Sunday, January 31, 2010

The 64 Trillion Dollar Question

What is the fate of money going forward? For the purposes of this post, let's define money as that device or product which has the status of legal tender. Federal Reserve Notes and Treasury minted coins are that device, and, where cash money is concerned, only they act as the legal medium of exchange inside The United States, in lieu of barter, to acquire food, fuel, clothing, and other daily necessities. Suffice it to say, that the most visible and tangible product of The Federal Reserve Banking System, namely those highly watermarked green pieces of paper in your wallet emblazoned with esoteric symbols of Freemasonry and various Presidents and other luminaries from the early days of The Republic, are the signature product of a franchise operation.

But for how much longer will the Federal Reserve Bank's signature franchise product be employed by the populace? We might do just as well to ask how much longer will the signature product, and the electronic entries made by banks across the world connected, however tenuously, to that signature franchise product, retain any purchasing power? After all, since its inception in 1913, the creature from Jekyll Island, aka The Federal Reserve Bank, has seen its "notes" lose ninety four percent of their purchasing power, so that now, irrespective of supply and demand dynamics, it takes approximately a dollar to buy what once took a nickel.

I will spare you a recounting of the history of money in the U.S. since The Fed acquired its franchise, except to say that there is a decent brief primer on it in this report. In the meantime, consider the relative purchasing power of gold versus Federal Reserve Notes, and consider the status of finances in the U.S., and for that matter, the state of finances across the globe, and then, as it may be a matter of the utmost importance to your future, financial and otherwise, ask yourself the following 64 trillion dollar question: Is there any reason to expect the long standing trend of franchise money (where the purchasing power of the aforesaid has been consistently eroded over its entire history, and has, especially over the last decade, especially with respect to gold, markedly deteriorated) to change in any meaningful way?


Thai said...

While I absolutely think I see what you are saying, this does have the fundamental logic flaw of inductive reasoning- e.g. using history as a guide, I expect we will see the following future

I think you can use it as a very useful guide but not always, especially at new boundary conditions.

Is it really the same today as it was back then?

I wonder.

Edwardo said...

You've pooped, albeit a tad gingerly, on my thesis, but you've not offered an alternative. In answer to your (rhetorical?) question, no it's not the same today, but neither is it so different that we can not expect that more and more fiat currency will be required in exchange for ownership of the yellow metal.

There are boundaries for everything, and here are the choices, other than the one I posit as most likely, with respect to the question of the fate of gold versus FRNs.

1.) The dollar breaks its century long trend of a steady erosion in its purchasing power and gold languishes.

2.) The dollar and gold lose both lose value versus.....?


Bearing in mind the limits of Newtonian physics. it is still useful to remember that bodies in motion remain so until something comes along to halt their

Thai said...

... You know me, I just like to poop on thesis in general.

It is nothing personal. ;-)

re: "... but you've not offered an alternative."

I am stuck in the cooperation boundary condition. If you would cooperate with me to help me figure a way out of this boundary, I would be most appreciative.

re: "...until something comes along to halt their progress."

Which has always been my point my friend.

re: "versus..."

Now imo that is the real question to ask and the one to really really ponder.

Hmmm, thinking...

What are the assumptions (mental hubs) in the models around gold/fiat currency/etc..?
For if any of those assumptions ever become invalid, you know what is going to not be seen as value soon enough- anything which is based on that assumption.

Edwardo said...

I almost electronically scribbled an elaboration on what "versus" would be, but decided not to. Silly me. Here is a two word abbreviation of what versus would entail.

Road Warrior.

Thai said...


Certainly a possibility but one I have a hard time seeing, especially after you taught me that violence/property crime does tend to drops in times of deflation and that in and of itself allows for a lot energy to get used elsewhere in the system.

I do not think most people who do not deal with the world of violence really comprehend how expensive it is, it is hard for them to really understand it until they see it first hand.

So I tend not to think this will happen. America is looking literally more and more like other countries where corruption is a problem and we do not see violent riots often in these places.

Fear is a powerful motivator. Using violence always carries the risk that it can turn people away from your cause/backfire as a strategy.

Without taking sides in the middle east, Palestinians are mostly kids and their violence is mostly supported by adults who do not have to actually live with the violence themselves... Kind of the same for Irish American support of the Irish Republican Army (IRA), etc...

What group in the world either in or outside America will come to the aid of either recent US immigrants or groups who are socioeconomically disadvantaged?

What will Americans with resources start to think of those within the US who are created a Road Warrior environment?

For violence to win, it has to have an end game strategy.

I am not saying it can't happen but I done see the dots lining up yet.

I do think we will start to see cuts to programs that pay people to not work, etc... or pay people to work less that they currently do, etc... and this will free up resources to pay people who do want to work, etc... which again kicks the problem down the road.

I see printing our way out of this if our trade deficit reverses but not before.

... I guess that could get close to happening if we stopped importing so much oil. So I guess Hell's ideas might lead to printing.

Thai said...

And of course some boundary conditions are less popular than others

Edwardo said...

I am not a subscriber to the Road Warrior outcome either. I am just taking the idea of gold and fiat money having no value, to what I believe is a logical conclusion.

getyourselfconnected said...

Nice post Edwardo.

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