Fiat Currency Rankings – From Bad to Worse

Today, as we step into the New Year, we reach down to turn over a new leaf.  We want to make a fresh start.  We want to leave 2019’s bugaboos behind. But, alas, lying beneath the fallen leaf, like rotting food waste, is last year’s fake money.  We can’t escape it.  But we refuse to believe in its permanence.

 

This is what “monetary stability in the Fed-administered fiat money regime looks like: in the year the Fed was established it took $3.80 to buy what $100 buy today – provided the government’s CPI data are actually a valid gauge of the dollar’s purchasing power. [PT]

 

Victorian economist William Stanley Jevons, in his 1875 work, Money and the Mechanism of Exchange, stated that money has four functions.  It is a medium of exchange, a common measure of value, a standard of value, and a store of value.

No doubt, today’s fake money, including the U.S. dollar, falls well short of Jevons’ four functions of money.  Certainly, it comes up short in its function as a store of value.

Hence, today’s money is not real money.  Rather, it is fake money. And this fake money has heinous implications on how people earn, save, invest, and pay their way in the world we live in. Practically all aspects of everything have been distorted and disfigured by it.

Take the dollar, for instance.  Over the last 100 years, it has lost over 96 percent of its value.  Yet, even with this poor performance, the dollar has one of the better track records going.  In fact, many currencies that were around just a short century ago have vanished from the face of the earth. They have been debased to bird cage liner.

 

This graphic is slightly dated by now (we downloaded it almost 20 years ago), i.e., a few more fiat currencies have joined the expired contingent by now. It also excludes a number of historical paper currency experiments in China, which failed without exception. Still, it can be estimated that no more than 20% of the paper currencies created so far still exist – and the strongest one of them has lost “only” 96% of its value! [PT]

 

Who Will Buy All this Debt?

The failings of today’s dollar are complex and multifaceted.  But they generally stem from the unsatisfactory fact that the dollar is debt based fiat that is issued at will by the Federal Reserve. How can money function as a store of value when a committee of unelected bureaucrats can conjure it from thin air?

After President Nixon “temporarily” suspended the Bretton Woods Agreement in 1971, the future was written. The money supply has expanded without technical limitations.  This includes expanding the Fed’s balance sheet to buy Treasury debt. In a practical sense, Fed purchases of U.S. Treasury notes are now needed to fund government spending above and beyond tax receipts (i.e., fiscal deficits).

As an aside, the Fed’s charter prohibits it from directly purchasing bills issued by the U.S. Treasury.  So to bypass this restriction, dealers – i.e. preferred big banks – purchase Treasury bills upon issuance and then several days later these same Dealers sell them to the Fed.  What’s more, for providing this laundering service the Dealers pocket an unspecified markup. These indirect money printing operations have been going on for well over a decade, and last occurred about a week before Christmas – to the tune of nearly $23.7 billion.

 

Unbridled monetary inflation: TMS-2 (US broad true money supply), Fed assets and bank reserves. [PT]

 

According to the Congressional Budget Office, the federal budget deficit for the first two months of fiscal year 2020 is $342 billionAt this rate, Washington is going to add over $2 trillion to the national debt in FY 2020. Who will buy all this debt?

Not China. Not Japan. Not Saudi Arabia. Not American citizens. Instead, the Fed will buy it via balance sheet expansion. Of course, there are natural consequences for these underhanded practices – and you will pay for them, you already are…

 

Thank God we have this bearded Nobel Prize winner to remind us we are completely wrong about fiscal deficits…[PT]

 

Subjective Evaluation

About a decade before Jevons outlined the four functions of money, he elaborated the idea of marginal utility.  That the utility – the satisfaction or benefit – derived by consuming a good or service changes from an increase in the consumption of that good or service.  This change in utility influences how goods and services are priced within the economy.

 

Stanley Jevons, Carl Menger and Leon Walras worked out the law of marginal utility independently from each other at roughly the same time. It revolutionized price and value theory, but evidently many people fail to grasp it to this day. For instance, the Wikipedia article on marginal utility is chock-full of arrant nonsense and has proved utterly resilient to correction since we first laid eyes on it ten years ago (here is an example illustrating that the author of the article simply does not know what he or she is talking about. Listing alleged “exceptions” to the law of diminishing marginal utility they write: “[…]marginal utility of a good or service might be increasing as well. For example: bed sheets, which up to some number may only provide warmth, but after that point may be useful to allow one to effect an escape by being tied together into a rope.”  This is incorrect, for the simple reason that “bed sheets tied together into a rope” are a different good than bed sheets. As soon as they are tied together into a rope, they are no longer bed sheets, but a rope. The concept of marginal utility then applies to similar ropes. The rope’s previous incarnation as bed sheets is irrelevant. One would think this is obvious, but apparently it isn’t on Wikipedia, which one should definitely not rely on as a source for anything). [PT]

 

Yet Jevons went down the rabbit hole of simultaneous determination, which included modeling complex relationships as systems of simultaneous equations in which no variable “causes” another.  The flaw in Jevons’ approach is that it relied on creating artificial, modeled representations of reality.  Unfortunately, much of popular economics followed him down the rabbit hole where they still reside to this day… enamored with technical nonsense.

However, at the same time as Jevons, Austrian economist Carl Menger, from the University of Vienna, independently developed the concept of marginal utility.  Menger, in contrast to Jevons, applied these principles through deduction and logic to explain the real world actions of real people. For Menger, the role of subjective evaluation was critical to the principle of marginal utility.

Menger, in Principles of Economics, published in 1871, explained prices as the outcome of the purposeful, voluntary  interactions  of  buyers  and  sellers,  each  guided  by  their  own  subjective evaluations of the usefulness of various goods and services. Menger elaborated that the exact quantities of goods exchanged, and their prices, are determined by the values individuals attach to marginal units of these goods.

Menger also recognized that the first unit of consumption of a good or service yields more utility than the second and subsequent units, with a continuing reduction for greater amounts.  Hence, the fall in marginal utility as consumption increases is known as diminishing marginal utility, and is commonly expressed as the law of diminishing marginal utility.

Money, like any other good, is subject to the law of diminishing marginal utility.  Specifically, an increase in the quantity of money by an additional unit leads to a reduction in purchasing power per monetary unit.  As people exchange the increased money against other goods, prices rise.  Or, more aptly, the purchasing power of money falls.

 

How the Fed Robs You of Your Life

The inflation of the money supply, in effect, distorts the prices of goods and services.  Subsequent units of a good or service may have a reduced utility, though, over time, their nominal cost increases. This also undermines individual savings… and robs savers – that is you – of their lives…

 

Highway robbers not only lurk at Epsom… these days they lurk in the Eccles building too. [PT]

 

When the Fed introduces new money to the economy to finance deficits it debases the dollar. Similarly, when the Fed provokes the over-issuance of credit by artificially suppressing interest rates, it further inflates the money supply and debases the dollar.  This has the effect of reducing the dollar’s purchasing power. What does all this have to do with you?

Think of all the days you would have rather stayed home with your family than schlepping and slogging the day away for money.  Think of all the time you spent on the road getting dumped on by clients while your kids were growing up. Think of all the sunny days you missed because you were at the office all day estimating and bidding on ridiculous jobs.

For what?  So that after paying taxes on it all, what is left over is inflated away from your bank account? Remember, money, in addition to being property, also represents time and the sacrifices made to earn it. 

When the Fed inflates your money away it not only robs you of your money.  It robs you of your life.

 

Charts by St. Louis Fed, Dollardaze.com

 

Chart annotations, image captions and editing by PT

 

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

 

 

 

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2 Responses to “How the Fed Robs You of Your Life”

  • As an aside, the Fed’s charter prohibits it from using US legal tender currency in any of its operations (FRA Section 16, paragraph 1). This necessarily means that everything the Fed does is being done in credit denominated in dollars (not a US currency). And as we all know, credit is a claim on US legal tender dollars, that the Fed cannot honor due to its charter prohibiting its use of the US legal tender currency in any of its operations.

    As another aside, this also means that the Fed does not create or supply banks with reserves. In point of fact, bank reserves are very specific things; cash in bank vaults, and assets held on deposit at the Fed, and those qualifying assets are Treasuries, Agency MBSs, SDRs, and Gold Certificates, none of which are created by the Fed.

    And I challenge you to prove me wrong.

    • RedQueenRace:

      “And as we all know, credit is a claim on US legal tender dollars, that the Fed cannot honor due to its charter prohibiting its use of the US legal tender currency in any of its operations.”

      I don’t know what you mean by “any of its operations.” FRNs are legal tender and they are distributed through the FRBs to commercial banks, who “buy” them with their reserves. The Treasury prints them up and the Fed posts “collateral”, typically in US government securities and / or gold certificates. Given that government securities used as collateral were acquired by “purchasing” them with credits created out of thin air the whole thing is quite circular. But they most certainly can honor those credits with legal tender.

      “As another aside, this also means that the Fed does not create or supply banks with reserves. In point of fact, bank reserves are very specific things; cash in bank vaults, and assets held on deposit at the Fed, and those qualifying assets are Treasuries, Agency MBSs, SDRs, and Gold Certificates, none of which are created by the Fed.”

      I’ve never seen anything that indicates a bank can “deposit” a Treasury, MBS, SDR or Gold Certificate with the Fed as reserves. If you are aware of an authoritative source that says this is possible then provide it. I’ll certainly change my mind if I see that. But I’m doubtful, especially given that back in the June 2019 FOMC meeting minutes there was discussion about creating a standing repo facility where banks could post T-bills as collateral for reserves. Why would they need that if banks can simply “deposit” their Treasuries?

      My understanding is the “reserves” deposit at the Fed is nothing more than a credit in the same way that deposits are at commercial banks. The Fed will credit / debit this liability when they engage in open market operations. Banks can add to /subtract from it by returning “excess” vault cash to a FRB or drawing down on their “deposit” to get cash. Total reserves can also increase / decrease when a non-reserve Fed liability is reduced / increased. Some examples of that: the Treasury General Account, foreign official deposits, the foreign repo pool, domestic reverse repos, currency in circulation.

      “And I challenge you to prove me wrong.”

      The Fed certainly believes they create and destroy reserves. So as far as I’m concerned it is up to you to prove THEM wrong.

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