And Devaluation, Too

The Daily Reckoning
Weekend Edition
December 14-15, 2002
Paris, France
By Addison Wiggin

MARKET REVIEW: And Devaluation, Too!

One of the more pleasing aspects to our work here at the Daily Reckoning is the interaction we get with readers. Having spent the better part of the weekend moving from one apartment in the 5th arrondisement in Paris… to another just around the corner, I’d like to take this time share some of the love.

First a little set up… in Thursday’s edition of the Daily Reckoning we noted how useful the letter ‘D’ had become in describing the financial landscape: Debt, Deflation, Default, Deficits, Demographics…

A reader who, thus far, I know only as “BC4SW” responds: “How about the word, devaluation? For it too, is the trend we’re coming to. George Soros made that clear, some time ago. The projected figure is around 30%, but it could be more.

“Hypothetically speaking, consider the following: Looking at the history of the US and its origins of the Federal Reserve, would it not be possible for history to repeat itself, worldwide. The world economies are in shambles, and real money is drying up. The idea of a world currency, backed by precious metals, and approved by the World Bank and the IMF, is not unrealistic.

“The emphasis of the current US administration is: inflation. This isn’t the desire of the rest of the world, for it dilutes the value held of their assets in the US. The solution may have presented itself in the trial balloon issued in March 19th’s Wall Street Journal: a new ‘colored’ US dollar.

“The new colored dollar, accepted for use here in the US, would still not backed by precious metal. It would still be fiat currency, so they can keep the presses printing ’til hell freezes over. When DEVALUATION hits and the greenback drops, people will run to the banks with abandon, to trade in their currency that holds little, but some value overseas: the old greenback. As more of these get collected and destroyed, the more value the ones remaining will hold. Therefore, some short term confidence will be restored to the dollar, by foreign hands.

“History has shown that a fiat currency always fails, due to the nature of those that control it. The world is not ready to pass the baton to another fiat currency. We have just learned that lesson the hard way. With the US trade deficit at 1.5 billion a day and a continued rate of broken promises, made by our government to the world at large, confidence is gone. Watch for a new world currency and a new colored dollar, coming soon to a bank near you! It’s no longer a question of ‘if’ but rather of ‘when’. My guess is right after the first of the year. It’s not a hard stretch, I might add, considering Greenspan and co. have nowhere to go with rates, and to follow Japan’s play book spells doom for the rest of the world markets.

“Blue or red US dollars used here at home. Old greenbacks devalued and accepted abroad. That’s having your cake and eating it too. But no doubt about it, there will be a new world currency that dominates the world scene, for it will be backed by precious metals. Just food for thought…”

As the post-bubble economy unwinds, dear reader, we suspect anything is possible. A two-tiered currency system, who knows? Stranger things have happened in monetary history. The hard part is for readers to get around the idea that – yes, it can happen here. In any case, we’re just sitting by enjoying the spectacle of it all. Keep the ideas and letters coming… and by all means have a good weekend.

Cheers,

Addison Wiggin,
The Daily Reckoning
December 14, 2002

P.S. The modern world’s first experiment with ‘fiat’ paper money was exactly the kind of ‘useless-paper-for- worthless-debt’ swap our reader speculates on above. Following the death of Louis XIV in 1715, Mississippi John Law and Phillip II, then Regent of France, cooked up a scheme to repair damage to the royal finances done under the Sun King’s reign.

It was declared that the bank notes issued by Law’s Banque Royale could be purchased with 25% government coin and 75% billet d’etats. The billet d’etats were essentially junk treasury bonds issued by Louis XIV to pay for continuous wars with France’s neighbors, and building palaces around the countryside, including the audacious Versailles. The bank notes were initially backed by gold. Law promised the public directly that if any of his bankers printed more paper than gold reserves they had on hand they “deserved death.” It meant that investors who held the all-but-worthless billets d’etats (backed by a bankrupt government’s promises) could redeem them for an equal value of bank notes – backed by gold! What a deal… with these assurances the bank notes traded at a premium on the open market; at first, they brought 1.01 in gold coins of equivalent value, then within a year they rose an additional 15% to 115.

The bubble surrounding the notes began when, after seeing what confidence the public placed in the notes – Philip II and Law decided to let the printing presses run… in the end they printed 80 times the amount of paper that could be redeemed by existing supplies of gold in France at the time.

Alas, two of Law’s political enemies saw what the dynamic duo were up to – and tried to cash in their paper for gold. The end was nigh. Confidence cracked in phases, but when by the end France was bankrupted; Law, ruined and driven out of the country by threat of bodily violence. On the way down, the Regent tried everything including cranking up the printing presses even more… and making the physical holding of gold illegal to all French citizens. Alas, once confidence was broken all that was left supporting the paper notes, were even more promises of a bankrupt government.

— Daily Reckoning Book Of The Week —

Gold Wars: The Battle Against Sound Money
by Ferdinand Lips

Amid recent action in gold markets, many investors are asking questions that haven’t been raised in a long time. In his book, “Gold Wars”, Ferdinand Lips chronicles the historic performance of gold as protection against inflation and monetary crises, discussing, among other issues government efforts to suppress gold markets and promote inflation.

Further, ‘Gold Wars’ gives readers a panoramic understanding of gold’s history as sound money, including the gold rushes and the abandonment of gold-as-money under the modern welfare/warfare state. Mr. Lipps concludes that only a gold standard can return an ailing world economy to its full potential, reduce unemployment, help restore law and order, and help to secure peace and freedom for mankind.

“The word ‘extra-ordinary’ should be used carefully. And that’s what this book is. It will be a classic. It is past, present and future–not only for and about gold but about society and what hope there is for stability and liberty. At last you will understand what the gold standard really was. And why politicians make war on gold. the book is properly titled. When you have read this book, you will understand gold and more about human nature. Mr. Lips makes the history of gold come alive and will enthuse you to join the war for the sake of freedom, free markets and social peace. You will want 50 copies for your best friends, press and politicians.”

–Harry D. Schultz, International Harry Schultz Letter

Gold Wars, The Battle Against Sound Money

THIS WEEK in THE DAILY RECKONING

12/13/02 ANIMAL SPIRITS AND OTHER AMUSING FICTIONS
by Andrew Kashdan

“…If anything is worthy of the title ‘voodoo economics’, it is the lingering use of Keynes’s concept of “animal spirits.” Keynes’s famous phrase is often used by those who misinterpret the causes of a downturn as being mainly psychological. On the contrary, until the unprofitable investments of the boom are liquidated or adapted to actual consumer preferences (as opposed to the dreams of investors), the recovery will be based on wobbly footings…”

12/12/02 THE GREEN FIELDS OF ASIA
by Marc Faber

“…In the same way that a visitor to Asia today who had last visited the region prior to the Second World War would be stunned by its progress and by the changes that have occurred in the balance of power, a visitor to Asia in the year 2010 will find a totally different economic, social, and political landscape than the present one…”

12/11/02 ESPOUSAL OF THE FATTEST
by Sean Corrigan

“…In a free market, the most rarefied form of democracy exists: we all get precisely one vote for each and every dollar we have at our disposal. During the bubble years, the people with the extra dollars were the Tech and Telecom companies, the pass-the-parcel, Dot.com, Pie-in- the-Sky POs. Now, these have been replaced by a different batch of people voting with unearned dollars: the almighty consumers!…”

12/10/02 INFLATIONISTAS AT THE HELM
by Paul Kasriel

“…As a nation of net debtors, we want inflation. And this Fed aims to please its domestic constituency. If global investors need to “park” funds, it would appear that there are now better currencies in the world to do it in than the dollar…”

12/9/02 PEARL HARBOR
by Bill Bonner

“…In 1941, Axis military power had been in a bull market for nearly a decade. People don’t think clearly in a bull market, and their imaginations are dull. They can only see ahead of them what they’ve just experienced. It wasn’t until 1942 that Axis power peaked out. Then, the thinking began and imaginations began to work again. But by then it was too late…”

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HEADLINE, NEWS And INSIGHT:

The Rotten Fruits Of America’s Strong Dollar Policy
by Marshall Auerback

“…For all of the current discussion about deflation, and China’s alleged role in exporting it, a longer-term perspective would see such deflationary pressures as a direct consequence of an ill-conceived effort to sustain a dollar exchange rate well above what long-term fundamentals would have otherwise justified…”

Where’s The Mean?
by Lynn Carpenter

“… All through the bull market, I cringed every time I heard one of the bears moan, “P/Es are too high – they always revert to the mean.” Reversion to mean? Uh-uh. What the market historically suffers is an aversion to mean, not a reversion. It would rather be anywhere else, like the child who can’t be the class genius and decides to be the class clown to stand out instead. But if the mean is a mean measure, maybe there’s instruction in looking at where P/E hangs out most often…”

Stone Age Tribalism vs. 21st Century Nationalism
by John Pugsley

“…Human aggression is an unalterable part of the human genome, rooted in the primal instinct of territoriality. Territorialism is an unalterable instinct, but rational thought tells us that liberty and property protection are the goals that mankind must achieve to survive. When our synapses are bathed in messages from our primal brain urging us to join the tribe and expand our territory, we are well advised to pause and ask our conscious minds whether such aggression best serves our long-term objectives…”