Fiat Bernanke dollars

We have a good chunk of our savings in gold. We’re not really diversified, but we do have some money in other commodities, particularly silver. So, we took a hit last week, though we’re still up big time.

Frankly, I’d rather not have to speculate that much with my money, but what choice do I have? I’d be happy to put my money in something that returned 4-5% in real terms with little risk, but our modern monetary system can’t create such an asset. It needs you to spend your money. It punishes saving. The development of this financial system in which savings are punished and we’re all forced to be speculators is a cornerstone of “progress.”

Moldbug’s latest piece was long and complicated even by his standards. But his argument wasn’t particularly complicated. In one sentence it was: “you’re a dumb ass if you keep your savings in fiat Bernanke dollars.”

If I got to add another sentence, I’d add: “this means that a de facto gold standard is likely to return.”

You’re a dumb ass for two reasons: 1) the people that control how many dollars exist are trying to create as many dollars as possible; and 2) in the last few years, it’s gotten very easy to keep your savings in any form you want.

You should make some return for your savings. It should now be clear however that if you save in dollars, you’re saving in a medium that is becoming less valuable over time. In modern times, we’re all forced into being speculators – you better get used to it.

Prior to the creation of ETFs, it was hard to convert all your savings into anything other than dollars. Now, with a discount broker and PALL, you can keep all your savings in palladium, for example. This might strike you as dumb. It might be dumb. But it’s almost certainly not dumber than keeping all your savings in dollars. Bernanke is creating more dollars. God isn’t creating any more palladium.

So the question is, if you have lots of easy choices for your medium of savings, why on earth would you pick fiat Bernanke dollars? What happens to the dollar when enough people realize that it’s no longer a viable means of savings? What happens when one medium wins as the most viable form of savings (hint: it’s value goes way up)?

In the old days (like 15 years ago), if you believed in the return of the gold standard, you were considered crazy. You probably were crazy, because you were almost certainly referring to a de jure return to the gold standard. Such a return is not going to happen – governments will not willingly give up control over money.

However if you’ve followed my argument this far, you’ll see that a de facto return to the gold standard seems quite reasonable given that saving in gold is now no more difficult than saving in dollars and saving in dollars is retarded. Again, the really interesting recent development is that it’s no longer true that governments would have to formally adopt a metal-based standard for a major shift in savings to occur. If enough people decide to save in gold, it will become the de facto medium of savings.

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35 Responses to Fiat Bernanke dollars

  1. PRCalDude says:

    Frankly, I’d rather not have to speculate that much with my money, but what choice do I have? I’d be happy to put my money in something that returned 4-5% in real terms with little risk, but our modern monetary system can’t create such an asset

    Read this classic. I put a partial review on it up at mpc.com, but there was only minor interest so I didn’t finish reviewing it. There is quite a bit of nuance to the man’s argument so it usually leaves zerohedgers howling.

  2. Red says:

    I believe we’re unlikely to return to a gold standard until our current elites are gone which is at least 20-60 years away(They are way to wedded to their dumass economic ideas). However we are definitely going to loose US dollar as a store of value before that. The question then becomes what should we keep our money in until we transition to the new currency and it seems the answer is not euros or dollars.

    • Handle says:

      The US provides two ordnungsmacht roles for the world today. Global Security, and Global Reserve Hard Currency. The key to playing either of these roles is credibility. The moment that people no longer trust the US to protect small states fall from its shores, or to sustain the real purchasing power of the dollar, is the moment that credibility collapses in a rapid cascade.

      But the question is not “Who next” if there’s no one else with sufficient power and credibility to fill the role. There is no one else. No one trusts the Euro or the Chinese to do a better job at sustaining a currency, potentially at their personal expense, for the sake of the world.

      When there’s no nation to trust, institutions arise spontaneously to fill the gap. The question is, when nobody trusts currency anymore, what will fill that gap?

      To put it another way, today, when transacting commerce in soft-currency-country-of-your-choice, international business is often carried out with contract and debt terms specifying performance and repayment “hard” currencies. When there are no more hard currencies because they’ve all gone soft, what term will business put in their contracts and debt instruments?

      I think the answer is almost definitely “Gold”.

      One of The Moldbug’s points is that, when this type of switch event “monetary re-standardization” occurs, the thing which wins the battle and becomes money will see it’s relative value to everything else sky-rocket because of its new usefulness as a vehicle for exchange and savings, which can turn worthless pieces of fiat paper into valuable certificates.

      Now, there’s three tricks to all this. First, governments will resist the trend with a combination of all sorts of tactics similar to what Roosevelt ordered in 1933, including the invalidation of gold-clauses, confiscation of gold, and punitive taxation of windfall capital gain from rapid gold appreciation. You think they won’t? I think they will.

      Second, though the Reactionary Blogosphere will probably disagree with me, I think that having Central Banks isn’t all bad, and in fact, if done properly with NGDP targeting (Hayek approved!), it can be positively beneficial – stabilizing benefits we would lose in a gold-based world.

      And third, when this happens there will be a “smoking heap of rubble” where our global financial sector once was – with more “nuclear shockwaves” than “ripple effects” into everything else. In other words – there’s a wee bit of a transition cost involved in all this, and your stockpile of bouillon may or may not insulate you adequately from it.

      • PRCalDude says:

        There are pitfalls to owning too much of anything, whether it be cash, equities, commodities, metals, bonds, or real-estate. The point of Harry Markowitz’ famous paper is that diversification can eliminate most risk over the long run.

        I likewise agree that there are upsides to a central bank. Either way, it’s important to deal with the fact that we DO have a central bank, not the way things oughta be. You can always hedge for a central bank collapse by diversifying out of cash, CDs and dollar-denominated bonds.

        In any case, it’s impossible to predict the future accurately enough to profit. Only a couple of men in history have delivered above-market returns over the long run.

      • Sardonic_sob says:

        PRCalDude: A while back I read an analysis that showed, mathematically, you should expect one Warren Buffet every fifty years or so. Warren Buffet works hard, but a great deal of his and other superinvestor’s luck is that they fit in the occasional Warren Buffet-shaped hole that the universe inserts in the investment markets. You can’t make the hole: it has to be there (which is mostly chance) and you have to fit (which is mostly skill.) Without both nothing happens.

  3. av says:

    I’ve started using Bitcoin to save money. Compared to gold its properties for use as a currency are superior in the online world. I can send someone bitcoin directly without needing to trust an intermediary. If I want to use gold online I’d have to trust some company which can be taken down by USG such as eGold.

  4. rightsaidfred says:

    No-value savings accounts are a form of taxation. So put it in the bank and grab your ankles, Foseti, it is your civic duty to pay for all the wars, immigration, transfer payments, etc. Plaster a smile on your face.

  5. Tim says:

    Moldbug has made the point that there is very likely more paper gold in the world than can be covered by physical gold. By investing in paper commodities you have traded one ponzi for another.

  6. Sgt. Joe Friday says:

    Then there is always the possibility of course that the federal government could simply outlaw private ownership of gold. They did it under FDR.

  7. Jmanon says:

    Why is the alternative to saving in Fiat dollars, saving in GLD?

    I have a little bit of GLD, but most of my wealth is invested in ETFs and stocks. The majority (probably 60%) of those equity holdings are foreign. Some of my foreign holdings are, almost entirely bets on the future strength of the underlying foreign currencies relative to the dollar (e.g., EWA, EPP, EWS).

    As for my U.S. equity holdings, when prices inflate, so do the earnings of the U.S. companies in which I own stock. The increased earnings usually result in an increase in the price of the stocks, because analysts love to push the buy button when P/E ratios get low. The end result is that stock prices auto-correct for inflation to a large extent.

    In my view, there is no reason to be heavily concentrated in commodities because it has all the indicia of a speculative bubble. Also, there is no way USG and the International Community are going to allow gold to become a currency again. And they have teh guns.

    • PRCalDude says:

      I think “investing” in commodities isn’t really “investing” at all, but pure speculation as you said. IOW, it’s a sure-fire way of losing money if you’re a little guy.

      • Foseti says:

        So what’s the difference between investing in commodities and dollars? Dollars are guaranteed to lose value?

        The problem is that there is no more non-speculation.

      • Jmanon says:

        f– It is not a binary choice between dollars and commodities. Why rule out normal investments like stocks and bonds as saving alternatives?

      • Foseti says:

        GLD came on at the end of 2004. Since then, it’s up about 230% while stocks (SPY) are totally flat (up 14%) and bonds (BND) have basically only returned interest (up nominally as of right now).

        Investing in stocks and bonds during that time has been subject to at least one period of significant losses. Finally, bond yields are historically low.

        You’re fine saving that way – any investment adviser will tell you do so. It’s just been a crappy way to save for a long time. W/r/t to bonds in particular, the Fed has been ensuring that you’ll make as little as possible during that time period.

      • Jmanon says:

        It’s true that GLD has outperformed, and I have owned some since 2006. I’m just advocating diversification so you don’t take a huge hit if the commodities bubble pops.

        My portfolio has returned over 50% since 2005 when I started investing. True, that’s worse than if I put all of it into GLD over the same time period. But one asset can always significantly outperform the rest of the market for a while. For instance, one of my plays in ’09 was to buy TTM at ~$4. I have more than sextupled my money. But that doesn’t mean it would have been wise (ex ante) to put a year-and-a-half’s worth* of savings into that one stock. (*I put all of my ’08 savings into the bank until 1Q ’09 because I thought a crash was coming)

        As for bonds, I agree that they suck right now. My only investments in them are high-yield funds (JNK and PIMCO), which return 10-12% per year in dividends.

  8. Rollory says:

    “if you have lots of easy choices for your medium of savings, why on earth would you pick fiat Bernanke dollars?”

    Because it’s not actually fiat. It’s debt. That’s a very important difference.

    That’s part 1. Part 2 is that for Bernanke to just break even without any deflation at all, he needs to pump 9 trillion dollars into the economy. That’s how much value has disappeared from housing – value which is still pretended to be “money good” by the banks, but does not in fact exist, and can not be legislated into existence.

    Watch t’other hand!

    • Foseti says:

      Actually fiat Bernanke dollars are equity. He can print them at will and he never has to repay them. They’re perpetual and they require no dividend payments – that’s the IRS’s definition of equity.

      • Rollory says:

        That’s about as clear a statement of your own ignorance on the matter as you could possibly make.

        Every dollar printed represents a dollar’s worth of Treasury debt that has been sold to somebody. They do not and can not “just print” dollars. If they did do that, it would have direct and immediate consequences, first on the value of the Treasury debt that has already been sold (it would mean robbing every single holder of Treasury debt of the value they thought they had paid for, on a large scale – that sort of thing starts wars, because it means destroying everybody else’s economy to try to save your own, without fixing your own bad decisions), and second on the ability to finance any further deficits through the dollar (the buyers disappear, and the deficit spending stops dead, and the government budget suddenly can only pay for half of what’s requested). They _could_ toss the existing debt-backed dollar and replace it with the fiat dollar you are talking about, but it would not be a clean transition, and would probably result in Egypt-style riots for months due to the lack of a wage-price spiral. The fact remains that whether the government and/or Fed would prefer fiat or not, that is not what they have.

        QE2 has been nosing right up against the line of treating it as fiat instead of debt, because it is the Fed buying its own debt – and if you’ve been paying attention, there has been pretty unanimous criticism of QE2 from abroad. But they are still going through the motions of treating it as actual debt sold to somebody and not just hand-waving it into existence while devaluing everyone’s wages. QE only can work (to the extent it works at all) if it isn’t big enough to change the nature of the debt market. If it is big enough, everybody else sells their debt back to the Fed, the bond market implodes, government paychecks start bouncing, prices skyrocket, and there’s anarchy in the streets. At that point you have other concerns than whether you invested in palladium.

      • Sardonic_sob says:

        Rollory:

        That’s a bit harsh. If for no other reason that dollars do not come from the Treasury and have not for almost a hundred years. They come from the Fed, which can and does “just print them.” They can do this in a huge variety of ways, including many which have the effect of creating dollars only as a second or lower order effect. You’re quite right that the Treasury can’t print money and every dollar the USG has, it got either by taxing it from somebody or by issuing debt, but it is very misleading to say that since the USG can’t print money all dollars are debt-based. Fiat currency is a weird, weird beast but I share the opinion, as do many others far more knoweledgeable than me, that it fits more neatly into the “equity” column than the “debt” column.

  9. PRCalDude says:

    So what’s the difference between investing in commodities and dollars? Dollars are guaranteed to lose value?

    Those aren’t your only options by a long-shot. Technically, anything you buy represents a move out of dollars and into the thing you buy, whether it’s stocks (equities), bonds, REITs or commodities.

    Read the book I linked – you won’t regret it. I bought it on Eric Falkenstein’s recommendation. It explains all of this.

  10. SkepticalCynical says:

    I agree with others on this thread. If you’re worried about the declining dollar, there are less risky assets that also make good inflation hedges. Land and stocks come to mind.

    1933 is the real caution here. Can you argue with a straight face that your mates in USG won’t pull that trick again?

    • Foseti says:

      No I can’t make that argument, but I’ve been enjoying my 20%/year in the meantime.

      • SkepticalCynical says:

        If you’re close enough to it to know when to get out, more power to you. As an outsider, I’m not confident of my ability to predict USG’s moves.

      • Foseti says:

        Let’s compare potential USG actions with gold and stocks.

        Is it more likely that USG goes after gold – as you suggest – or goes after stocks? For example, perhaps USG will confiscate holdings in retirement accounts, which would potentially devastate the stock market. Several people have suggested this latter course is the only way for USG to obtain enough cash.

        Which is more likely? I have no idea.

      • Sardonic_sob says:

        In the end, when all other possibilities are exhausted, the USG will have to follow that apocryphal advice and go where the money is. In the Dirty Thirties, there was enough gold, and the government could get enough utility out of it, that seizure was useful. Now the great protection for gold is not that the government *couldn’t* do the same thing again but that they probably wouldn’t bother since the benefit would be negligible and the backlash would be large.

  11. PRCalDude says:

    @Sardonic

    That doesn’t surprise me at all about Buffet. I’m an indexer (or passive investor), so I don’t believe there’s much to be gained (though much to be lost) by trying to emulate Buffet. It doesn’t surprise me at all that he may be a statistical artifact.

  12. PRCalDude says:

    @Foseti,

    Trying to base future returns off of very recent past performance is not a good idea. Looking at the performance of precious metals over several decades is a much better idea. I think gold actually does keep pace with inflation over the long run. If that’s all you’re trying to do, more power to you. If you’re trying to build a retirement nest-egg, you really need returns that significantly beat inflation.

  13. […] ultimate objection to my argument for the return of a de facto gold standard was that if we start down that route, USG will just take […]

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