All Fiat Money Systems Fail, Right? Wrong.

One thing we constantly hear all over the media is how “all fiat money systems in history have failed”.   This is just not correct.  By my count, there are several hundred fiat regimes in existence today.  What has failed and will always fail is fixed exchange rate regimes and commodity based monetary systems.  As far as I know, there is not a single one around today that has stood the test of time.  The gold standard has always failed.  And it will always fail due to inherent constraints that make it a very poor monetary design.

Now, you might not agree with the reasons why commodity systems fail (I explain the simple unsustainable trade trends that generally results in the collapse of such monetary regimes here), but when someone says “all fiat monetary systems fail” they are forgetting to also mention the fact that all commodity based monetary systems have also failed.  Oh, and they’re ignoring the fact that hundreds of fiat systems still exist.  So no, all fiat monetary systems have not failed.  And if you live in any developed nation your bank account or wallet is living proof of this fact.

And yes, saying all fiat systems will eventually fail is pointless.  One day the Earth will explode in a ball of fire also.  But that doesn’t tell us much about how to benefit from or utilize the current monetary system during our lifetimes….

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • http://www.memobeacon.com melvin

    I came here to say this.

  • http://jerrykhachoyan.com TheArmoTrader

    Also, most ignore that lots of fiat currencies (Franc, Mark, etc) were exchanged for the Euro, thus reducing the # of “successful” fiat regimes.

  • Broll The American

    Just like all people will eventually die. By the logic of those anti-fiat / pro-gold based monetary system supporters mankind should be scrapped in favor of dinosaurs.

  • http://www.deltafinancials.com Delta Financials

    The point is more that once it fails, it isn’t worth a damn thing. When gold fails, its still worth something. Obviously, nobody believes that statement literally – it’s simply indicative of the government excess that usually accompanies FIAT money.

  • Dunce Cap Aficionado

    +1

  • Johnny Evers

    By ‘fail’, what people mean is that eventually the currency becomes devalued because too much of it is issued. And that has pretty much always happened.
    Also what I take from those failures is that fiat money is a poor way to preserve or store wealth. Money is for spending and for buying things that will retain value (one hopes.)

  • Chris Jackson

    +1

  • http://www.orcamgroup.com Cullen Roche

    When the earth explodes gold will be worth exactly nothing. Just like pieces of paper whose “value” is based on what we believe it is worth in exchange for other physical things. The only thing holding up the value of gold is the belief that it is somehow valuable due to its rarity, beauty or other elements.

    Mistaking gold as having value is like mistaking a ticket for a play. Gold is a medium of exchange. Just like a paper dollar. Gold’s value is sustained by the belief that it has value as a medium of exchange. If there is no output with which to use these media of exchange then they are all worthless. Gold, fiat, all money.

  • http://Avondaleam.com Scott Krisiloff

    Sure, there are plenty of fiat systems in existence, but the fact that one dollar today buys ~11% of the goods that it could buy in 1950 shows a significant impairment. The system hasn’t failed in that people still accept the currency, but it has failed to be a store of value.

    In an economy with increasing productivity prices should naturally fall over time, not rise.

  • http://www.orcamgroup.com Cullen Roche

    No, that has not always happened. There are plenty of existing fiat regimes where it has not happened.

    What has always happened is gold standards have always resulted in the exact opposite. Deflationary depressions resulting in failure of the system.

  • http://myindigolives.wordpress.com/ Ellie Kesselman

    Cullen Roche: You are 100% correct, about this matter.

    Why is advocacy of fiat monetary systems (and floating exchange rates) considered a contrarian view recently? Maybe I am hanging out with the wrong crowd. No… it is endemic. A few Seeking Alpha contributors (Shareholders Unite is one), Liberty Street Economics blog and Bradford de Long provide safe harbor for those that prefer major world currencies… rather than converting all one’s assets into gold and silver.

    So far, you’ve elicited a very congenial selection of comments! (I laughed when I saw the Twitter update, on publishing this post, and guesses as to likely reactions ;o)

  • http://www.orcamgroup.com Cullen Roche

    Purchasing power is not the correct measure of a fiat money’s sustainability. Yes, the USD has lost 95% of its value over the last 100 years. But have our living standards declined? No. Why? Because our output has soared. Our living standards have exploded through the roof. Why? Because 1 hour of output produces substantially more than it did in 1913. We are all wealthier despite the decline in our purchasing power because our labor purchases substantially more output.

    Best to measure the true value of the currency via real per capita wages. Inflation is only part of the picture. And doesn’t tell us much about whether the fiat system has been good or bad to us.

  • David

    I’m just really freaked out that our sun is going to turn into a red giant star and expand out and devour our planet whole. That’s eventually going to happen and it’s not going to be cool.

  • http://Avondaleam.com Scott Krisiloff

    I get your point, but gold does have true utility as jewelry, which maintains its price, which supports its value as a medium of exchange.

    While the value is mostly psychological, so is all other hedonic pleasure.

    A cow that produces milk or an automobile will also have no value when the earth explodes even though the cow can feed you and the car can transport you while the earth is still in an unexploded state.

  • Johnny Evers

    Again, everybody is talking at cross purposes and not listening to the other side.
    What I am saying is that our fiat currency — the dollar — does not hold its value. That’s what people mean when they say fiat currencies fail.
    As Scott notes, a dollar does not buy what it did in the 1950s. Now if you had used that dollar to buy land or gold or stock in Coca Cola, then that would have been a good way for you to store your value.
    But not money. That’s neither good nor bad, it just is. People who want to use money to store their wealth don’t understand the purpose of those pieces of paper.

  • Dunce Cap Aficionado

    Thank you.

  • http://www.orcamgroup.com Cullen Roche

    Right, but the difference between the cow and the gold bar is that the cow (or things like it that nourish us) is actually a necessity. That’s what we use a medium of exchange for. Primarily to obtain things we need. Gold is a luxury. It is not necessary. And its perception as having value is derived from the fact that it is a luxury item or something that is difficult to replicate.

    In a true survival environment gold will have no real value. The only things that will matter to you is how many guns and cans of food you have. paper money will not matter. Gold will not matter. Real wealth is what will matter. Physical medium of exchange is the result of man’s evolution into socialized creatures. Take us back to our roots and you’ll find that the medium of exchange is in fact all in our heads.

  • http://Avondaleam.com Scott Krisiloff

    You’re confusing two issues. You’re right, the real economy has grown exponentially in the last 100 years mostly in spite of our fiat system. An hour of labor buys much more because of technological advancements and productivity enhancements. I think we agree on that.

    That doesn’t change the fact that you absolutely should measure the value of a fiat MONEY system on its ability to store wealth. Money is a wholly different concept from the economy whose value should not be itself influenced by the changing state of the economy. That is to say, if it takes fewer hours to produce the same widget, it should mean that the widget can be purchased at a lower price.

    In real terms, that is exactly where we find ourselves, but in nominal terms the price of the widget has only gone higher. That is because the money which determines the numerical value of the widget has fallen in value.

    The problem with this circumstance is that the holder of of the fiat currency “contract” or “security” usually agrees to hold currency based on the understanding that the security will not decline in value but maintain it. The fact that it declines in value slowly is a surreptitious theft of the property of the holder and therefor represents a failure of the fiat system.

  • Dunce Cap Aficionado

    Johnny,

    Do you truly believe the 1950s comparison is a fair one? Can you pick a product or service that was available today and was available during the 1950s that has not had and marked change, from the raw materials that go into it, the processes and procedures that are used to get/transport/change and ultimately make the product/service, and the abilities or impact(s) of the product/service itself? Interested in your thoughts.

    Best,
    DCA (I AM NOT A SPAMMER!)

  • Sigi

    I don’t agree that saying “[fiat systems] will eventually fail” is pointless. I also think that the comparison to the Sun eventually expanding is moot.

    Both for the simple reason that it is conceivable to have a monetary system that is — maybe at least theoretically — indefinitely sustainable. I’m not under the impression that is true for the fiat systems that we have tried so far.

  • http://www.orcamgroup.com Cullen Roche

    That’s not correct. Wages denominated in USD purchase twice as much as they did 40 years ago. You’re just looking at inflation. That’s the wrong measure. You have to use real per capita wages. We are FAR better off than we were in 1950.

  • http://Avondaleam.com Scott Krisiloff

    The value of the cow vs the gold is a personal value judgement (one I admittedly agree with) but that doesn’t make us the sole arbiter of relative economic worth. It may very well be the case that all the cows in the world are worth more than all the gold in the world. This would hypothetically tell us that both items are properly priced, but one is more abundant than the other (cows more than gold because lower per unit price).

    Definitely if we were in a Mad Max apocalyptic environment I’d probably rather own guns and farmland, but the point isn’t that I’d rather own productive and relatively scarce assets. The point is will I need a means to purchase them? [You could argue that I wont and the strongest tallest people will rule the world (that would be bad for me).] But if the post-apocalyptic world does have some form of trade then gold is a good commodity to facilitate it because it is a) standardized b) malleable/divisible c) supply constrained. Gold may be a barbarous relic but it is not wholly useless and there is a reason that it formed the basis of currency for thousands of years.

  • Anonymous

    Indeed, does anybody remember that 1982 article in The Atlantic, “Have you Ever Tried to Sell a Diamond?

    What people think has “intrinsic” or inherent or “essential” value it turns out is always a cultural construct. So that distinction Cullen makes above is important.

    http://www.theatlantic.com/magazine/archive/1982/02/have-you-ever-tried-to-sell-a-diamond/304575/

  • http://www.orcamgroup.com Cullen Roche

    You’re just looking at inflation. You can’t just subtract inflation from itself and claim we are worse off. Real per capita wages have doubled in the last 40 years. This means it takes a lot less time and labor to purchase the same amount of output.

    I hear this argument all the time. “Why do we need two heads of household to survive today?” Because households today want to live in a mcmansion, with 5 cell phones, 2 cars, 5 flat screes, 5 computers. If you really wanted to live a 1950’s lifestyle you could easily afford to on one income. But start by getting rid of all the advancements that make your life great. In other words, rewind your living standards by 60 years and there you go. One job. Your wife can go collect water from the river and wash clothes on a board. You can walk to work and go hammer out swords or tools. If that sounds like fun then go for it! :-)

  • Dan

    Indeed, does anybody remember that 1982 article in The Atlantic, “Have you Ever Tried to Sell a Diamond?

    What people think has “intrinsic” or inherent or “essential” value it turns out is always a cultural construct. So that distinction Cullen makes above is important.

    http://www.theatlantic.com/magazine/archive/1982/02/have-you-ever-tried-to-sell-a-diamond/304575/

  • Johnny Evers

    We’re better off than we were in the 1950s.
    A television is ‘better’ than it was in the 1950s (although I doubt that people derive any more pleasure from watching TV today than they did back then. Another subject, perhaps.)
    But that has nothing to do with the argument that the dollar has not held its value.
    Look, money is a medium of exchange, agreed? I can’t exchange my labor for your goods, so money stands in. And when an man takes his earnings for the month, let’s say $2,000, and put it in the bank, what he expects is that he can use his earnings for this month, to pay for his expenses in the month he retires 20 years from today.
    But in a fiat money system, he cannot do that.
    If he were to buy an ounce of gold, perhaps he could.

  • Pierce Inverarity

    Gold is a good record keeper, but it in and of itself is not a basis of money. Money is something else entirely.

  • http://Avondaleam.com Scott Krisiloff

    Ellie,

    Do you hold 100% of your assets in cash? If you don’t then you don’t actually own a majority of your net worth in fiat currency, you own assets that are easily convertible into fiat currency. If you’ve chosen equities, then you’re likely to outperform gold over the long term and if a fiat system were to truly fall apart you would be able to convert into whatever currency follows or even more gold than you could have today.

    The point is not whether fiat systems fall apart or are better than fixed regimes. The point is that all assets are inherently backed by the price of all assets in that there is a negotiable price of convertibility.

  • http://www.orcamgroup.com Cullen Roche

    The main reason gold is perceived as a good medium of exchange is because it is perceived as being rare and pretty. This is largely the result of religious and social beliefs that persist due to the brainwashing of current generations by past generations. Its value is 100% in our heads. Like paper money, gold has no real utility. If anything, it is a luxury item. Same as paper money. It has no real utility. Mistaking gold or fiat as having value is like mistaking it for a ticket at a movie theater. The ticket does not have value. It is the movie that has value. Just like the cow has value. Gold is no better as a medium of exchange than a diamond or any other rare rock. There is nothing special about gold. But we hold onto the past for dear life because the uncertainty and change of an evolving monetary system is scary.

  • Johnny Evers

    People have been using diamonds as a store of value for thousands of years. If you were a Jewish trader in a Slavic territory in the 17th Century you bought diamonds because they were portable, could be hidden, retained their value and could be laundered.
    And yeah, it’s perhaps illogical that gold and diamonds have that kind of value, but they do.

  • http://www.orcamgroup.com Cullen Roche

    The value of money is tied to output. If you mistake money for the output then you’re missing the whole point. If a society’s output fails to increase and its fiat money supply increases exponentially then living standards will decline. I think we agree there. But that has not happened in the USA so these comments about how we’re in decline since 1950 are totally wrong. Could it happen? Sure.

  • http://Avondaleam.com Scott Krisiloff

    Cullen, again, we’re in total agreement that society is much much much much much better off than it was in 1950 measured in real terms.

    The reason I am talking about inflation is that I am arguing that inflation is the only adequate measurement of the efficacy of a fiat currency (note: not net worth, economic value, long term savings). The currency itself is a highly specialized short term security which is supposed to maintain its value over time.

    We could argue whether or not the fact that this security surreptitiously declines in value over time has helped to boost real economic growth (I would probably disagree net-net), but that’s not what we’re discussing here. My understanding is that we’re discussing whether the currency itself has failed and I’m saying in one of its most basic functions (store of value) it empirically has.

  • http://Avondaleam.com Scott Krisiloff

    Tell that to my girlfriend.

  • http://www.orcamgroup.com Cullen Roche

    My girlfriend hates gold. We should have them duke this out. :-)

  • Johnny Evers

    Cullen, let’s write a contract. Every year you give me the option to buy gold from you at $1,715 an ounce.
    Let’s see whose living standard improves the most over the years.

  • http://Avondaleam.com Scott Krisiloff

    Please!

    I’m sure she likes other pretty/useless stuff. We all do.

    Why do I have an iPad again??

  • Don Levit

    Cullen mentioned that as long as output increases and that money creation does not increase exponentially, then living standards will increase.
    It is interesting that he speaks of output only increasing versus the money supply increasing exponentially, which leaves a whole lot of space for the money supply to increase.
    And, who says living standards are better than they were in the 1950s, when one income supported 4 children, whereas today, two incomes are needed to support 2 children.
    You may counter that we are livving much better materially, but the value of the extra materiality is subjective, particularly when you see that private debt has exploded since the 1950s. There are a lot of material goods and services one can enjoy if he goes into debt to do so.
    Don Levit

  • hangemhi

    I do enjoy the “dollar was worth x in 1913″ comment. Last I checked you’d be 100 years old if you were born then, and dead for decades if you cared enough about buying something today with the dollars you had saved in 1913.

    At least in this comments section 1950 is being used… but if you’re trying to retire in 1950 btwn the ages of 55 and 65 with your hard fought savings…. you’re also dead today.

    Finally, most of those I know who are up in arms about “the fed is stealing our money through inflation” have no money. They’re fighting the rich man’s battle…. which is fighting for the value of his money when his grandkids get it. What a waste of breath

  • Tradeking13

    Gold will be worthless eventually, once we figure out how to manufacture it.

    http://www.youtube.com/watch?v=dvmvu6GxqSg#t=81

  • http://www.orcamgroup.com Cullen Roche

    The ipad is useful. It increases your output. That’s why it’s so popular at businesses….

  • LVG

    Gold bugs should just admit. The only reason they want the gold standard is because they hate the federal government. There is no rational economic argument for it. They just hate the government. Just say it and stop beating around the bush.

    And the funny thing is that I think Cullen is totally understanding of that belief.

  • Mikael Olsson

    So take all the money you have and buy gold. No? =)

  • Mikael Olsson

    All money is a poor store of value. It’s not really MEANT to be a store of value in large scale. Major savings means major loss of output. And then there is no guarantee that the output will be available 30-40-50 years later.

    The only semi-safe investment is broad investment in productive resources. But those are scarce compared to the amount of money that seeks protection today, so we end up inventing new ways to store money and try to fool eachother that they are safe stores when they are not.

  • Mikael Olsson

    I don’t even think currency should be usable for long-term store of value so I fail to see the problem.

  • Mikael Olsson

    Logic does not prevent some people from screaming loudly about the horrible socialist conspiracy. When asked what they’ve been smoking, many tend to answer “Go read Atlas Shrugged and you’ll understand”. Erf.

  • Mikael Olsson

    Might not have to wait that far even. Sea floor gold mining is much closer.

  • Gary_UK

    Oh dear, this was my comment wasn’t it?

    You are correct that fixed-gold standards fail, for the same reason that fiat currencies fail: mankinds desire for its governments to finance nice stuff (and wars) that simply can’t be afforded. They all fail eventually, and ALL fiats will fail eventually.

    Unless, hmmm, how about a currency that keeps a load of gold as a reserve item only, and allows its gold holdings to float against the currency? Wouldn’t that be something unique? Gold as an arbiter for the fiat issuer? And then savers could choose to save in gold or fiat, rather than be forced to invest in nutjob high yield bonds, or govt debt.

    Gosh, if only such a currency existed. And it would be so much better if this currency was separated somehow from the nation state, so it couldn’t be manipulated by bloody politicians.

    If only such a currency existed, it might lead to a better world in the long run.

    Finally, this comment from our host (which is a terrible indictment of his lack of knowledge in this area):

    ‘The only thing holding up the value of gold is the belief that it is somehow valuable due to its rarity, beauty or other elements.’

    …is at odds with this comment:

    “No asset is safe now. The only choice to hedge risks is to hold hard currency – gold.”

    To see who said that, head to this link, then make your own minds up who is seeing the future, and who is stuck in the present, ignorant of gold’s history:

    http://af.reuters.com/article/commoditiesNews/idAFL3E7NQ1SV20111226

  • Gary_UK

    ‘But have our living standards declined? No. Why?’

    Because you have been living off the backs of the Chinese and others for 50+ years, way way beyond your means. And I do believe your living standards are already on the slide:

    46+ million on food stamps is it? Woo hoo for higher living standards!! Ok if you live high on the hog in Washington, but I see America already in decline, and the day of reckoning hasn’t arrived yet.

    Take away the debts and what do you have left? Bugger all of nothing.

  • http://myindigolives.wordpress.com/ Ellie Kesselman

    LVG,
    Although I received no answer from Cullen (nor the person who did reply, whose point is too subtle for me to comprehend), I DO understand what you just said. That makes sense, finally. So-called gold bugs don’t like, or at a minimum, strongly distrust the government, for any number of rational or irrational reasons. I do wish they would just acknowledge that.

    Being a fan of fiat currency versus a gold standard isn’t equivalent to approving of every action and policy of the Federal Reserve. Those get muddled too.

  • Mikael Olsson

    Cullen, you state several times that real wages are up over the last several decades years so I have to ask… using which comparators? Because the way I see it the last 30 years have been years of real wages dropping except where number-of-electric-gizmos-you-can-buy are concerned.

    The current CPI tracks with average hourly earnings for nonsupervisory employees. But add in medical costs and rents and it doesn’t look as shiny anymore.

    Quick FRED graph to illustrate:
    http://research.stlouisfed.org/fred2/graph/?g=cxX

  • Mikael Olsson

    Bad graph I agree. Something like % income left after taxes & insurance & school & rent would have been more useful. Or possibly how many Big Macs it would buy.

  • Mikael Olsson

    I’m a huge fan of the fact that we haven’t had 15-25% recessions every 5-10 years after WW2. But that’s too facts-ey to comprehend for the goldbugs.

  • Mikael Olsson

    Who is preventing you from buying gold to ensure future value store if that’s what you believe is best?

  • Mikael Olsson

    1. You are absolutely right that 97% of money is debt-created and this is turning problematic; any deleveraging hits the economy hard now.

    2. I’m sorry, no, it’s not about living off of Chinese backs. Automation and offshoring mostly enables huge profits. Our societies are hugely productive now thanks to all technological advances. We can produce WAY more than Joe Worker can afford to buy. That’s the only problem in this recession – consumers don’t have enough money.

  • Bond Vigilante

    When (NOT IF) the US goes down the drain then the fiat system called USD goes down the drain as well. Then it will be replaced by another fiat system, e.g. gold, CAD, New York dollars or Texas dollars. All monetary systems are fiat systems, even gold. When there isn’t gold available then people will use e.g. rare seashells instead.

    The USD has lost 95% of its purchasing value since 1900. So, the purchasing power of the USD can increase 20 fold in the next two or three years. In the next deflationary leg of the crisis.

  • Bond Vigilante

    The gold standard has failed because governments have created more credit/debt than they had gold.

  • beowulf

    Depends on what you pay Cullen for the option premium. In fact, sometimes there is such a thing as a free lunch (Pigouvian taxes!) but there’s no such thing as a free option. You wanna dance, you gotta pay the band.

  • http://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation Jason H

    Exactly

    China has had fiat paper currency for over 400 hundred years (before it was conquered by foreign powers with guns) to become the most technological advanced civilization on the planet (inventing printing press, compass, plough, steel (along with India), porcelian, ceramic, etc hundreds of years before Europe) –that’s 200 hundred years longer than how old the US is. It then went back on a gold/silver standard & deteroiated

    archaelogical studies show the first money used were commodities like grain, salt, cowrie shells,

    Jewelry DOES NOT retain it’s value.. New York Times did an experiment & tried to sell $1 million in diamonds on the black market… it only got 10% of it’s value

    MOney (gold & jewelry) is only worth what society will accept for it as a medium of exchange…

    European traders/explorers meeting primitive islanders in the Pacific & Amazon have written how the natives were NOT interested in trading their food for the ships/sailor’s gold but instead were more interested in their steel swords, guns & whiskey.

    Gold,Jewelry, Rembrandt paintings, modern art paintings, & gold.. all their values are subjective —

    and when thee is no production, they are worth nothing if you all you want is food (ie,try trading gold or your Rembrandt painting when there’s no production after WW3) or other things that are useful instead of decorative.

    Any study of history or economics will detail that

  • http://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation Jason H

    More sources/support for Cullen from economics PhD. Steve Kangas in 1996:
    http://www.huppi.com/kangaroo/L-gold.htm

    What are the benefits of the current [fiat] system?

    The most important has already been mentioned: the elimination of depressions.

    Being able to expand the money supply in times of unemployment and recession is a critical tool for government.

    Before World War II, eight U.S. recessions worsened into depressions (as happened in 1807, 1837, 1873, 1882, 1893, 1920, 1933, and 1937).

    Since World War II, under Keynesian monetary policies, there have been nine recessions (1945-46, 1949, 1954, 1956, 1960-61, 1970, 1973-75, 1980-83, 1990-92 ), and not one has turned into a depression.

    In fact, no nation in the world has suffered a depression under Keynesian policies.

    The current monetary system also gives us protection from less scrupulous or unfortunate countries.

    A bank run that starts in Europe is not going to end up in America, thanks to the flexibility and autonomy of the Federal Reserve Board.

    And fiat money also gives economists a chance to tie the appropriate size of the money supply to what’s actually happening in the economy.

    In the end, the amount of gold a nation has is completely irrelevant to its level of economic activity. Gold is a commodity that experiences price swings. A change in dentistry or electronics is enough to change the entire market.

    To see how unrelated it is, consider the following trends. Since the U.S. dropped the gold standard in 1971, the price of gold has risen tenfold.

    But consumer prices have risen only two and a half times.

    If the U.S. had instituted a full gold standard in 1971, the result would have been the worst deflation since the Great Depression.

    And considering that widespread unemployment is usually the result, not deflation, it is easy to see the why such a policy would increase the risk of a depression.

    Gold bugs also face an enormously challenging question: what kind of gold standard would they like to create?

    One based on fractional reserves? But that led to countless bank runs. Furthermore, as a practical matter, it doesn’t stop banks or governments from changing the money supply, simply by changing the amount of fiduciary notes.

    So the only purist alternative is a return to commodity money, where a bill is backed 100 percent by gold. But there is no longer enough gold in the modern world to cover the needed economic activity.

    More at the link

  • Stephen

    “the USD has lost 95% of its purchasing value since 1900″

    Wow,that’s absolutely astounding,it is. Even more so when you think how many people own so many more goods/property than they did in 1900.How many more people use services than they did in 1900.How many more people retire for at least a few years before they die as opposed to work until you drop in 1900. How many more people can have kids in college than in 1900. All I can say is Americans must have been astoundingly rich in 1900,because in an hundred years they have lost 95% of their purchasing power and today they can still have so much. Amazing.

  • Greg

    You are just looking at a dollar stored in a mattress Johnny. How about a dollar invested in the safest vehicle around US Treasuries? Its done a lot better. Its doubled at least twice in 50 years.

    Why should anyone think a dollar stored in a mattress would continue to hold value. A dollar out of circulation is worthless and should be.

    If you aint spending a dollar you cant get anything for it, and just cuz you decide today not to spend that dollar you should not expect that when you later choose TO spend it you can get exactly what you could have gotten before…. thats crazy! Its like deciding not to marry a girl when your 20 and then at 30 going back and finding her and wanting to marry her but now she’s 25 pounds heavier and has lost 5 teeth. You better get what you can now. To quote a favorite 70’s singer Jim Morrison “The futures uncertain and the end is always near! (don da don da don da donnnn, don da don da don da donnnn)

  • Gary_UK

    no one.

  • Gary_UK

    If the US were to be forced to pay up for the free Chinese stuff it has milked, and is still milking, it would have a dramatic plunge in living standards…you would be Greece.

    One day soon you will be, but the govt will destroy the dollar first to wipe out the debt.

    The figures are the figures, don’t let your ideology blind you to that.

  • Johnny Evers

    Greg, when the currency depreciates, it takes away a man’s ability to earn now and spend later. And yes, I do think it’s to government’s responsibility to protect the currency so that its citizens can do just that.
    Our policy now discourages savings, so that as a society we can barely save for a recession or unemployment, let alone retirement.

  • Greg

    Johnny, protecting the currency is a fools errand I think. The currency is not a thing. They (govt) should protect their citizens and using currency is a tool to do that. When many people talk about “protecting” a currency they mean many conflicting things. You hear keeping the currency strong (whatever that means) but a strong currency punishes exporting, which is another way in which most of the strong currency types wish for us to rebuild our economy (get us building stuff again!!). Saving is completely fine but a govt which encourages savings and doesnt run deficits large enough to accommodate the savings desires is actually punishing the citizens. I know that there is an important form of saving which can occur even with a govt not running deficits but the fact remains, most citizens measure the level of their savings by the level of dollar balances in their MM or savings accounts in addition to the stocks or other assets they own (and the price of those assets). And without deficits there will be no excess dollar balances to be in the private sectors accounts.

    So I agree that the govt should protect our savings by ensuring we have access to the dollar balances we desire, within limits of course…..(I realize that the DESIRE for dollar balances might be over a hundred quadrillion dollars at the moment!!)

  • Johnny Evers

    Hi, Greg:
    As we know, money stands in as a medium for exchange. Originally, I labored for the lord and he gave me a pig at the end of the summer to get my family through the winter. Over time, instead of giving me a pig, he gave me a shiny piece of metal that allowed me to buy a big elsewhere.
    In today’s system, I labor and am paid in dollar credits. Same concept. However, if I wait 10 years to spend my credit, I won’t be able to buy the full pig. I will go hungry.
    So, if you are going to take away the human need to save for a rainy day or a crop failure or unemployment ore retirement, then he is going to look elsewhere.
    I’ve never been a gold bug, never owned gold, but reading the discussion in here and seeing the disdain MR advocates have for saving, I would recommend that young people buy gold as a way to store their buying power.

  • Greg

    Hey Johnny

    Where on earth do you get a disdain for saving? I save A LOT personally. My 401k, thanks to almost 30 years of contributing, a fortunate 6 figure salary and matching from my employer, has grown beyond what I imagined when I started working. However I have no illusions nor do I hold the govt or anyone else responsible for what my current nest egg will purchase in 5 years. Life changes, cost of living fluctuates and no future guarantees are my motto as far as investing.

    You say;

    “Over time, instead of giving me a pig, he gave me a shiny piece of metal that allowed me to buy a big elsewhere.
    In today’s system, I labor and am paid in dollar credits. Same concept. However, if I wait 10 years to spend my credit, I won’t be able to buy the full pig. I will go hungry”

    A couple things missing from this story. You will be earning during those ten years and like my girlfriend story you have no right to expect a coin saved under your bed to still buy a pig 10 years later. Thats an absurd expectation. If it doesnt its NOT the govts fault per se.

    Now the govt CAN make sure that when you have worked 25 years (or even if you have never worked) that you can receive a pension, but that requires getting the electorate educated enough to not listen to the deficit scaremongers.

  • Johnny Evers

    Hi, Greg.
    Just a difference of opinion, I guess.
    I think a system in which a dollar today bought the same standard of living 10 years from now would be a good one and would help people plan and take ownership of their lives.
    You mentioned pensions: Such a system would also help companies set up pensions. I’m seeing companies pay out lump sums to their workers, precisely because they see that they are not able to adequately grow the money to keep up with inflation.

  • Greg

    So think about this Johnny.

    How would it even be possible for everyone who saved a dollar today to be able to maintain purchasing power AND accommodate new additions of people to the economy. There are real limits to how many pigs we can keep on the planet, or bushels of wheat we can grow, or any other thing we might wish to claim with our dollar. Nobodies portion of the pie can remain the same as the pie grows and more people are eating from it, its just a mathematical fact. So for us to judge our system by its ability to maintain an unsustainable metric is a problem.

    Ultimately what you are maintaining is that if I can buy 1/1000th of the pig output today with X amount of dollars, I should be able to buy 1/1000th of the pig output in 5 years or Im being ripped off.

    I think that is unreasonable for reasons given

  • Johnny Evers

    Greg, you’re making a different argument now. You’re saying they’re won’t be enough pigs or output in the future, no matter what we do, whether it’s my plan to preserve the currency or the the present promise to buy pigs for everyone in the future.
    The history of this century shows that we will be able to provide the resources for consumption; however, it is less clear that we are providing the tools for the people to buy those goods on their own.

  • percolator

    Cullen you should submit this post to “America’s Finest New Source” http://www.theonion.com/

  • http://www.nowandfutures.com bart

    Reality trumps theory every time.

  • http://www.nowandfutures.com bart

    Generally agreed, especially with the “if” part about gold… or any other asset or good or service for that matter.

    Regardless of whether money value is tied to output or not, the dollar has not held its value. Over the last century, gold provably has – as have many other items – but not consistently during the entire period.

    And if a more correct measure of inflation than CPI-U is used, the picture of purchasing power or ‘output value’ changes greatly.

    Things about which to go hmmm on CPI-U:
    * CPI-U share of total medical costs is ~7%, GDP share is ~17%.
    * Hedonics exists and can be valid like on TVs, but why not reverse hedonics, as in adjusting the other way for smaller airline seats etc. etc.?
    * An hedonic adjustment towards, as one of many examples, chicken from beef is most often a reflection of a lower standard of living or loss in purchasing power.
    * Etc.

  • http://www.nowandfutures.com bart

    That’s not his point. His primary point was that the dollar has lost value, which is incontrovertible.

    Wages are measured in dollars, and they’re gone up a lot more than just twice in 40 years.

    Neither he nor I are debating whether standards of living mostly haven’t increased since 1950 – and that’s a different subject and also subject to individual value structures, much like many her find little use in gold.

  • http://www.nowandfutures.com bart

    “I think a system in which a dollar today bought the same standard of living 10 years from now would be a good one”

    And so did my father, grandfather and great grandfather. A huge amount of folk from my father’s generation lost most of their assets and retirement funds in the irresponsible inflation in the last 60s and 70s.

    I suspect many of those that disagree with your points did not directly experience that period.

  • http://www.nowandfutures.com bart

    No worries. I’ll board my gold spaceship and depart for Alpha Centauri.

    (yes, this is a joke or attempy at humor based on ridiculous extreme points)

  • http://www.nowandfutures.com bart

    Gold bulls are different.

    Gold is both an investment and, to a much lesser extent, an insurance policy against wanton money creation.

  • http://www.nowandfutures.com bart

    Hourly earnings since 1964 – nominal, CPI and CPPI adjusted

    http://www.nowandfutures.com/images/hourly_earnings_cpi_lies1964on.png

  • http://www.nowandfutures.com bart

    Cullen, the best point that I think you made is that no monetary standard lasts forever – whether fiat currency or gold or whatever.

    Reality and actual history trumps theory every time.

  • Johnny Evers

    Owning gold is an investment decision, same as buying Apple or real estate or certificates of deposit or life insurance.
    I wouldn’t say gold bugs hate the government … they distrust the Fed’s mandate to maintain stable prices. Reading some of the comments in here, it’s clear some people don’t even believe the Fed should do that.

  • http://www.orcamgroup.com Cullen Roche

    Gold is nothing like stocks, real estate or CDs. Stocks, CDs and real estate are cash flow producing assets. Their value is largely based on the income stream that comes from the underlying assets. This is nothing like gold whose value is based almost entirely on perception.

  • Johnny Evers

    What matters in the end is what kind of purchasing power you have at the end of your investing horizon.
    A company can go bankrupt, a piece of property can become worthless if the neighborhood changes, Confederate or Weimer script can become worthless, your pension might not be there, government may raise the Social Security age limit on you.
    Gold endures.
    I get the feeling that bothers you somehow, not sure why.

  • http://www.orcamgroup.com Cullen Roche

    It doesn’t bother me at all. But the rationale behind buying gold should never be the idea that it’s an “investment” because it’s absolutely not an investment. It’s a hedging asset that should be held only to hedge a portfolio of cash flow positive assets. If you want to collect rocks in your living room with the hope that some greater fool will come along at a later date and buy them from you then be my guest. But you have to recognize that that’s precisely what you’re doing. There is very little fundamental basis for the value of gold. It is largely in people’s heads. That’s fine. And you can benefit from it. But I think it’s unwise to construct portfolios around zero cash flow assets. It not only makes them impossible to value, but it makes them worthless once the belief in them disappears. Portfolio construction should be designed around cash flow generating assets that have predictable or reliable values and cash flow streams. Gold is a fine hedge, but it’s not an investment.

  • http://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation Jason H

    exactly.. fiat currency & gold/jewelry/artwork ..those are all based on perception & only worth what production they can buy .. if there is no production, no food, (such as historical fact explorers unsuccessfully trying to trade gold for food from islanders from primitive tribes that had no prior contact with Western powers)
    or
    after being shipwrecked on a desert island with only primitive islanders there, or hypothetical WW3 or asteroid hitting the planet ), gold, jewelry & artwork are worth nothing compared to actual real food, steel weapons/guns, etc

    savings really only make sense if:
    1) there is production & working productive society left
    2) commodities that can be used (food) or have cash flow/productive value

  • GreenAB

    fully agree with that.
    to me gold isn´t even a hedge.
    like many other commodities imo gold enjoyed this fabulous run because of BRICs demand explosion. and thats dangerous once the business cycle turn south in China & co.

    i don´t see a reason why gold shouldn´t trade below 1.000 one day again.

    a better store of value is crude oil. while not cash producing it´s the absolute necessity of the economy. and budgets of many oil producing nations are based on certain (high) oil prices. that doesn´t guarantee a floor, but over time they can manage supply to influence prices.

  • Mikael Olsson

    Yeah exactly like I imagined it would look. Hunky-dorey from WW2 til the 70s. Then it looks flat vs CPI but down when you weigh in more factors.

    Cullen! Explain thyself! :)

  • Mikael Olsson

    The gold standard failed because it was causing pain and politicians decided to go off it. Then there was less pain.

    I will absolutely grant you that credit-based money has its own set of problems which we’ve been seeing quite clearly lately.

  • Ben Dover

    You say: “By my count, there are several hundred fiat regimes in existence today.”

    Please list the 10 oldest fiat currencies.

    By the way, your reasoning is faulty. Using your reasoning I could claim: “All people die, right? Wrong! By my count there are several billion people living today.”

  • http://www.orcamgroup.com Cullen Roche

    Ben, I said all monetary systems fail. That doesn’t tell us anything though. What we know is that all commodity based systems have failed. They have all come and gone. They don’t work and never will. So, when people say “fiat systems always fail” it’s useless. As useless as saying all people die. That might be true, but fiat systems aren’t extinct like commodity based systems.

  • Greg

    “Greg, you’re making a different argument now. You’re saying they’re won’t be enough pigs or output in the future, no matter what we do”

    No Im not saying that at all. Im saying that no on e should expect their share of the output to remain the same in perpetuity, which is what the inflationistas are essentially claiming. More to the point though is that simply saving your money is not investment. If you want future output to grow and make your future dollars have more things to access, you have to put in the effort and participate in the process. Putting your bills in a coffee can SHOULD cost you. You are being lazy and asking others to do the investment to produce the output.

    .
    “The history of this century shows that we will be able to provide the resources for consumption; however, it is less clear that we are providing the tools for the people to buy those goods on their own”

    Well you are right that we have done a remarkable job this century, but anyone who just sits on their past earnings and doesnt participate in building that future has no right to complain that the future didnt take care of them. Dont expect everyone to laud your virtuous saving, if you didnt in fact make any investments in the future. Hoarding currency is not investing in the future, its clinging to the past and should not be rewarded.

  • Greg

    Exactly Stephen.

    All that statement shows is that THAT measurement of USD purchasing power has NO BEARING AT ALL on our economic life.

    I hope my grandson can get the same “95% loss of purchasing power” over that time as well.

    Thats the problem with these financial metrics that get thrown around, they have little relation to real economic outcomes like living standards, longevity and overall improvement of life

  • Mikael Olsson

    I’m not sure there’s much ideology involved in the disagreement from my side. Maybe I understand better than you do the nature of international trade.

    I will give you one point: If China says “NO MORE TRADE” tomorrow, much of the world will be in short-term trouble. Because we won’t have the factories to produce the things they sell us. They would have to be built.

    If you would care to elaborate a bit more on what you think will happen in a given scenario, I’m sure we could get more constructive in the argument. Right now all you are saying is “china, debt, doom”, which is hard to argue with other than to say “no”.

  • Mikael Olsson

    I rephrase.. “no, not for that reason”. Because I do think we are headed for the crapper without some system changes.

  • http://www.orcamgroup.com Cullen Roche

    I love that line:

    “I hope my grandson can get the same “95% loss of purchasing power” over that time as well.”

    I am gonna steal that from you….

  • Mikael Olsson

    Gold works for that, sure. Just keep it away from the money system!

  • Mikael Olsson

    1 reason for gold to keep rising: too much idle money looking for safe assets. And that amount of money – relative to the rest of the economy – is always on the rise.

    But don’t take my random input as investment advice; I just offer it as one more argument in the list!

  • Mikael Olsson

    What we KNOW about the gold standard is it produces a very nasty set of boom-busts every 5-10 years with REALLY deep troughs.

    That alone is a reason for me to disregard it as a viable option.

    Do I think that debt-created fiat currency is the way forward long term? No, I don’t. It is pretty evident that the debt component does “funny” things in the very long term.

    I would like to see a carefully managed debt-free currency with a nice controlled inflation to counteract the harms of excessive savings. Reasonable proposals do exist.

    There are also initiatives for peer-to-peer currency that many find interesting but thus far I’ve stubbed my brain trying to understand them. Might give it a shot again.

  • Colin, S.Toe

    Agreed that a ‘debt-free currency’ sounds like the way to go – especially in an era when expansion based on unlimited consumption of resources may no longer be viable.

    I don’t see a problem with savings, if they provide the real basis for the extension of credit to support productivity – or any necessity for inflation, if the supply of ‘debt-free’ money is increased to match real increases in production.

  • Ben Dover

    Well, the title of the article says that not all fiat money systems fail. So if the article itself says that all monetary systems fail, it would seem that you are suffering some confusion. Unless you maintain that fiat money systems are not monetary systems…

    Of course, I am not prepared to argue that all fiat money systems fail. Most of them are very successful in doing exactly what they are intended to do: transfer purchasing power from the populace to the government. In that respect, Zimbabwe’s has been particularly successful. And of course, the general decline in Zimbabwe’s standard of living had nothing whatever to do with its monetary system. Perish the thought! Inflation means good times for all. That is why the 70’s were such a fun decade.

  • http://www.orcamgroup.com Cullen Roche

    Ben, The first line very clearly states:

    One thing we constantly hear all over the media is how “all fiat money systems in history have failed”. This is just not correct.

    If you want to nitpick at the tense of the title then fine. But if you read the article you knew what I was saying since it couldn’t have been stated any more clearly. I’m sorry the facts don’t match your preferred politics. And I am sorry that the gold standard is extinct. Maybe if you keep going all over the internet scaring people into believing your ideas you’ll convince them that we should go back to the gold standard. After all, you don’t have anything to fear from people like me who just state the facts. We’re losing this battle by a mile. You fear mongers just can’t lose these days no matter how wrong you keep getting everything…..And yes, the fear mongering hyperinflationsts who decry fiat money have gotten just about everything wrong over the last 10 years.

  • Ben Dover

    Further, I don’t agree that “all commodity-based systems have failed”. If I had a gold aureus minted during the Roman Republic, I could go out and exchange it for goods and services at least equivalent to what it would have purchased during Roman times.The purchasing power of the aureus remains even though the government that issued it is long gone.

    It is true that paper currencies supposedly backed by commodities almost always end up being devalued. But I would argue that commodity-backed paper currencies are really fiat currencies with the commodity backing being just a gimmick to allow them to be more readily accepted.

  • Ben Dover

    You know, titles are really important. The title should clearly express the idea which will be developed in the article. And your title:

    All Fiat Money Systems Fail, Right? Wrong!

    clearly says that not all fiat money systems fail. Then you tell me that all monetary systems fail, leaving me confused. Then you accuse me of quibbling about the tense. I’m sorry, but tenses are very important, too! And if you are a writer, you should really try to get them right.

    Are you saying that you really intended the title to be:

    All Fiat Money Systems Have Already Failed, Right? Wrong!

    That seems funny to me, because I don’t think many people would agree that all fiat money systems have already failed.

  • http://www.orcamgroup.com Cullen Roche

    You’re changing the topic. The monetary system that existed in Rome does not exist. A monetary system is bigger than any single asset. So yeah, gold might still exist, but that doesn’t mean the Roman monetary system survived.

  • http://www.orcamgroup.com Cullen Roche

    So, you want to declare victory over the tense of the title. Sure. You win. But your gold standard lost and will always lose. And your hyperinflation predictions and high inflation predictions were all wrong. Your prediction that t-bond yields would rise because there will be insufficient buyers was wrong. Your prediction that the USA would suffer a solvency crisis was wrong. Your comment history here is literally one bad prediction after another. You’ve made every incorrect prediction that Austrians and fiat haters all made over the last few years. So sure, if you want to declare victory over a title then go for it. I’m not a professional writer so if you want to critique my writing skills then be my guest. I need the help. But don’t forget to mention to all the readers here that you’re a walking advertisement for getting things about the monetary system wrong. Just as all hyperinflationist fiat money haters have gotten everything wrong for a long time running….So, I’ll stick to getting grammar wrong, you stick to getting grammar right and I’ll stick to getting the monetary system right and you can stick to getting it wrong. Then all will be right in the world. :-)

    In the meantime, if you actually want to try to understand the system we have (as opposed to wishing for a new one) then perhaps read my paper on how the system works. After all, I am not here to have conversations about grammar and politics. I am here to help people understand how the system works. If you’re not interested in that then you’re probably wasting your time reading.

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625

  • Mikael Olsson

    I’m not saying that sane levels of savings are bad. I’m talking about the $21tn in offshore, $5tn in corporate coffers, etc.. These would be extremely deflationary without increasing money supply.

    As always, economics is about balance.

  • Ryan

    So gold is just pretty? It isn’t used in manufacturing or electronics? The idea of commodity based monetary system does not have to be gold. It can be competing currencies and the most prolific and the highest demanded currency will reign. Will the business cycle still occur, yes but on a local small scale, unlike the fiat. Will it help restrain over spending and carelessness by our government? Somewhat, it can still use plunder as it currently does, but it will be more obvious than inflating currency. You ignore the primary issue with fiat, the fact the use of a gun is necessary to keep it popular.

  • Mikael Olsson

    Read and understand http://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States#Free_Banking_Era_to_the_Great_Depression

    Especially notice the frequency and depth of recessions from 1879 and onwards when the US went on the gold standard. Really, count years. Note the -10% — -35% GDP drop figures.

  • Mikael Olsson

    It utterly baffles me how people are buying this “everything is stable on a gold standard” bullshit when all documented evidence points at the complete opposite. Faith?

  • Ryan

    I didn’t say everything was table on gold , GDP is a horrible representative of economic strength. The recessions were much less severe, after the fed we have had much more severe recessions that last much longer. One again ignoring the fact that in order to institute these policies you must use force.

    http://mises.org/daily/6055/Charting-Fun-with-Krugman

  • http://www.nowandfutures.com bart

    There are zero investments whose value is not based almost entirely on perception. AAPL is a good recent example.

    There are also many very successful investment vehicles who have zero cash flow, many stocks who don’t pay dividends included.

    Holding bonds that did have a quite substantial cash flow during the majority of the 70s was a near death experience for many.

    In other words, to limit an investment to only those that have a cash flow excludes many sane and very well performing investments.

  • http://www.orcamgroup.com Cullen Roche

    Fiat does not have value due to men with guns. It has value because of the freedom to create valuable output that backs the money. You seem to be missing the fact that fiat works best when govt is not the dominant factor in an economy….And it works in such a system without the many constraints that gold comes with.

  • http://www.nowandfutures.com bart

    I “love” the implicit approval of massive currency devaluation that has occurred.

    In other words what they’re saying is “Don’t bother me about currency devaluation or inflation, not only can’t it possibly affect my standard of living but also I’ve got mine and I don’t care about the much larger debts that I’m leaving my children.”

    Keynes was SO right:

    “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million can diagnose.”
    — John Maynard Keynes, “Economic consequences of the peace”- Unseen Hand, page 57

  • http://www.nowandfutures.com bart

    Both the gold standard and fiat standards don’t last forever.

    There should be a lesson in there, something about monetary systems and who or what causes them to fail.

  • http://www.nowandfutures.com bart

    “What we KNOW about the gold standard is it produces a very nasty set of boom-busts every 5-10 years with REALLY deep troughs.”

    Horse puckey and just plain incorrect.

  • Tom C

    Nothing is perfect although there is nothing less ‘perfect’ than a monetary system controlled by ‘policy makers’ and knucklehead politicians. All fiat money systems will fail. You say they won’t. You are wrong.

  • http://freedomlovin.com Kevin

    This is a straw man argument.

    Let’s look at fundamentals. What is the commonality with nearly every currency that fails? They all are controlled by a government or central bank that can print endless amounts of money and destroy the value. If it’s gold-backed, they can simply make is less gold backed or not backed at all and manipulate it.

    But you’re correct in the fact that it is not a problem of fiat currencies per se. Bitcoin is a fiat currency but doesn’t pose the problems of say the dollar or Euro, because it is not controlled by any central agency.

    So the bottom line is fiat currency or gold backed currency, the one thing we do know that does not work is letting a small group of people control it.

  • http://www.orcamgroup.com Cullen Roche

    Who controls the quantity of gold? Surely, it’s a “small group of people” or governments. I don’t understand why a small group of (mostly foreign) guys with shovels should determine the quantity of money in the USA. The quantity and value of gold in recent years has been controlled to a large degree by India and China. Should our money be pegged to their activities? What sense does that make? Gold activists act like gold is controlled by the market place or something when the reality is that its quantity is controlled mainly by how much maniacal dictators in foreign countries can dig out of the ground. How does this serve anyone better than any other money system?

    A fiat system is backed almost entirely by the freedoms of its users to create output that gives this money value. In the right sort of system, fiat is infinitely more synonymous with freedom than gold is. The USA is proof of this.

  • Jay

    + 1,000

  • George Tessier

    Whoa there guy, apparently unlike some present I was actually there in the fifties. Quality of life generally much better then than now despite all the electronic diversions and supplements today allowing the virtual to supplant the reality of experience. If this is what makes life great in your mind, I’m forced to suggest your experience is unfortunately limited. And as for mcmansions, there were plenty of real mansions then which unlike today actually represented some form of status in a generally comfortable and reasonably educated society relative to the rest of the world. Granted we had just conquered the rest of the world, which in large part lay in ruin, and we were laying the foundation of our present empire and the so-called international community, guided by ourselves in the guise of a “United Nations” with the best of intentions of course,… seriously. Recall the road to hell is paved with what?… And before blindly leaping to the conclusion we as a society are materially better off today then in the fifties, one might be advised to compare the number of trailer parks to mansions, mc or otherwise, today with conditions in the fifties. True the fifties had Appalachia and rural Mississippi as apposed to today’s Detroit and inner cities generally, recall that “the poor are always with us” but we might consider the degree and respective stress and mental comfort since we are comparing quality of wealth in the fifties to today.

    Much more to be said along these lines but it diverges from what might be considered purely monetary systems and economics.

  • Tom C

    In a system governed by the rule of law where the role of the state is limited to the defense against foreign invasions, the administration of the courts for the enforcement of contracts and the punishment of force and fraud as well as maintaining the conditions for commerce, the money system is controlled by the people who will exchange their scrip for specie at the first signs of official malfeasance. Hard money is simply another check on government short-sightedness and stupidity.

  • http://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation Jason H

    If other nations like China do not want trade with the US nor want US dollars anymore in exchange fo their goods, the US will just build domestic factories to produce the missing products like it did in the 1950s,etc before the 1980s

    The reason why US doesn’t build factories here now is because their prices would be undercut by Chinese factories that get $1-2 TRILLION per year in ‘free’ loans from Chinese gov banks (a form of CHinese gov deficit spending/money creation) with their FIAT Chinese currency … China gives trillions in low-interest gov subsdized loans that require no repayment for 12+ years, forgiven loans, & even lower tax rates too.. to grow their targeted industries

  • Mikael Olsson

    Well, when Rome fell, they were at their peak of wealth concentration. Interestingly, the US has surpassed them now. Time for the Canadian barbarians to invade? ;)

  • Colin, S.Toe

    Balance – of course.

    As to offshore accounts, etc. it may be that any major currency reform may need to be international in scope to succeed.

    What is your take on the IMF working paper, “The Chicago Plan Revisited”?

    Where MR has led me is not opposition to the extension of credit by a private banking sector, but that this needs to be limited to a fraction (less than one) of the ‘debt-free currency’.

  • Colin, S.Toe

    As I understand it, for quite some time before Rome’s fall, ordinary people had become increasingly bound to their occupations – not only farmers to the land, but also tradespeople, eg, a baker to his trade – all working in the service of a wealthy and connected ‘patron’.

    I don’t see it as out of the question that a modern version of widespread debt servitude may even now be emerging under our current monetary regime. (The increasing burden of educational debt is one aspect; ‘underwater’ mortgages are another; medical bills, a third.)

  • Mikael Olsson

    Or the simple fact that 97% of the monetary base is now actually debt.

  • Andrew P

    When the sun turns into a red giant 5 billion years from now, humanity will have either expanded to fill the cosmos, or died eons before. In the former case, gold will still be worth something. In the latter case, the point is moot.

  • Andrew P

    Sorry. alpha-Cen A will turn into a red giant long before our sun does. It is a slightly older and heavier (shorter lived) star. alpha-Cen B will live longer as it is smaller. but who knows what will happen to its planets when A goes red giant. You will have to find another star system to escape to. And make sure you bring your gold and platinum. One thing you can be sure of is that alien fiat won’t be accepted anywhere in the universe.

  • Andrew P

    Just like my dad told me ages ago. 1973 was his peak real earnings year. From then it was all downhill.

    Not coincidentally, 1973 was also the year of the oil price spike. All real economic growth ultimately comes from energy consumption. Living standards have risen massively in the last 100+ years because of inventions that allowed fossil fuels to be turned into production. Those fuels are now declining, and will be gone in 100 years. After that, we could be back to a zero growth economy, just like 6000 years ago.

  • Andrew P

    He won’t without new energy sources.

  • Andrew P

    You don’t need a gold standard to have “hard money” You just need to be able to hoard gold, platinum, and silver coinage.

  • Mikael Olsson

    From what I have seen you say around here, I think we are on the same page.

    I think the IMF paper + PositiveMoney.org.uk ideas can be good. I can’t say I know if the details are good; I just don’t understand the intricacies of banking well enough.

  • http://www.nowandfutures.com bart

    You’re missing the point.

    Gold is still around and has a very substantial value. And it has maintained it throughout the period that included a huge amount of paper currencies that are no longer around.

    And please don’t mistake this for something about the gold standard.

    You want to call gold a hedge rather than an investment – fine. But there are very few hedges that return over 500% in a few years.

    The point of investing is to increase one’s net worth. Gold has done that *very* well.

  • http://www.nowandfutures.com bart

    More horse puckey based on wrong facts.

  • http://www.orcamgroup.com Cullen Roche

    Most gold purchases CANNOT be “investment”. BY DEFINITION. Investment is purchases not consumed, for use in future production. When you buy gold you are not investing. You are hedging. You are not seeding capital for future production. You are purchasing an asset for the purpose of protecting primarily against loss of purchasing power. Gold just so happens to be a fine hedge against inflation. But it is absolutely positively not investment.

    Investment includes IPOs, private equity, buying supplies for your business, etc. That’s investment. Buying shares of stock on a secondary market is not investment. It is an allocation of saving. You are not funding anything. Gold is the same. Gold is an exchange of cash for gold. You are not funding anything. You are not investing. You are purchasing an asset solely for the purpose of hedging against the potential loss of purchasing power. You are really just allocating your saving. I would argue that gold does not protect against the risk of permanent loss therefore reducing its importance in portfolio construction.

  • Tyler

    Gold’s value is sustained by the fact that it can’t be printed. :)

  • http://myindigolives.wordpress.com/ Ellie Kesselman

    Scott:
    You said “The point is that all assets are inherently backed by the price of all assets in that there is a negotiable price of convertibility.”
    That is too subtle for me to comprehend.

    No, I don’t believe that one should hold all one’s assets in fiat currency, nor in precious metals. The gold bug people advocate near-100% precious metal-related asset allocation e.g. physical commodity + gold ETF’s (editorial “ugh!” in my opinion) + common equity of mining companies.

    I continue to believe that Harry Markowitz and friends had a few good ideas, with Modern Portfolio Theory and CAPM. For diversification or maybe just peace of mind, put 5 or maybe 10% of your assets, as an, individual in gold. Gold is beautiful, tangible and soothing.

    As for the rest, Mikael Olsson has the right idea: Invest and hold securities that are associated with productive output, whenever possible i.e. an assortment of U.S. Treasuries, some corporate bonds, muni’s, a little real-estate, common equities in small and large companies that produce something other than games, mobile apps and so-called freemium social media services.

    Scott, one more thing. I read your pas de deux with Cullen, subsequent to my initial comment. I think Cullen is playing devil’s advocate here and churning, or rather, trawling for page views with this old gold v. fiat currency gambit. Of course, I came running to chime in too… It works, every time.

    P.S. The “Confirm you are NOT a spammer” makes me lol every time, too. I’d love to know if it is effective.

  • http://myindigolives.wordpress.com/ Ellie Kesselman

    Mikael Olsson:

    Do you have a blog or newsletter or something that I could subscribe to, and tell my friends and family to read too?

  • http://None Midas II

    Peace of mind counts for a lot. We had more of it until 20 years ago. Owning 2 cars does not add to peace of mind, any more than maintaining computers, cell phones, e-readers, Wi-Fi systems, and other complications. Keeping up with today’s lifestyle uses up too much time. I do remember the time when I would spend an evening home with my wife just reading books while the kids played cards or Monopoly or visited friends in person. Just the thoughts of an 85 year old. I have not found the time saved that Cullen reports but perhaps he has.

  • Colin, S.Toe

    Note: The barbarians did not initially ‘invade’ the Empire – they infiltrated under pressure from invaders of their homelands, often welcomed by the state as soldiers to defend against the latter, a job residents were no longer willing or able to fill (with wealthy ‘citizens’ concerned solely with their own fortunes, and the rest reduced to servitude).

    The parallel today would be ‘undocumented’ migrants under economic pressure, largely from south of the border – to do work citizens won’t, and with the most likely path to citizenship for the young, service in the armed forces.

  • Mikael Olsson

    Nope, sorry, I mostly comment here and on FTAlphaville. I’m a mere hobbyist with an interest for long term macroeconomic developments.

  • Mikael Olsson

    Hahaha wonderful parallel :)

  • http://None Midas II

    I was a child in the great depression and my parents had a hard time but tried to shield us from it. As a child I did not know I was living under a lower standard as I had not known any other. By the time I graduated job prospects improved and I was completely unaware that I was suffering from the great debt of WW2. The job prospects offered growth, although the nickle hot dog was gone forever.

  • http://None Midas II

    Cullen, an excellent summary on gold. Thanks.

  • Mikael Olsson

    And by that I mean the details on how the shift would be carried out. I do think I understand the end system.

  • http://isomorphismes.tumblr.com isomorphismes

    It’s a tautological claim. All societies that used to exist and no longer do, “failed”. All societies that still exist, haven’t failed yet. Duh.

  • http://isomorphismes.tumblr.com isomorphismes

    http://twitter.com/_CB01/status/247425194925371392

    “Fiat standard during Song Dynasty where jiaozi was the currency lasted 6 times as longer as that AND it propelled CHN to #1 econ by GDP.”