EDITOR NOTE: This article presents a clear and easy-to-read primer on inflation, how central banks generate it, and its impact on purchasing power. It’s written from an Argentine perspective, a country whose inflation rate is running a bit hot and out of control. The author also states a case for the value cryptocurrencies (as a safe haven) while balancing the view with a close look at its shortfalls. The topic then shifts to the coming era of digital national currencies. The future of the dollar may end up digital. As the author warns, such an “innovation” presents an even greater risk: the further “denaturing” of intrinsic value toward the complete artificialization of monetary integrity.
SAN MARTIN, ARGENTINA – For half a century, America’s greatest export has been the dollar. So much so that there are now more physical dollars outside the U.S. than in it.
Overseas, people use dollars as an alternative to their own money. Foreigners are more familiar with Ben Franklin than Americans. In many places, people cling to U.S. dollars like a drowning man to driftwood.
Here in Argentina, for example, inflation is already running at about 50% per year. People think it will get a lot worse. So they prepare by trading their pesos for dollars – now at a rate of 150-to-1.
But what happens when the dollar sinks?
The question is premature. Almost naïve.
For the present, the dollar is as buoyant as an empty plastic bottle. The velocity of money – a key component of consumer price inflation – is actually going down.
Americans are happy to get dollars from the government. And foreigners are happy to get them any way they can.
But soon, everyone will see that the U.S. feds are acting like the people who run sh*thole countries. They stifle the economy with laws and regulations – shutdowns, moratoria on evictions, $1,200 checks for everyone – and try to finance it with printing-press money.
We have no superpowers here at the Diary. We cannot climb walls, fly through the air, or see through concrete walls. So we cannot tell you when or how the dollar fails.
But today, we will explore the question of what you should do about it.
Money is only “good” if it can be used to claim goods and services from others. So, when the inflation rate increases, typically, people rush to claim whatever goods and services they can before their currency loses more value.
The poor buy food… tools… household supplies… and televisions.
The middle classes buy houses and cars.
The rich buy land, commercial property, art, collectibles, and jewels.
Rich or poor, the goal is the same – not to end up holding the Old Maid money.
Here in Argentina, it is almost impossible to get a mortgage. The economy is shrinking. The money is being inflated away. The economy is shut down.
And yet, people are buying apartments and houses – and paying in cash – as a way to protect themselves from the government’s money. (Apartments in Buenos Aires are being advertised for just $37,000.)
Traditionally, gold is the best defense. It has been a “last resort” money for at least 3,000 years.
For example, a cache of gold coins and objects, buried in England in the 8th century, was discovered a few years ago. In the time between its burial and its discovery, England suffered civil wars, religious wars, Viking invasions, the Norman Conquest, plagues (in which a third of the population died), bankruptcy, bombing, external wars, and the decline of the empire.
But not only were the coins still valuable – they were much more valuable when they came up out of the dirt than when they went in.
Our guess is that gold will continue to do its work – especially in the first phase of the coming crisis. People will become more and more concerned about the dollar, the economy, and the stability of the country. They will buy gold as protection, even as they are unsure what they are protecting themselves against.
And if the election results are contested, for example, the price of gold will probably spike as soon as six weeks from today.
Classic consumer price inflation may not come quickly. Instead, we could be in for a longish period of depression first. Even so, gold – like a refuge against heat as well as cold – will probably rise.
But a depression would just encourage the feds to step up their money-printing. So, one way or another, sooner or later, we should expect consumer prices to rise – perhaps at 5% per year… maybe 50%.
Then, things will become much tougher.
And gold is no panacea. Desperate governments will call people who try to escape the currency crisis “parasites,” “profiteers,” or “class enemies.” Gold may be banned… taxed… or even confiscated.
In 1933, by Executive Order 6102, President Roosevelt made private ownership of gold illegal – subject to a $10,000 fine (which was a lot of money back then…) and 10 years in jail. Contracts stipulating payment in gold were nullified. This ban was enforced for the next 40 years.
Just last week, the Argentines put a tax of 35% on exchanging pesos for dollars… that was on top of the 30% tax already in place. And you are limited to just $200 a month in exchanges.
It wouldn’t be hard to imagine similar taxes restricting Americans’ use of gold.
In the long run, productive farmland may be a surer form of wealth than gold. It is less likely to be confiscated or heavily taxed.
On the other hand, it is very illiquid. Here in the Calchaquí Valley, for example, there are now no buyers for farmland… or anything else.
When Argentina emerges from its current crisis, landowners will probably still have their land. And they probably won’t starve. But in the meantime, they may have no “money” at all.
Today, people have another alternative – cryptocurrencies.
Theoretically, bitcoin is superior to gold… in that it is easier to exchange it and hide it. No need to lug bags of gold coins around… or to pay someone to store them for you.
And unlike farmland, it doesn’t need to be managed… and may not sit, inert and useless, for years while you wait for the crisis to end. With a few clicks on a keyboard, you can use your bitcoin to buy a pair of blue jeans… a pizza… or a new house.
In theory, bitcoin may be harder to tax, too, as long as it remains in the ether crypto world. But try to use it to buy something… and it becomes vulnerable.
Will bitcoin prove to be a good alternative to land, the peso, the dollar, and gold? We wish we had the superpower to tell you.
But gold is a work of nature. Bitcoin is a work of man. And so far, man’s works have proven transitory.
Bitcoin was surely a clever innovation. But there are millions of clever people… Who knows which of them will find a better bitcoin?
Crypto/digital money might turn out to be the money of choice for governments more so than for their citizens.
It is no secret to us that current levels of debt growth and money-printing are leading to trouble. By 2030, the feds will probably owe about $40 trillion, not counting their unfunded obligations under Social Security, Medicare, etc.
That debt is only sustainable as long as the dollar floats. When it sinks, the whole ship goes down with it. The feds know this as well as we do. And they, like we, are already making plans.
No, they are not making plans to right the ship by balancing the budget, cutting the deficit, or reducing the Federal Reserve’s balance sheet. They know that is politically impossible.
More likely, they’re planning to abandon ship.
Who would benefit most from the collapse of the dollar? The world’s biggest debtor, of course – the U.S. government.
At 50% inflation (the current rate in Argentina), half of the feds’ debt disappears in a single year. In three years, it is almost all gone.
Then, they can introduce a new dollar. Our colleagues at Tradesmith report:
The Bank of International Settlements, or BIS for short, is known as the central bank for other central banks. In January 2020, the BIS published a new research paper – not its first one – on central bank digital currencies (CBDCs).
Eight months ago, the BIS found that 80% of all the central banks they surveyed were investigating CBDCs, and 40% had moved from the research stage to the concept and design stage.
Meanwhile the U.S. Federal Reserve and European Central Bank (ECB) have expressed interest in digital currency and research, and the People’s Bank of China (PBOC) is potentially years ahead of the competition in rolling out an e-yuan, with mass trials underway involving real-world commercial use.
So you see, Dear Reader, there is no reason for despair. The feds will get to start the scam all over again!
Originally posted on Rogue Economics