It’s the End of the Dollar as we Know It (Do we Feel Fine?) Part 3 of 3

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.


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.]