6/7/2012 5:36 PM ET|
Tear up your paper money
Modern currency is nothing without trust that governments that use it will back it. And if the once-strong euro can break, what is safe?
So what is it about money that the leaders of the eurozone don't get?
Money has been around for a while, and it's not terribly complicated.
The key element is trust. That was true when money was a piece of metal that you could bite or bounce. Now that money is just a piece of paper, it's even truer. Today's money is nothing but trust.
That's why the euro crisis is so bizarre. The euro is, in theory, one of the world's great currencies. And yet, as this crisis has demonstrated, nobody actually stands behind it. There is no lender of last resort. There is no "full faith and credit." There's nobody on the other end of the promise.
And it's as if the leaders of the eurozone wanted to go out of their way to prove it. They've taken us up to the velvet curtain and then themselves, with a self-satisfied smile, pulled it aside to show us that there is no Great Oz.
And in the process they've done major, and perhaps irretrievable, damage to their own currency and to the very idea of money in our time. If you can't trust the euro, what paper can you trust?
As solid as the solidus?
The idea of money may never have been grasped more clearly than in the Byzantine Empire, the great Roman Empire of the East.
From the time Constantine the Great minted the first gold solidus in 312 until the final coin was minted by Basil II, the Bulgar Slayer, around 1020, the solidus was minted at a steady rate of 72 coins to a Roman pound of gold, or 4.48 grams of gold per coin. When coins came back to the imperial treasury -- all taxes had to be paid in solidi -- they were melted down and restruck. No wonder most Byzantine emperors were proud to put their own images on the solidus.
And it's clear that the Byzantine emperors understood the power that owning a trusted currency gave them in the world. One of the first acts of the empire after recovering from the chaos caused by the attacks of the Seljuk Turks in Asia Minor and the Normans in Italy in the 11th century was to reverse the debasement of the currency that had begun in 1042.
By 1080 the solidus was down to 10% gold, as embattled emperors melted down older coins, diluted the gold with silver and then attempted to pay their mercenaries with cheaper money. The empire's own troops, however, refused to accept the solidus, which had been the most respected coin and the medium of exchange from India to the Baltic, as payment. In 1092, once order was restored in the empire, Emperor Alexios I Komnenos replaced the debased coins with the hyperpyron, a new coin of 20.5-carat gold. The new coins contained 4.45 grams of gold.
That's a steady currency. A drop of 0.03 grams of gold per coin in roughly 800 years.
The euro is no hyperpyron
Contrast that to the euro.
The currency was created as if it would be a monument to stability. That's why there are no provisions in the treaties that created the euro for a country to leave the monetary union and go back to its own currency.
But the reality is that the euro is way more leveraged than the solidus, even at its worst. After all, even the debased solidus still contained 10% gold.
Start with the European Central Bank. The bank has official equity capital of just 6.5 billion euros, roughly $8.2 billion. That tiny bit of capital supports a balance sheet that now totals 3 trillion euros -- about $3.8 trillion.
How is this possible? It's possible because the European Central Bank is essentially owned by the national central banks of Europe. They have contributed the bank's capital in exchange for ownership stakes in the bank. Through that structure, the European Central Bank has a claim on these national central banks.
It you think of it structurally, each national central bank owns a share of the European Central Bank's balance sheet. All those Spanish, Greek and Italian government bonds, all those mortgage-backed assets, all those loans to French and German corporations that European banks have used as collateral for loans from the European Central Bank ultimately belong, for better or worse, to national central banks.
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Let inflation come.
When bread is $20 a loaf and silver is $300 an ounce, I will sell off silver and gold for inflated dollars and pay off the house in full and buy solar panels.
Fiat currency is not a store of value, it is merely a means of exchange with an unstable worth. You don't exchange metals for food. You trade metals for money and then money for food.
Or you can grow it like me.
I'd say with 15+ trillion in debt and lots more in unfunded obligations, the dollar's day is coming (after the Euro). They can play all the little games they want and hope all that they can hope, but when the avalanche has already started, it is too late for the pebbles to vote.
Our currency will only become worthless when people stop accepting it as payment for goods and services. This is why gold, stocks, bonds etc. have their value expressed in terms of dollars.
Try taking an ounce of gold into a grocery store and see how much food you can buy with it.
Doesn't matter how much it's "worth" because it's not accepted as currency.
Investing in anything is a trust game, be that currency, metals, stocks etc. You're either trusting that governments will do what is needed to keep inflation under control, trusting that metals will still be valued or that companies will remain profitable.
If you really believe that the dollar is going to collapse and money is worthless you're best bet is to invest in hoards of tradable goods and create a stash. Canned and dry foods, pots and pans, textiles, etc.
LEAVE THE TAX CUTS IN PLACE FOR ANOTHER YEAR OR TWO do not cut spending as much as planned this next year, only cut spending a little, and try to eliminate waste, then require everyone to pay cash money on the budget deficit, millionaires, banks, oil companies, insurance companies etc, everyone on a sliding scale, to raise two trillion dollars, really fast, and pay the budget deficit off in full, use the money left over, to do infrastructure, in the country, then pay all the unemployed around 17 million of them 600.00 dollars per week tax free for two years, and let them find work, but tax the work they find, then take 28% from the top and give that to the states every week for two years, this will stabilize the states, and create jobs, and bring in tax revenues, cut these 17 million off of any subsidies for two years, do this even if the debt ceiling needs to be raised to do it the economy will take off like a rocket, the debt will come down, because of the millions of people working, and paying taxes, the country will save on everything, food stamps, etc. and lower crime, it would help to fund medicare, and SS, the soldiers returning could all find work, the ones paying the cash could get tax breaks to get a lot of their money back but they should be proud to refuse those tax cuts, as part of doing their patriotic duty, they would not suffer any hardship for doing it, [example if a millionaire paid fifty thousand dollars, or a billionaire paid a million dollars, a bank, , the country is facing a crisis the congress, and the President should do this and worry about elections later!!! It would probably help the real estate markets to, I know small business would recover, manufacturing would go through the roof, what are we waiting for we have the means to fix this problem overnight???
If a hundred million people paid twenty thousand dollars it would come to two trillion dollars, how hard can it be to raise the money???
At the time of the solidus, it was possible to create enough currency to handle all the needs of the Roman Empire. But if you did that now, you would reduce currency to a tiny fraction of what it is now and greatly restrict the economies of the world. Even in the late 1800's, it was becoming impossible for farmers and small businessmen to get capital under the Gold Standard and the USA was right to repeal it in 1913.
Freeing a currency from material things essentially says, "the government guarantees it has worth to back up the currency." The worth can be in terms of dollars worth of hydroelectric power from the Hoover Dam, stored gold, oil reserves, etc. It all works out for much better.
I would like to see a new monetary unit created that automatically holds its purchasing power by adjusting in dollars for inflation, which does not get taxed on the adjustment as phantom income. That’s what I would like to hold in my bank account. That’s what I would like to get paid for my salary. Let the government back and guarantee this, instead of near zero interest rate loans to Wall Street banks.
Isn’t it amazing that among the tens of thousands of investment products offered by the financial industry for long-term retirement savings, not one of them guarantees this simple performance metric? Isn’t this disgusting?
Trust means expecting your government (or it's corrupted central banks) won't double the money supply almost overnight to pay for bloated government programs and pet projects of the politicians that the government should never have started or expanded to unreasonable scope.
In America we should be seeing massive inflation except that the Euro and other currencies were also massively devalued at the same time. This is why gold and other precious metals went through the roof while the Dollar maintained or improved its value against other currencies.
The Fed claims not to profit on the money it issues to the US government, but that is a bunch of bunk because what they mean is the owners take out as salaries all the profit and salaries are an expanse. The Fed is the largest financial parasite the World has ever known.
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