Dear Friends,
It seems to me, the profligate spending of the world’s leaders will soon end in economic disaster. The US Dollar, the cleanest shirt in the hamper, is filthy. With 40 trillion of debt and 1 trillion annual debt payment as of writing this, the dollar’s reserve currency status is under terrific stress. Meanwhile, the other currencies it vies against are being held up by balloons, hope, and more debt. The reason is that the governments of the world have engaged in extraction instead of leadership. The incentive structure forced them to. The real problem with all the currencies collapsing all at once is what will we use in their place? Currency has utility other than as a means of extraction. Currency facilitates transactions by providing a neutral intermediary between goods.
The reason you use dollars to buy bread is because it’s efficient. We could exchange a dozen eggs for a loaf of bread, but that would require the baker to need those eggs. What if he needs flour? Then he has to find someone who has flour and wants eggs. That is an inefficient use of his time. Better to have a currency that can be exchanged for anything. This is what makes money so important. The problem with this paradigm is, everyone has to agree the currency has value. Cowrie shells were a form of money back in the day. This tells us the form is irrelevant but the people’s opinion is everything. So if a currency is abused so much it loses 90% of its value in a few decades, that event corrodes people’s opinion of its value. If our opinion goes to zero… so does that currency.
If a currency has zero value, how do we trade? There has to be a replacement or else we’re back to trading eggs for flour. Many central banks are turning to gold. This is a tried and true method of storing wealth but gold is a cumbersome form of currency. Gold-backed money was the standard in the early twentieth Century, but the profligate spending of the time forced all the nations to disconnect from gold and become fiat currencies. The only legally but not exchangeable gold-backed currency is the Zimbabwe ZIG. It was introduced because of the hyperinflation they experienced. No major world currency is gold backed. This is irrelevant if everyone agrees they have value. The trouble is, that perceived value is eroded by the printing, borrowing, and spending of the world’s governments.
In a fiat system, if there are 100 dollars circulating, and 100 more dollars are added, the ones in circulation lose ~50% of their value. This is because there are 200 dollars seeking the same amount of goods and services. If this continues, the dollar will eventually become worthless. In a gold-backed system 100 more dollars can’t be printed unless the equivalent amount of gold is added to the reserve. This keeps the number of dollars stable but could fall short in high growth times triggering deflation. If the amount of products and services grows but the money supply doesn’t (because there’s no more gold available to back more money printing) the value of the dollars in circulation must increase. That is textbook deflation. The economists made it a bogeyman to rationalize their printing and spending.
So here we are, many nations on Earth have more than 100% debt-to-GDP. The US has ~40 trillion in debt in an economy that produces ~30 trillion. This is setting the US and thus the world to go into a tanh curve collapse. Slow at first then all at once. We’re in the slow phase now, the collapse will be almost straight down, with a leveling off at the bottom. Who knows how far down that bottom will be? With no currency clean enough to step in to fill the gap, that bottom could be far down indeed. One could hope for the best, but it’s wise to plan for the worst at the same time. In my self-educated arrogance, I think people should move their savings from fiat and into actual assets. Things that pay you to own them instead of costing you to own them. Then wait it out.
Sincerely,
John Pepin
