05/09/11 London, England – Continued from part two.
As far as investors are concerned, merely reducing exposure to dollars and dollar financial assets may not be enough. To what extent the dollar devalues versus other currencies is, ultimately, a speculative guessing game.
Perhaps all currencies devalue in real terms as one country after another resists currency strength. Certainly the euro-area, Japan and the UK have debt problems of their own. And many emerging markets are currently experiencing booms, the magnitude of which have, historically, ended in busts.
While we do have our opinions as to which currencies are rather more or less undervalued vis-a-vis each other, it is a far, far simpler conclusion to reach that, the further along the above process we move, the more likely it is that commodities rise relative to currencies in general as the former begin to function, in varying degrees, as alternative stores of value.
Yes, gold and silver have the most prominent historical claims to this role. Yet other metals are not so far behind. And the farther one descends down the rungs of the global economic ladder, one can find historical precedents for all manner of commodities serving as money in some shape or form.
Seeds, nuts, grains, various livestock, peppercorns, cigarettes, liquor; such stores of value may seem uncivilized to some, but please tell us: What is civilized about a systemic transfer of wealth from the many to the few via currency debasement?
If this is what qualifies today as ‘civilization’, well then we’ll take our chances with the Barbarians, as indeed the frontier Romans did from around the 4th century onward, when they finally lost patience with the rapacious regime in Rome and invited the Barbarians in, province by province, as the implied tax- and inflation-relief outweighed the uncertainty of governance under their new, northern masters.
In time, even those Romans living closer to home came to regard the Barbaric side of this Hobson’s choice as rather more preferable, resulting in the complete dissolution of the Western Roman Empire.
Perhaps it should be no surprise that, for the next millennium or so, the bulk of Western European economic progress occurred not in Italy but rather in the more dynamic trading societies of the north, including the Normans, who would manage to conquer a large part of the more prosperous lands around the European periphery, north and south, including of course the bulk of what is known today as Great Britain.
Meanwhile, the Eastern Roman Empire at Byzantium would last another thousand years. Why? Historians have their various reasons, many of which seem reasonable.
In our view, perhaps the most compelling is that, notwithstanding the travails of economic fortune through the ages, the Byzantines stuck with a tried and tested ‘hard money’ policy, rather than succumb, as did their western counterparts centuries earlier, to the temptation of currency debasement and inflation.
Historically, empires both large and small have a curious yet consistent inability to long outlive the purchasing power of their currencies. As the saying goes: What men learn from history is that men do not learn from history.
And with that, Exeunt.
Regards,
John Butler,
for The Daily Reckoning
[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]
John Butler
John Butler has 17 years experience in the global financial industry, including European and US investment banks in London, New York and Germany. Recently, he was Managing Director and Head of the Index Strategies Group at Deutsche Bank in London, responsible for development and marketing of proprietary, index-based quantitative strategies in global interest rate markets. Prior to DB, John was Managing Director and Head of European Interest Rate Strategy at Lehman Brothers in London, where his team was voted #1 by Institutional Investor. He has contributed to financial publications including the Financial Times, Wall Street Journal, Boersenzeitung and Handelsblatt.
The Daily Reckoning is your premier source for making sense of the news Washington and Wall Street generate. Each business day, The Daily Reckoning calls on its stable of world-class writers and thinkers to show you how to get ahead.
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Greece, Irland, Portugal´s GDP = 708 bn USD
EU GDP=16 282 bn USD
Greece, Irland, Portugal´s GDP = 4,3% of EU GDP
Silly to talk about a debt crisis!
Just to get the eyes of the US debt death!
Enough already.
Let us move toward proper money which is created by the people who create the wealth.
Money is not the wealth. It is but the mechanism by which we exchange private wealth. All governments and their central bankers hold wealth hostage by their power to create and issue money. It is this monopoly of the money power for political ends which leads to the never ending business cycle of boom and bust and the eventual debasement of our currency through inflation. Let us learn what money is, and how its created.
Honest exchange between wealth producing traders is the only way people can survive beyond mere subsistence. Only the people who create wealth which is desirable by others shall have the power to issue money. In a free society, money must NOT be issued by the government or by a centralized agency.
Gold is NOT money.
Gold is a commodity.(you’ll find it on the periodic table)
Money is a concept.(you’ll find it between your ears)
Its a sorry commentary after 5,000 years that humans have yet to grasp the concept of money. We are but children waiting for Santa Claus to dispense his toys so we can survive another year. Utterly pathetic.
We are humans — we can figure this out.
The solution is not found in government, central planners or a magical yellow metal.
The people who create the wealth shall determine and establish the means by which they will exchange their wealth. Its the only free and civilized way.
Good god someone with a brain. Keep up the comments Richard.
the end model no matter how well conceived can undoubtfully provide a framework of further understanding. I like your blog. Nice work John.