the role of a medium of exchange; what is the purpose of interest rates; the collapse of the everything bubble; managing counterparty risk; and physical commodities are set to replace paper equivalents.