The Prospects For Money
By Tyler Durden
Submitted by Alasdair Macleod via GoldMoney.com,
In my view, this new bout of turmoil in financial markets is the prelude to the final demise of government currency.
If I’m right, a long-expected collapse in the purchasing power, and of the very concept of fiat currency, will evolve from current events. The purpose of this article is to explain why monetary theory predicts a currency collapse.
The question at the heart of today’s market instability is the validity of fiat currency; that is to say, forms of money issued and sanctioned by individual governments, with no backing other than faith in those governments’ creditworthiness, and the enforcement of its use by law. The risks they impose on all of us will be evidenced one day by both the speed of the fall in each individual fiat money’s purchasing power, and inevitably by their comparison with gold’s more stable purchasing power. Essentially, an awareness of the dangers of unsound money will gradually become evident to every economic actor.
So far, or at least since the days when fiat money was freely exchangeable for gold, central banks have managed to enforce upon us their currencies as money, originally on the basis they were gold substitutes. That pretence was finally dropped in 1971. The purchasing power of fiat currencies has never been seriously challenged since, except in relatively few extreme cases, such as Zimbabwe and Venezuela. Not even the financial crisis eight years ago threatened a collapse in fiat currencies, when banks had to be rescued with unlimited extra quantities of money and credit.
The current crisis has commenced while there are determined efforts to stop the purchasing power of the major currencies from rising, even leading to the deployment of negative interest rates in this quest. None of the central banks’ policies appear to have worked. The increasing purchasing power of the yen, despite all attempts to lessen it, is the clearest example of the abject failure of a central bank to achieve its monetary objectives. The same can be said of the ECB and the euro, a currency even more synthetic than those it replaced. It is clear that the central banks are setting monetary policy more in hope than in a true appreciation of their own hopelessness.
They place an undue emphasis on empirical evidence. That’s why charts and statistics are so important to them and all their epigones. When you don’t understand and cannot explain something, you turn to the so-called evidence. And when very few people actually have a reasonable grasp of what money is about, you can rely on empirical evidence being unchallenged. For monetary policy, this tells us two things: central banks are clueless about monetary theory, and in the event of a second systemic crisis, they will be misguided by their experiences of the last one.
Today’s empirical evidence reflects the bail-out of the global banking system in 2008/09. Neo-classical monetarists were initially worried by the potential for price deflation in the wake of the banking system’s rescue, and so central bankers …read more
Source: The Prospects For Money
