Crazy Days For Money

This article anticipates the end of the fiat currency regime and argues why its replacement can only be gold and silver, most likely in the form of fiat money turned into gold substitutes.

It explains why the current fashion for cryptocurrencies, led by bitcoin, are unsuited as future mediums of exchange, and why unsuppressed bitcoin has responded more immediately to the current situation than gold. Furthermore, the US authorities are likely to suppress the bitcoin movement because it is a threat to the dollar and monetary policy.

This article explains why growth in GDP represents growth in the quantity of money and is not representative of activity in the underlying economy. The authorities’ monetary response to the current economic situation is ill-informed, based on a misunderstanding of what GDP represents.

The common belief in the fund management community that rising interest rates are bad for gold exposes a lack of understanding about the consequences of monetary inflation on relative time preferences. Rising interest rates will be with us shortly, and they will burst the bond bubble with negative consequences for all financial assets and the currencies that have inflated them.

In short, we are sitting on a monetary powder-keg, the danger of which is barely understood by policymakers and which could explode at any time.


We have entered a period the likes of which we have never seen before. The collapse of the dollar and dollar assets is growing increasingly certain by the day. The money-printing of the dollar designed to inflate assets will end up destroying the dollar. We know this thanks to the John Law precedent three hundred years ago. I last wrote about this two weeks ago, here. In 1720, it was just France and Law’s livre. Admittedly, the British had their South Sea bubble at about the same time, but it was the Mississippi bubble that proved that if you print money to puff up asset prices, you end up destroying the currency when the bubble bursts. The Bank of England didn’t make that mistake, but today led by the Fed that is precisely what most central banks are doing. John Law has become global.

And then there’s the European Union and its Eurozone. Last week I explained how the TARGET2 settlement system has become thoroughly corrupted by the bad debts throughout the Eurozone, and that the commercial banks have become horribly over-geared and vulnerable to the slightest knocks. That article is here. There can be little doubt that when this systemic corruption is exposed, the ECB and the euro will be finished. Timescale? Who knows — but it could be any day. Just one day. Any time from now, most likely at the same time as the dollar collapses because both events will likely be driven by higher interest rates. And those who are unprepared for it will lose everything.

The speed at which rigged markets unravel can be extremely rapid. Many of us will remember the end of the Berlin Wall. For seventy years, the Soviets suppressed markets, killing dissenters in their tens of millions. On 9 November 1989, if you tried to escape from East Berlin to the West, you were shot. The next day you were free to cross it. The end of communist suppression of markets took just one day.

The equivalent today is when ordinary people no longer accept suppressed markets. It could be triggered by foreigners, suddenly realizing they are badly exposed. It could be Europeans, suddenly deciding to take their money out of the banks in somewhere not that significant, such as Greece.

The dollar and the euro share a dangerous characteristic. The Fed and the ECB are printing dollars and euros respectively in massive quantities to finance government deficits that have spiraled out of control. To facilitate this inflationary financing, they have suppressed interest rates and mispriced government debt. Only one thing can happen. Interest rates, which reflect the time preference of money, must rise to compensate holders and users of money for loss of purchasing power. Governments cannot suppress markets forever — ask the Soviets.

This danger is gradually dawning on the masses. Commodity prices are now rising while tranches of money are being helicoptered into every adult American’s bank account. They will spend much of it when there are not enough goods to match the demand.

Ephemera such as bitcoin and ether have rocketed in price, surely reflecting the debasement of the dollar and other fiat currencies, to the extent that even the financially illiterate now know why they are rising. Small investors, acting as if they are the new professionals, are taking on the new patsies — hedge fund managers who still think they are masters of the Universe. The reversal of roles is nothing short of astonishing, nor is there any sign of ending.

Of one thing we can be certain, and that is after a century of increasing intervention and inflation by the Fed, including fifty years of no gold backing for the dollar at all, it is time for the financial iron curtain to be breeched. The EU and The US between them represent nearly 40% of global GDP. No other country can survive a combined blow-up of these two entities, and we can be certain that when one falls, they both fail and so do we all.

History tells us that when governments lose control of their money, that markets, being the collective expression of human activity, return to sound money chosen by the people as their medium of exchange. And that has always been metallic money — gold, silver and copper.

Fiat interest rate rises will be unstoppable

Interest rates are bound to rise, reflecting a fall in fiat currencies’ purchasing power. But investors share a common misconception that rising interest are bearish for gold and silver. They point out that the higher the interest rate on fiat currencies, or on investments such as government bonds, the greater the opportunity cost of owning physical metal — which they say pays no interest. The comparison is not valid, because possession of physical gold is the equivalent of physical fiat cash, neither of which pay interest. But gold can be loaned or leased for interest, in the same way as any fiat currency.

The interest rate obtained is determined by the same factors, but the originary rate, that is to say the rate shorn of lending risk factors, is different. This refers to time-preference, the preference of immediate ownership to possession at a future point in time. Since the comparison is between actual possession and the promise of possession in the future, the future value of any form of money is naturally valued at a discount to its current value, and conventionally this is reflected in its originary interest rate.

If a central bank issues additional fiat, a rational holder will assume its purchasing power in future will be less than that of the present. The element of time preference in favor of current possession will increase, reflected in the expectation of a lower future value for the currency, and therefore a higher originary rate of interest to compensate. In a free market, this element of interest rates is marginally set between lenders and borrowers. Similarly, a rate of time preference for gold is decided in free markets. The takeaway is that time preferences for gold and fiat money are independent of each other.

Now let us assume that a central bank embarks on a policy of inflating its fiat currency by a considerable quantity. We can see that this will radically affect perceptions of future purchasing power, leading to materially higher interest rates. But that is resisted by the central bank, which increases its intervention in financial markets to ensure that interest rates remain suppressed. Part of that suppression is to claim that monetary policies will not lead to rising prices. In other words, to a loss of the currency’s purchasing power.

The suppression of the evidence of the consequences of monetary inflation for the purchasing power of currencies describes the current situation, not just for the dollar, but for all other fiat currencies to varying degrees. Now that monetary inflation has been accelerated to new levels, interest rate suppression cannot continue for much longer, because without the recognition of time preference a fiat currency becomes rejected in favour of goods and commodities, which can be expected to retain their value better than the currency. This is why the increase in the quantities of fiat currency is already leading to widespread increases in commodity prices.

When economic actors begin to experience the loss of the currency’s purchasing power, the flight out of fiat money can only be stopped by the central bank realising it must permit interest rates to properly reflect time preference. But with the financing of its government’s deficit in mind the central bank is under pressure to restrain interest rate rises. Meanwhile, the time preference for gold will remain relatively stable, and gold becomes increasingly preferred to fiat so long as interest rates underrepresent fiat’s time preference. This is why in the inflationary 1970s, the gold price started the decade with a price of $35 and a Fed funds rate of 9.25%, and ended the decade at a peak of $850, while the FFR rose to nearly 20%, in contradiction of the erroneous belief that rising interest rates are bad for the gold price.

There are two ways to stop the gold price rising relative to fiat. The obvious one is to stop expanding its quantity in circulation, which will decrease the time preference between current and future ownership of the currency. This is always resisted by neo-Keynesian inflationists. The alternative, deployed by Paul Volcker in 1980—81, is to raise interest rates above the rate of the currency’s time preference to persuade holders to sell gold for fiat.

Clearly, the conditions exist for interest rates to rise significantly, given the current degree of monetary inflation, which is arguably now entering hyperinflationary spirals for the dollar and other fiat currencies. This should not put off ownership of metallic money: indeed, it should encourage it.

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Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information ...

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William K. 2 weeks ago Member's comment

Certainly this post makes a lot of sense, and looks like a rational analysis of the situation. The bad news is that returning the US to a gold standard based monetary system will cause a great deal of pain to a whole lot of folks, far more painful than the treatment for hard drug addictions, and possibly not as survivable.

The other problem is that the priorities of the federal banking system as aimed at protecting their friends are becoming more obvious, and perhaps the payback time is coming. I wish for it to be non-violent, by some big miracle.

My hedge is a very marketable and wide skillset, which should be able to support me in the era where fiat cash is only worth it's weight in paper.