Fiat Money

No, I’m not talking about the $15K you’ll shell out at your Chrysler dealer to buy a Mexican-made Son of Mini.

[The Cinquecento is designed by the same guy that did the 2002 Mini re-introduction, so I’m not kidding when I say it’s the “Son of.”]

I’m talking about a reader comment on the Correlation Curse post.  Trent wrote the following:

It could be helpful to express the article in terms of purchasing power of bullion vs fiat money; Fiat dollars will lose purchasing power as they are created without limit by government.  Bullion may lose some purchasing power relative to things you want to get, but it’s likely to be the ‘cash’ demanded preferentially over fiat for exchange for goods and services– Unless you are talking about returning to a barter economy.  All bets off in that case!

Trent — here’s where we differ.  I see all currency, including bullion, as means of transacting barter.  To me, there’s no difference between trading a Krugerand or a check, or a Puka shell necklace, for something I want, or for someone’s labor.  The same for trading my labor or things to someone else.  Usually I won’t be needing exactly what they may have in surfeit,  so we both use currency as our means of transaction.

The Dollar, bank checks, Puka shells and bullion all depend on the joint agreement among us that the “currency” represents purchasing power.

You ask me to guess what sort of purchasing power a gold coin might have after the Apocalypse, and I say “I don’t know.”  I also say that a box of 22 Long cartridges a can of gasoline or a bottle of Doxycycline might be worth more, and so might a stack of $20 bills.

Certainly the stack of twenties and the gold bullion both rely on the belief of the transactors that the means of exchange is actually worth anything.

At least paper money is easier to hide and carry than bullion, and there’s enough of it in circulation to provide the means of executing trades for the size of our economy.

Maybe you can tell me — are there enough gold coins in the world for each person to own at least one?  I suspect there aren’t, and for that reason alone, I don’t see them serving as a basis for a post-meltdown economy.  You need enough units of exchange to float the volume of transactions that go on.

That said, I’ve been doing quite well lately with a small gold miner Moriarty of 123Gold mentioned months ago.  I’m fully aware that if everything melts down, my shares can only be sold for dollars, and some people may not be willing to trade anything of value for those dollars.

I’ll take that chance.

FWIW, I did own both Krugerands and No Motto Ste. Gaudin Walking Liberties in the past.

They’re gone now, and you could say that I traded them for an inventory of classic McIntosh amps and JBL speakers.  But that’s for another post.

hh

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10 Responses to Fiat Money

  1. Jon Rosenbaum says:

    Hmmmmmmmmmmmmmm
    classic McIntosh amps and JBL speakers.
    Prefer Yamaha receiver and Magnaplanar speakers myself…..the high end for both.

    • hhill51 says:

      I use Bose 901’s for the mids, and it works pretty well. Nothing quite like an all-analog end to end sound (vinyl, tube pre-amp, tube power amps). Amping the woofers, mids and tweeters separately also allows me to tweek and fill the room with sound that comes awfully close to the original performance.

  2. Edwardo says:

    “Certainly the stack of twenties and the gold bullion both rely on the belief of the transactors that the means of exchange is actually worth anything.”

    When in human history, that is to say, when, over the last three thousand years, has gold not held (considerable, if not great) value, both as a medium of exchange and a store of value? Gold’s value, as silver’s, has certainly waxed and waned, but it has never been reduced, not even close, to the stuff of wheelbarrows. And it has certainly never ceased to exist altogether as so many currencies of yore have. And both metals have, with silver certainly being in the ascendant in this regard, very clear value with respect to industrial use broadly defined.

    And though I am loathe to bring the execrable Maestro into the discussion, he was correct when he observed that, “Fiat money, in extremis, is accepted by nobody. Gold is always accepted.”

    All this by way of saying that, present day brainwashing in the U.S. and other parts of The West aside, perception really plays little, if any, role, in how humanity views and interacts with precious metals.

    I don’t imagine it is your intent to do so, but your juxtaposition of fiat with gold-whereby you assert that they both rely on belief- is, in essence, a canard, and one that the purveyors of fiat, which is merely money established by “official” decree, rather than custom, tradition, or any sort of broad lasting consensus, etc, etc. are only too happy to have us all succumb to.

    This is not to say that it’s inevitable that gold and/or silver will, in any official way, return as the anchor of our financial system. It likely won’t, but, by the same token, it won’t have to.

    • hhill51 says:

      Eduardo….

      You nailed it with the word consensus. It’s only worth more than base metals like lead or iron because you and your counterparty agree it’s worth more, unless you need to plate some end contacts on a printed circuit board, or some other very advanced industrial use.
      \\
      You can say that it can’t be printed by a government, but if we actually want to have an economy big enough to include all the humans on the planet, there aren’t enough (really tiny) gold coins around to do that directly. Therefor there isn’t enough to be the basis for anything other than yet another paper money system — with faith then put in the representation that there is gold, somewhere, that backs the paper. See the circle looking at it logically takes?
      \\
      As barter items, I think hens, medicines, soap, kerosene, bullets, knives, axes, vegetable seeds, sewing needles and fishhooks all blow away precious metals, unless the consensus survives to put a high value on something that is fundamentally of no use to most people. Do you think your test — whether people would “accept” them applies equally to small useful items?

      • Edwardo says:

        “You can say that it can’t be printed by a government, but if we actually want to have an economy big enough to include all the humans on the planet, there aren’t enough (really tiny) gold coins around to do that directly. Therefor there isn’t enough to be the basis for anything other than yet another paper money system”

        Are you familiar with economist Antal Fekete’s writing on The gold based Real Bills regimes that ably under girded trade before the present fiat period?

        http://en.wikipedia.org/wiki/Antal_E._Fekete

        “Do you think your test — whether people would “accept” them applies equally to small useful items?”

        Yes. Here’s an anecdote: I just hired a workman to do some repairs, and he informed me, without any prompt, that he accepted payment in cash, check, or gold. When I see him, I will ask why he didn’t include silver in his group of accepted forms of payment.

        My point about gold is that an unwavering consensus has been in place for gold (as money) for millenia despite the best (or worst) efforts of the money by decree contingent to have us all think of ala Keynes as a barbarous relic.

      • Greg says:

        Edwardo

        You are correct that gold will always be worth something. So what?
        How much it will be worth is the ultimate question. Why should I give up ONE THOUSAND TWO HUNDRED things that I know will purchase something today to get one ounce of something I have no idea what it will get tomorrow.

        If you want to go for it. Buy all you can. You’ll leave more of the other stuff for me.

        Instead of “preparing” for a post apocalyptic world where gold becomes the prime currency again ( a questionable claim in itself)
        why not work today to prevent that apocalypse from happening.
        We are not on an unalterable path to the New Stone Age, unless we let people like Boehner and Palin have unfettered power.

      • hhill51 says:

        Greg…
        I have a small investment in a gold miner, because I believe enough people will want gold during stressful markets to increase the price paid for it.
        \\
        That said, I don’t buy into the complete collapse of the Dollar scenario, nor do buy into the Apocalypse with a fraction of humanity wandering among the burned-out hulks of our cities.
        \\
        I figure that we’ll finally “get the joke” that people working at a middle class job will need to be paid enough to support living in a middle class house and a middle class neighborhood. The elite earners will have to take less, or pay for more of the essential services we all use. It simply doesn’t work to pay subsistence to most of us, yet take the blood and money it takes to protect private wealth from that vast majority.
        \\
        Right now, we’ve got a populist uprising that still believes in the fairy tale of trickle-down economics, so they blame the equally blind “socialists”…..
        \\
        Neither is right, nor are the end of the world crew that think we won’t adapt to the bad situation we’re creating.
        \\
        Just my opinion, of course, but I do think we’ve come to the end of the half-cycle that extracted prior retained earnings via all the forms of post-1980 tax-incented asset stripping. The coming half-cycle will rebalance the income and assets between the elite and us working proles.
        hh

      • Greg says:

        hh

        “I have a small investment in a gold miner, because I believe enough people will want gold during stressful markets to increase the price paid for it.”

        Bully for you! I dont mean that sarcastically either. What I hope you dont do is try to stir up peoples fear to make your investment more profitable. I’m sure many would say “Why not its his right to market his product any way he wishes?” In this case though those marketing techniques could lead to many people doing many anti social things that put a lot of peoples well being at risk. Its under the “yelling fire in a crowded theater” type behavior in my view.

        “I figure that we’ll finally “get the joke” that people working at a middle class job will need to be paid enough to support living in a middle class house and a middle class neighborhood. The elite earners will have to take less, or pay for more of the essential services we all use. It simply doesn’t work to pay subsistence to most of us, yet take the blood and money it takes to protect private wealth from that vast majority.”

        I agree with your analysis of the situation but I dont have as much hope that we’ll finally get the joke. Not with the modern American GOP frothing at the mouth for some of their power back.

  3. Edwardo says:

    Greg, with all due respect, what you’ve said is positively nonsensical.

    To wit, you wrote:

    “Why should I give up ONE THOUSAND TWO HUNDRED things that I know will purchase something today to get one ounce of something I have no idea what it will get tomorrow.”

    -Let’s be specific, shall we. You are, of course, referring to 1,200 one dollar bills aka FRNs. Now, I’ll answer your question. You should exchange your zero maturity notes for an ounce of gold, (actually you will need considerably more than 1200 dollars) because, unless you have been living under a rock for the better part of a decade, gold, and silver for that matter, have demonstrated vastly superior purchasing power to that of FRNs, or any of the other fiats.

    “If you want to go for it. Buy all you can. You’ll leave more of the other stuff for me.”

    -Will do.

    “Instead of “preparing” for a post apocalyptic world where gold becomes the prime currency again ( a questionable claim in itself)
    why not work today to prevent that apocalypse from happening. “We are not on an unalterable path to the New Stone Age, unless we let people like Boehner and Palin have unfettered power.”

    -Ugh. This is the worst sort of red herring bilge that really indicates nothing more than that you have experienced a lamentable susceptibility to a thorough brainwashing. Gold and Mad Max simply do not equate, and it’s not an argument that has any bearing on the matter of gold’s worthiness versus that of The Federal Reserve’s franchise product.

    • Greg says:

      Edwardo

      Gold has purchasing power?! Not until you convert it back into a fiat currency. I’m sure there are things somewhere that are priced in gold but they are few and far between. See the thing is you cannot give me a value of gold without using a fiat currency as a unit of denomination. Without using dollars,yen, renmibi or euros I want you to tell me the value of gold.
      You cant?? Hmmmmmmmmm

      Are you suggesting that a complete collapse of fiat currencies would not result in extremely dire social conditions?? Interesting. If thats true then you should not give a shit if we print as many as we want.

      I’m suggesting that the collapse will not be from the currency but simply reflected IN the currrency.

      Like I said gold is a fine investment, buy all you want, but at some point you WILL want dollars again. You’ll not know how much your gold is “worth” without them.

      G’day

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