Wanna bet that government currency won't be destroyed in your lifetime...?
Dear Daily Reckoning,
IT IS WITH fascination that I read your newsletter and contrarian views. Pardon my ignorance, but all this money supply and high asset prices...and the printing of money...what sort of things could happen that stop this merry go around?
What are the potential shocks? My concern is that for those of us that are getting wiser reading your email, what do we do? Stay in cash? We do not want to miss out on the boom either?
If you have the time, your reply will be most appreciated.
AH YES, replies Dan Denning, a great series of questions. Those are the ones that keep us up at night, too. That and our brother's 5-year old African grey parrot named Albert.
Two things happen at the end of every bubble: credit tightens...and investors return to their senses.
The re-rating of subprime risk has the potential to return investors to their senses AND tighten the availability of global credit, all at the same time. That's why markets are so nervous about it.
In the broader sense, the decline of the world's reserve currency means massive falls in Dollar-denominated stocks and bonds. Just what will happen to cash, precious metals including Gold Bullion, and the stocks of firms that produce tangible assets...is unknown. That's why it's worth reckoning with every day.
In the larger historical scheme of things, the age of American economic ascendance is over. That is, America can no longer afford to be the engine of global growth. The US economy has been red-lining it on debt for far too long.
Who will replace the American consumer as the chief source of global demand? Well, no one is ready to step in and take that role right now. The Euro is enjoying a great run because investors correctly identify Europe as a high-savings, decent-growth region to own while the greenback implodes. But the next 50 years belong to the Far East.
Eventually, the great source of new consumer demand in the world lies in the Middle Kingdom and India. Right now, all the investment opportunities from Asia's rise are in resource-intensive industries and infrastructure. This explains Australia's golden age. In the next few years, you'll see a gradual shift to retail and consumer opportunities in Asia's vast domestic markets. It will be time to buy Chinese stocks. And the next Warren Buffett will spend his time sifting through the 7,000 publicly listed companies in India, 6,500 of which are covered by one analyst at the most, and usually none at all.
But before that happens, the whole global economic growth model has to reorient itself away from America. Asia has to stop gearing its currency and growth strategies through exports to the United States. That's been an extremely useful and profitable strategy, however, for the last 50 years. No one is going to change until they are forced to. The Dollar's steady deterioration is doing the forcing.
Don't expect a seamless transition, though. Imagine changing the engine in your car while going full speed down the free way. You couldn't do it. There would be a wreck and all sorts of twisted metal.
Indeed, we found an artefact of defunct money, from France's depression-era currency collapse, while going through the contents of our father's old Spanish chest. It's a small, gold-looking coin. On one side it's dated 1921 and says "Commerce" and "Industrie". On the other it has a big "1" surrounded by the words Bon Pour and Franc.
"Good for one Franc," in other words. But where did this relic come from? What did it mean?
Our curiosity piqued, we went to Google what we could find. At one coin site we read this:
"This coin is indeed a French franc made of aluminium bronze (Br Al) and minted from 1920-28. It is a form of emergency money as there was a shortage of small value coins during this period of global economic depression. It actually says it is 'Good for 1 Franc'. Dumard was the coin's designer. Collector value depends on date, number minted, mint mark (if any), and condition of a coin, including amount of wear, any dents, scratches or cleaning. This one had a mintage of nearly 55 million and may be worth $1 or less if it has any wear at all."
If correct, this shows what all governments eventually do to your money. They inflate supply gradually so that each new unit worth less and less. This particular coin isn't a Franc...but it's good for a Franc. It might as well be a bottle cap. The government encourages you to treat it as if it were worth something. The melt value of the metals in the coin were probably more valuable than the coin itself.
Something like this has been happening to American money since 1974, when the quantity of paper money was de-linked with the Physical Gold Bullion in Ft. Knox. Left to their own devices, governments will print as much money as they can, until the market holds them accountable and the currency approaches its true value. Whether you believe in the ability of Ben Bernanke's Federal Reserve to save the US Dollar reminds us a little of Pascal's gamble about the existence of God.
Blaise Pascal, the famous French mathematician, famously showed that the value of believing in God outweighed the value of not believing in him. If you believe in God and God is real, you're saved. If you believe in God and God is not real, no big deal. But if you don't believe in God and God is real, you're doomed to hellfire and damnation. The prudent risk-management, Pascal reasoned, is to believe in God.
We would suggest the same prudent risk management when it comes to money. Because it would seem best to believe that, given enough time, the government will destroy the purchasing power of your savings. The value of believing in the eventual failure of central banking is infinitely greater than the value of believing in the success of central banks.
And really, what are the alternatives?
One the one hand, you can have confidence in the way the government manages your money. To do so, you'd have to ignore all the facts confirming the government's active mis-management of the money and the money supply. But go ahead if you'd like.
What is the value of believing that paper money schemes always fail? Well, that one is simple. If you believe it, then you'll take steps to prepare for the eventual collapse of the paper money system and its replacement by something else (probably by some other paper money system.)
What do you really risk by not trusting in the durability of government money? Your risk is that the historically inevitable collapse of fiat money...which we here at the Daily Reckoning think you are witnessing...may never come in your lifetime.
To put Pascal's wager into action, Buy Gold with at least a little of your savings today. To spurn it, stick with paper money and digital credit alone.